EVIDENCE

[Recorded by Electronic Apparatus]

Monday, November 4, 1996

.1204

[English]

The Vice-Chair (Ms Whelan): Order.

This morning I want first to welcome all our witnesses and committee members. We're all ready to see what western Canada has to say. We welcome your input into the pre-budget consultation.

I'm Susan Whelan. I'm going to be chairing the committee meetings out here.

The format of the meeting is a round-table discussion. We'll start the round table by asking each of you to make your presentation in approximately five minutes. If you go over, we'll be understanding. Then we're going to proceed to questions.

When we proceed to questions, questions may be posed to individuals. However, if you wish to answer a question, just signal to me, the chair. I'll take your name down and you'll be able to add to the answer to that question.

If there are no questions, I would like to start with Mr. Don Lewis, from B.C. Telecom.

.1205

Mr. Don Lewis (Manager, Taxes, B.C. Telecom Inc.): Thank you very much, Madam Chairman. My name is Don Lewis. I'm the manager of taxes for the B.C. Telecom group. My responsibilities include tax compliance and tax planning for the B.C. Telecom group of companies.

First, I will just put the telecommunications industry in perspective for the benefit of members. Economic indicators in our industry include an average four-year real growth rate of 4.9% over the years 1991 through 1994. We've accounted for 3.43% of GPP for 1994, which represents $18.26 billion. We make substantial contributions to research and development.

We employed 134,000 employees in the carrier segment in 1994, up from 119,000 in 1991, and there are 48,000 employed in equipment manufacture related to our business.

In terms of our infrastructure, we believe we are leading-edge in the world in network and telecommunication services. Over 98% of homes in Canada have one line and approximately 36% have two or more lines. All of that information actually comes from Statistics Canada's 1995 reports.

For a little more focus, the B.C. Telecom group, which operates primarily in the province of British Columbia, employs 14,000 Canadians. We have a payroll of approximately $830 million. In 1995 we had capital expenditures of over $602 million, which in turn obviously created many spin-off jobs.

We earned some $2.4 billion in total operating revenues. We paid cash taxes in 1995 of $212 million on income, and $209 million on payroll property and consumables. And we collected, on behalf of the provincial and federal governments, $246 million of taxes on goods and services provided to our customers.

We are a member of the central alliance that includes the major companies that operate from coast to coast in Canada.

We see our business as an environment in transition. We are in the midst of major transitions and we are renewing ourselves to meet the competitive global business environment.

Three key areas of transition are regulatory transition, technological transition and competition. With respect to competition in Canada, our two major competitors are AT&T and the new Concert company that was just announced yesterday as a merger between British Telecom and MCI. That means our major competition in Canada is the two largest telecommunication companies in the world.

We must compete for customers. We must also compete for investment dollars on a North American and a global basis. B.C. Tel is committed to maintaining its record of spending on capital, R and D, and other essential business inputs, all of which contribute to jobs and prosperity in B.C. and Canada. Our five-year plan for 1997 through 2001 calls for $3 billion worth of capital expenditures by our company.

Tax is a critical business factor in our industry, and to remain competitive we must keep all costs down. We appreciate some of the recent initiatives by the federal government in its efforts to reduce the deficit. I think that has obviously flowed back to the economy in reduced interest rates.

We appreciate the continuing efforts towards a national sales tax. Taxpayer involvement has become greater at Revenue Canada, and there is a more customer-focused orientation. One example of that is the large business advisory committee. The Revenue Canada reorganization in customs, excise and income tax is obviously an improvement we appreciate.

Now we will touch on some specifics that we would like to see the government continue to move on.

One is sales tax harmonization. Obviously, non-harmonized provinces are at a competitive disadvantage since we do not get the input credits for tax paid on business inputs. This can influence a decision on the location for setting up new businesses or can inhibit new investment.

.1210

The current arrangement of harmonized and non-harmonized tax jurisdictions in Canada results in provincial sales tax being non-neutral. The availability of input tax credits for tax paid on business inputs is now a variable in the decision-making process. The absence of the credit mechanism can result in tax cascading to the final customer as the costs of various tax inputs find their way through the distribution chain into retail prices of products or services that are also taxed.

In the area of research and development, Canada's telecommunications industry is a key contributor to private sector R and D in Canada. Between the carriers and the manufacturers, well over $1 billion a year is spent on research. B.C. Telecom is committed to maintaining a leadership role in R and D and continued government incentives for this strategic activity are central. Industry requires consistency in the interpretation of incentive rules, both going forward and looking back. R and D incentives contribute to maintaining high-value jobs in Canada.

We wish to make the following recommendations.

On sales tax harmonization, we encourage the federal government to continue to dialogue with the non-harmonized provinces to achieve a multi-stage national sales tax. This tax should have one base, one rate, few exemptions, and one simplified compliance and administrative process.

The second recommendation is to eliminate multiple tax systems and tax rates. A consistent calculation of taxable income and taxable capital would reduce compliance costs. I recognize this requires close cooperation between federal and provincial governments.

The third recommendation is to reduce uncertainty, which has an economic cost. We need a regime where key areas such as R and D are clear, simple, and consistent over time.

Our conclusion is that incentives are important to the entire telecommunications industry and have a multiplier effect through the entire Canadian economy. The government has the opportunity to stimulate jobs and growth by working with the telecommunications industry.

We appreciate this opportunity to present our views.

The Vice-Chair (Ms Whelan): Thank you, Mr. Lewis.

We turn now to David Strangway, from the University of British Columbia.

Mr. David Strangway (President, University of British Columbia): There are three principal points I would like to make.

Of course we all know education and that kind of funding are essentially a provincial issue, but I would like to say a little about what I call the ``productivity efficiency'' of our university. I think it is typical of all universities across the country over the last few years. My second point will be to talk about innovation and to link that into the infrastructure program that has been discussed and say why that's important to us. My third point is to talk about the international dimension of things, because again, the federal government has a major role to play in the international sphere, as do the universities.

My first comments are really aimed at saying that a lot of changes have taken place in the university system in the past decade, and I think it is not widely recognized. We are often seen as places of no change. We're often seen as places where there is very little responsiveness.

To give you a few statistics, at our university our number of graduates has increased by 36% in ten years, which is a pretty high increase in output. Our total full-time students have increased by 24%. At the same time, the provincial funding for the support of these activities in constant dollars has increased by 8%. If you work that through in terms of productivity, as output per provincial grant, we have had a ten-year average productivity improvement of 2.3%. Others, of course, will describe that as some loss of quality, because in doing that we are running through more students with fewer dollars and with larger classes, with all the prices that go with that.

I've attached a chart to my materials. It contrasts this situation with that of other sectors in British Columbia, in particular comparing it against the hospital sector, against the school sector, and against the college sector. What you will notice is the remarkable difference in what's happened to your universities in this country as you look at those differences. The hospitals have lost productivity by something like 50% over those same years. The schools have also lost a certain amount of productivity in that same period of time, and they are doing less with more, in effect.

.1215

I think it's important that people understand that whatever the policies are that bring these things down to us, as the people who have to deliver on the front line, there are massive differences.

I point out also that in terms of the provincial government itself, which of course is not your particular issue today, while the population has gone up by 11%, the public service payroll in this province has gone up by 40% in the last five years.

This is not a time for disinvestment in the universities. We are in a knowledge-intensive, competitive global time, and surely the universities are a key to the future of this nation. Yet we see disinvestment going on at rates that are unbelievable and, compared to the other sectors, very differential and discriminatory.

In terms of my second point, innovation is the key to Canada's competitive future. At this university we have the largest company spin-off activity of any university in the country. We have formed hundreds of companies, and thousands of jobs have been created directly out of the research and development activity that takes place at our university.

This is, of course, not unique to UBC. This is typical of the other universities in the province and is happening all across the country. We are a source of innovation and ideas. We are a source of the future of the economy of this country and of the province. We need all the help we can get to ensure that we can continue to be a serious economic driver.

We have done an economic impact statement, which is attached to the materials. I don't suggest that you read it now in detail, but in effect the impact of the University of British Columbia alone on the economy of this province is well over $2 billion.

In the meantime, our physical infrastructure has been allowed to decay. The way I state it is that as the federal government has reduced its debt, the provincial government has reduced its debt. What has happened, then, is that they have cut not only the operating budgets, but the capital budgets. The cutting of the capital budgets is simply being passed on to us.

We are in many ways the end members of the debts, and those debts are in the forms of buildings, decaying infrastructure, and inability to renew systems. As I have sometimes flippantly described, I have 20 acres of roof to look after, and if one acre of roof has to be replaced every year, that's one acre per year for 20 years. One acre per year deferred for one year doesn't seem like very much, but 20 years down the road it will hit you, and you will end up paying that cost. So it is a debt. It's a hidden debt. It doesn't appear in the financial statements, but it's a major debt that is being passed on to us.

At the present time we have only 90% of the space that we ought to have. If we took down the buildings that are in unacceptable working conditions, we'd be down to 78%. I think it's important to realize that as you develop an infrastructure program or you consider an infrastructure program, universities ought to be among the principal recipients of that activity.

We need to provide campus connectivity. We're in fact working with B.C. Tel on that very project, but we need all the help we can get in order to ensure that our young students can be fully supported.

Over the weekend I returned from Japan, where I had an opportunity to visit one of the universities that has done an amazing amount of information technology linkages around the campus. You could just look at that and dream and think that it's what we ought to have for our young people if they are going to create the jobs of tomorrow.

Japan, at the same time, is doubling expenditures on basic research and development. It's experiencing economic difficulties, just as other countries are, and I think it's remarkable that they have decided to invest rather than what is happening here. We're deciding to disinvest in our research infrastructure and our research activities. There they've decided that this is the future, and they are putting an immense amount of new dollars - yen, I should say - into ensuring that there's enough basic research in order to keep the economy of Japan vibrant.

Under international, one of the things people don't often think about is the balance of trade. If you think about a student sent abroad, that's an import. The dollars go in the opposite direction to that of the student. If you think about a student received from abroad, that's an export. The balance of trade in student exchanges in Canada amounts to many billions of dollars. There is a lot of that activity taking place.

.1220

We have exchange programs with 70 universities around the world. Currently 5% of our graduates will have had a year abroad at a sister university by the time they graduate. This kind of activity is terribly important, because in the new world that we're in, these young people must have that opportunity. Yet what I heard recently is that the Commonwealth scholarship program has been practically decimated by Foreign Affairs. That program has brought many students to Canada. If the cuts go on, those are the kinds of investments that will be lost.

We are starting on a full-cost international student recruiting basis starting for 1997. This is based on no cost to the B.C. taxpayer and no displacement of the present level of Canadian students.

We have built bridges around the globe, to Asia, to the Americas, to Europe, and to many different places. We have exchange programs, and we have relationships with businesses in these parts of the world. We consider ourselves to be part of the diplomatic and outreach activities of this country, as the other universities do.

In this activity we have been incredibly supported by Canada's high commissions and embassies. I must say that as I travel to these various countries and meet the various high commissions and embassies, I can see that they are hurting. Their capacity to support us is decreasing. They are having much more difficulty in giving us the support that I believe is needed. I think that needs to be looked at pretty closely.

The white paper on foreign policy urges that education and culture be made the third link of Canada's foreign policy. Canada at the same time is making the statement, Parliament having dealt with the white paper.... What you see in fact is that we are significantly reducing the support in this area, yet it is the underpinning of our international relations and our international competitiveness.

We have a key role to play in the internationalization of Canada. Our expertise must be tapped in various ways. That is something I'd like to conclude with.

I have three points. We are productive and efficient. We are a key to innovation in this nation, but we need all the help we can get. We are an essential component of the international activities of this nation. We need all the help we can get to be sure that we can play the role we ought to be playing. Thank you.

The Vice-Chair (Ms Whelan): Thank you, Mr. Strangway.

We now have the Vancouver Board of Trade. We have both Mr. John Hansen andMr. Mac Campbell with us. I'm not sure who's going to be presenting, but I'll ask you to begin,Mr. Hansen.

Mr. John Hansen (Assistant Managing Director and Chief Economist, Vancouver Board of Trade): Thank you, madam Chair. My name is John Hansen. I'm chief economist and assistant managing director of the Vancouver Board of Trade. With me today is Mac Campbell, who is one of our directors and is also the president and CEO of Kimberley Resort Corporation.

We thank the members of the committee for the opportunity to appear today. At the back of our brief there's a summary of the Vancouver Board of Trade. I won't go into that.

We have for at least the last eight years participated in the pre-budget consultation, and we're pleased to participate once again this year. This year we're pleased to say that we do commend the federal government for the fiscal performance under the leadership of Mr. Martin. Meeting and bettering last year's target for deficit reduction we think is very good news indeed. We support the government's efforts, and we're confident that now, for the first time in many years, there's light at the end of the fiscal tunnel. We urge the government to stay the course towards a balanced budget and to accelerate the planning to eventually tackle the debt.

We recognize the revenue results, and lower debt servicing costs have contributed a lot to the results this year. It's a bit of good luck and a bit of good management. We're also impressed with the actions that have been taken on the expenditure side of many federal departments.

We are encouraged by the success so far in transferring a number of units of government operations to private sector management. We urge the government to continue to devolve operations and to focus government efforts on policy and on regulations where necessary.

We think the devolution of airports and marine ports, which is pending under Bill C-44, and the air navigation system are fine examples of what can be achieved and could be models for other government departments to emulate.

.1225

At this time there's a lot of talk about tax reductions. Although that may be politically tempting, we believe that the fiscal state is not sufficiently robust to support an across-the-board tax reduction. Interest rates could go up and the economy could still falter. Our recommendation, therefore, is to hold off on general tax reductions until we're clearly on firm fiscal ground. At that point the benefit of a surplus should be shared perhaps fifty-fifty between payment of debt and tax reduction. In the meantime, however, this should not constrain efforts to improve and streamline the existing tax system.

We do urge that care should be taken to avoid tax measures that may have a detrimental economic effect. For example, the proposed regulations for full disclosure of global assets should not be implemented without a full understanding of the impact. These regulations could drive away many talented international business people from Canada.

As the government moves towards greater user-pay, which we generally support, care should be taken to ensure that these sources do not simply become another source of general revenue. For example, the premiums paid by employers and employees to the employment insurance fund should reflect the realistic expectations of demands on the program and should not simply be allowed to accumulate a surplus in general revenue.

We believe that getting the fiscal house in order should remain a high priority, and this should go hand in hand with good economic policy. As an example, we think some of the changes contemplated in the labour law are not consistent with the creation of a positive job investment climate. We think environmental laws should as far as possible be harmonized with provincial agencies, and we think barriers to trade and some mobility within Canada should be eliminated.

We believe that economic matters such as these are of high priority, and policies are needed to shore the foundations for future economic growth and to ensure that growth of revenues will continue. We're encouraged by the common directions of the Bank of Canada and the Department of Finance. We strongly support the commitment to price stability in order to achieve lower long-term interest rates and hence improve the investment and job creation prospects.

As you know, the Board of Trade invented a debt clock some years ago. The clock is still ticking, but at this point we're happy to see that the rate of increase in the debt is now slowing year by year. Based on last year's rates of growth, we had expected a debt of $600 billion to be reached by the end of this year or early next year, and it will now take place some time in 1997, which is good news. But there's still a long way to go, and the clock is still ticking. With luck, with low interest rates, and with good economic growth in 1997 and 1998, we may be poised to see a zero deficit before the year 2000. But the mountain of debt is still there, and it will be somewhere around $650 billion before it turns around. That means interest payments annually are $40 billion to $50 billion, and over $100 million is paid every day in interest.

Madam Chair, I will briefly summarize our recommentations to the committee. First,Mr. Martin and his department should be commended for the progress made to date. Secondly, the dividend should not be taken until the growth of debt is stopped and turned around. Thirdly, preparation should be started for a debt reduction plan and for tax reductions when the budget is balanced.

Thank you, madam Chair.

The Vice-Chair (Ms Whelan): Thank you very much, Mr. Hansen.

We move now to Mr. Jock Finlayson, from the Business Council of British Columbia.

Mr. Jock Finlayson (Vice-President, Policy and Analysis, Business Council of British Columbia): Thank you, Madam Chair. I'd like to deal with two main areas. One is the economic outlook and the current situation for both Canada and British Columbia and what that means for the budget next year. Secondly, I'd like to talk about some of the issues concerning the budget itself.

I'll deal first with the Canadian economic outlook. Looking back, it's clear that the 1990s have been a very disappointing decade for Canadians in terms of our economic performance. I don't think it's widely recognized that both output and employment have grown more slowly over the 1990-to-1996 period than at any time since the 1930s. Unemployment has been at or above double-digit levels for five years, and household incomes, adjusted for inflation, and taxes have dropped significantly in all provinces.

.1230

Our poor performance to date in the 1990s could probably be traced to a number of factors: necessary but painful public sector retrenchment in the face of large government deficits; a significant increase, almost six percentage points, in GDP; an increase in the overall tax burden in Canada; the adjustment costs associated with the Bank of Canada's pursuit of the goal of price stability, now largely behind us, I think, but very painful when we were going through it; rapid technological change; and of course widespread restructuring in the private sector. All of this has dampened consumer confidence, slowed the economy's capacity to create employment, and generally created difficult economic conditions across the country.

I think the good news is that as we look ahead there's a strong sense among economists, and I think among a lot of business people, that Canada's economic outlook is improving and employment growth will accelerate next year and beyond. One of the key reasons for this optimism is precisely the fact that the national economy has performed so far below its potential for six of the past seven years. In fact, only in 1994 during the decade of the 1990s so far did our economy grow at its potential rate of output expansion, which is about 3% a year. This means a lot of room is left for the economy to growth faster without triggering inflation pressure or higher interest rates. That's one of the reasons I think we can be reasonably optimistic about the outlook looking forward.

Although Canada's economy has failed to ignite in 1996, there are a number of emerging signs of strength, including a very solid export performance, firmer housing markets, some pick-up in job creation in the private sector, and of course dramatically lower interest rates. Inflation is low and it looks set to remain low. The positive effect of low interest rates will be felt very strongly next year and into 1998. Typically, declines in interest rates affect the economy with a lag of twelve to eighteen months. Therefore the sharp declines over the past twelve months I think will really begin to pay some economic dividends next year and beyond.

In short, then, the outlook is pretty rosy for Canada next year, and indeed for 1998, assuming our neighbours to the south, in the United States, do not go into a significant economic recession.

Turning to British Columbia, the situation is actually a little less rosy here. Members of the committee who come from other provinces - I gather that applies to all the members here today - may be surprised to learn that British Columbia is not the economic powerhouse so often portrayed by the central Canadian media. Specifically, B.C.'s economy grew by less than the national average in 1995. It will do so again this year, and in our view likely in 1997 too. I've provided a table in my presentation with the specific numbers, if you're interested.

In fact, when the final data are in for this year, 1996, they are likely to reveal that B.C. experienced a brief recession during the first half of 1996. For this year as a whole, local forecasters in Vancouver expect B.C.'s economy either to be flat or actually to shrink in real terms. It's the Conference Board and the banks back in Toronto that seem to think we're still growing. People in business in the economic forecasting field here in British Columbia do not share that view.

The main factor underpinning British Columbia's expansion in the 1990s has been our rapidly growing population, up by about 2.5% per year compared with barely 1% for Canada. If we adjust the economic growth numbers to account for population, it turns out the economic picture is not particularly impressive for B.C. In B.C. real economic growth per person or per capita has actually been negative during the 1990s, except for one year. Again, I've provided the numbers in my presentation for you if you're interested.

By this measure B.C. has actually done less well than Canada. In other words, per-capita real GDP growth has been lower in British Columbia in the 1990s than it has been in Canada as a whole. Perhaps more surprising, real gross domestic product per person in B.C. is today actually below the Canadian average. Although we expect our economy to pick up some strength next year, along with other provinces', primarily because of low interest rates, output growth in B.C. is likely to trail the Canadian average in 1997, and indeed perhaps beyond that.

So the message I'd like you to take back to Ottawa is that the period in which B.C. was outperforming Canada in economic growth is now behind us. In fact it ended in 1994, and we are now underperforming the Canadian averages.

.1235

Turning briefly to the federal budget expected next February and March, we share the view articulated by the Board of Trade that the 1997 budget should build on the very important progress the federal government has made in its three previous budgets in continuing to push for deficit elimination by the end of the decade, or indeed preferably sooner.

Finance Minister Martin recently announced a new deficit target of $9 billion, or roughly 1% of GDP, for 1998-1999. Achieving this target will be a milestone because it will result in the federal government having no net financial borrowing requirements in that year. We think it's very important; we're pleased to see that target enunciated, and we think it's critical that it be reached.

As Mr. Hansen also noted, though, we're not there yet. On the latest evidence, the deficit this year will be in the range of perhaps $20 billion - somewhat better than the government's official target - falling to perhaps $12 or $15 billion in 1997-1998. These projections assume continuing low interest rates, although perhaps slightly higher rates than we currently have today, but still reasonably low.

Despite the federal government's success in meeting or beating its deficit targets, the ratio of federal debt to GDP - which is more important than the actual volume or dollar value of the debt, as it's the ratio of debt to GDP that's the critical indicator - has continued to go up. It will hit 75% this fiscal year, up from 74% the year before. By way of comparison, in 1974 it stood at a mere 20%. This underscores the extent of the financial deterioration that has occurred at the federal government level over the past two decades.

Economic theory doesn't give us any clear answer to the question of what constitutes an optimal level of public sector debt; but by any reasonable measure, a debt of 75% of our national economic output is too high. A debt at that level increases pressure on the tax burden, reduces the government's flexibility to manage the economy, raises the risk that the deficit itself will skyrocket in the event of higher interest rates, and makes the task of monetary policy, which is to achieve long-term price stability, that much harder.

For these and other reasons, we believe very strongly that bringing down that ratio of federal government debt to gross domestic product must be the main guidepost of federal fiscal policy over the next few years.

Fortunately, as outlined in a recent study by the Royal Bank of Canada economics department, almost all of the actions needed to deliver a declining debt-to-GDP ratio have already been taken. The key is to ensure that the framework that has been put in place in the previous three budgets is maintained and not undercut by a misguided effort to boost spending or to deliver an untimely tax dividend, as Mr. Hansen mentioned.

Specifically on the subject of taxes, the overall tax burden in Canada has jumped by more than 20% since 1980, which is the biggest increase among any of the major seven industrial countries. We see no room for higher taxes in the 1997 budget. But what about the option of major tax cuts that some people have advocated?

Certainly a reduced tax burden would be welcome by Canadians, and certainly by the business community. Unfortunately, owing to the size of the federal debt and the need to get the debt-to-GDP ratio on a downward track quickly, we believe it is not the time for significant tax cuts at the federal level. Certainly the attainment of some kind of tax relief going forward should be a key goal of federal policy, but the 1997 budget will be a premature time to do so.

There is one area where we have a slightly different view on that, which is employment insurance premiums. They have gone up very significantly in the last seven or eight years. We think, given the large surplus that's building up in the employment insurance account and the negative effect of rising payroll taxes on job creation, that it would be timely to have a modest cut in the employment insurance premium - slightly more than Mr. Martin has signalled so far that he's prepared to do. We would be happy to talk about that during the question period.

A final point on tax policy often ignored in media discussions: Although the government claims to have largely held the line on taxes, the reality is that because of a lack of full inflation indexing of the income tax system, Canadians face a hidden annual tax increase, amounting to many billions of dollars over the past decade. This unfortunate situation dates from 1985, when former finance minister Michael Wilson announced that the tax brackets and tax credits would only be adjusted to the extent that inflation exceeded 3%. Mr. Wilson's policy has been maintained by the current government.

As soon as fiscal conditions warrant, we believe that full inflation indexing should be restored, and that should be probably the number one tax policy priority - rather than reducing the rates, restore the full indexation.

.1240

As a brief comment on unemployment and job creation, probably the number one concern for those of you who are in the business of getting elected every four or five years, it's been a fairly poor performance in Canada in this economic cycle. A big part of the reason for that has been public sector retrenchment and downsizing. That's something we've not experienced in Canada from during the post-World War II period until the 1990s.

For what it's worth, the private sector has in fact created roughly 900,000 jobs since January 1992. Although that is a lower rate of increase in employment than we have seen in previous cycles, it still indicates that some jobs are being created.

As Mr. Martin pointed out in his October statement, in the past 12 months private sector employment has increased by about 220,000 jobs. Given the low interest rate environment we are now enjoying, we think there's every reason to believe employment growth will in fact pick up, going forward into 1997 and 1998.

One of the things the government could be doing to encourage that, other than maintaining the current framework of fiscal policy, continuing to run a low-inflation monetary policy, is to look for opportunities to reduce and streamline the regulatory burden on industry while at the same time avoiding new measures that would in fact add to that existing burden.

In connection with the latter, we want to go on the record in voicing our concern about possible changes to parts I and II of the Canada Labour Code that are currently being considered by your colleague, the federal Minister of Labour. We're worried that the changes being contemplated could reduce flexibility and raise compliance and administrative costs for federally regulated employers. We don't think that's the way to go if the objective of policy-makers is to encourage jobs.

There are many other issues we could discuss, including GST integration, the need for Canada Pension Plan reform, and the impact of the Canada health and social transfer formula on discriminating against British Columbia, Ontario and Alberta in federal transfers, but perhaps we can deal with those in discussion.

Thank you for the opportunity to address the committee.

The Vice-Chair (Ms Whelan): Thank you, Mr. Finlayson.

I'll turn now to Mr. John Ellis from Marsh & McLennan Limited.

Mr. John Ellis (Member of the Advisory Board, Marsh & McLennan Limited): I'm presently a member and immediate past chair of the advisory board of Marsh & McLennan, and past chair of many other organizations, such as the Canadian Chamber of Commerce; the Canada Development Corporation; founding director of the Asia Pacific Foundation; and ex-vice-chair of the Bank of Montreal and presently an honorary director. I'm saying that not for self-aggrandizement but to let you know that you're listening to a small, pragmatic businessman.

[Translation]

Madam Chairman, I would like to thank you and welcome you.

I don't want to be a doomwatcher or a wet blanket.

[English]

For those of you who don't understand what that is - and I spoke to some French-speaking people who didn't know either - it's a wet blanket, so it's a double pun. Unlike my previous appearances at this forum, I'm here as a cautiously optimistic Canadian taxpayer.

My presentation is simplistic and not far astray of Mr. Hansen's comments, although I'm suggesting a compromise. I'm optimistic because at last there would appear to be some light at the end of the economic tunnel, thanks to the positive actions of our present finance minister, whose policies appear to have resulted in deck-level interest rates and inflation.

It is satisfactory to note that the heretofore paralysing national debt shows signs of coming under control, which is great news. Unemployment and creation of jobs seems to be the most vexing problem.

Instead of my usual litany of complaints and suggestions, I wish to make just one of the latter; that is, at the first opportunity, lower taxation to set the wheels of stagnated consumer demand rolling again. You'll note that I say ``at the first opportunity.'' I have little doubt that such action, in concert with cost-cutting, would help ensure both government popularity and a return to prosperity for our country. Low interest rates alone do not appear to be prompting the job creation. Lower taxation might do so and would make Canada a more attractive locale for foreign direct investment.

Domestically, I believe the combination of low interest rates and high overall taxation is having a negative impact on consumer spending. Export figures certainly are impressive but should not blind us to the importance of the domestic markets.

.1245

Psychologically, there is a widespread feeling of job insecurity. Restoration of confidence in the future would mitigate people's concerns in this respect. Practically and symbolically, easing of taxation rates would undoubtedly help. However, I believe major tax cuts should prudently await strong evidence that substantial debt reduction can in fact be effected.

I believe that highly visible but minor tax cuts should be made now and be widely publicized for psychological reasons. They would not have any great effect on our debt situation or on the present debt.

In conclusion, I applaud the Honourable Paul Martin for his common sense approach to a horrendous problem not of his making.

Thank you.

The Vice-Chair (Ms Whelan): Thank you, Mr. Ellis. That was brief and to the point. You got all the points out there. That was great.

I would turn now to Mr. Bruce More from the Confederation of University Faculty Associations of British Columbia.

Mr. Bruce More (Confederation of University Faculty Associations of British Columbia): Thank you very much. Thank you for the opportunity to bring to light some important issues relating to the prosperity of our country.

To begin with, I'd like to thank David Strangway for his eloquent comments on behalf of the universities. We certainly link our thoughts with those.

Life in our universities has become a constant struggle for resources. Facility administrators, staff and students alike spend a large portion of their lives in the pursuit of the means to engage in the real functions of the university - learning, research, and community service. Some of you and many Canadians will be untroubled by this. After all, life is tough and we must all tighten our belts. We fully understand and sympathize with these views. We do have a duty in the universities, however, to think about things beyond the horizon of the next election. Prosperity and social development will not fully bloom simply because we manage to balance the budget or pay off the debt. There are other preconditions.

The importance of a vibrant and innovative private sector is without doubt. But we also need a vibrant and innovative public sector, not only to provide the social safety net but also to fuel the private sector through the development of creative and capable individuals.

It is through public education and training that we give the opportunity to Canadians, regardless of social origin and financial means, to achieve their potential. Were it not for our systems of general public education and accessible post-secondary education and training, many intellectual social and business leaders would not be where they are today. These achievements may, however, be in the past. We will not tell you the universities will fall into ruin as a result of the reduction in transfer payments. They won't. They will, however, change, and not for the better.

We've already witnessed a polarization in our institutions. Science, engineering, and the applied arts, economics and commerce, for example, have obtained a relatively better financial position than the humanities and social sciences. Within the disciplines, applied research is the favoured child. This is troubling, because if the pundits are correct, our economy will be increasingly reliant on our ability to generate knowledge and use it in creative ways. By concentrating only on the applied disciplines and activities, we risk creating a parasite economy dependent on the discoveries and developments of others.

This is one of the reasons we support the brief submitted jointly by the Association of Universities and Colleges of Canada, the Canadian Association of University Teachers, and the National Consortium of Scientific and Educational Societies.

We must support and rebuild the research infrastructure if we are to become more than a branch plant economy. It is a national tragedy when Nobel laureate Sir Harold Kroto returns to Canada to find that the National Research Council, the vibrant government research laboratory that actually worked, is a shadow of what he knew in the 1960s and 1970s.

But a revitalized research infrastructure is useless without the people to work with it. We have heard many times that federal funding cuts are resulting in fewer opportunities for students. This may not be demonstrable through the price elasticity equations of the economists, but it is demonstrable through the work of such scholars as Dr. Lesley Andres, whose study of B.C. high school graduates found substantially different characteristics between those who go on to post-secondary education and training, and those who do not.

.1250

If we are committed as a country to developing the potential of our population, both as economic actors and as citizens, then we must provide the means for this to happen. Cuts to research funding do not help, nor do cuts to federal transfer payments. These may provide short-term relief to government finances but ultimately undermine the prospects of a country that is dependent for too long on its physical resources.

Today's young people deserve a chance for tomorrow. We urge you to recommend to the Minister of Finance that planned cuts to the CHST not be implemented and that past cuts be restored.

We also urge you, as you have done in the past, to champion the important role of research and development to our economy and society, and advocate for the revitalization of the research infrastructure in our universities.

Thank you.

The Vice-Chair (Ms Whelan): Thank you very much, Mr. More.

I turn now to Mr. Norm Stark, president, from the Greater Vancouver Gateway Council.

Captain Norm Stark (Chair, Greater Vancouver Gateway Council): Thank you. Good morning. First of all, I'm the CEO of the Vancouver Port Corporation and the chairman of the Greater Vancouver Gateway Council. Our members are Air Canada, the Maritime Employers Association, B.C. Rail, the B.C. Terminal Elevator Operators' Association, the B.C. Trucking Association, the B.C. Wharf Operators' Association, Canadian Airlines, Canadian National Railway, Canadian Pacific, Chamber of Shipping, the Fraser River Harbour Commission, the Grain Workers Union, the Vancouver International Airport Authority, and the Vancouver Port Corporation. We have members from Transport Canada, from the provinces of Alberta, Saskatchewan, Manitoba, and also from the Asia-Pacific Foundation.

I was hoping to give you a nice coloured slide presentation this morning, but I'm sorry I didn't arrange it far enough in advance to have the projector.

Every time a 747 lands at Vancouver airport it creates one person-year of work. Every time a container ship arrives in Vancouver harbour it creates four person-years of work. Every time a container train goes from Tacoma to Toronto versus Vancouver to Toronto, it costs the Canadian economy $400,000. Each container represents about $1,000 to the Canadian economy, and last year 150,000 Canadian containers went through the seaports of Seattle and Tacoma.

The gateway represents 28,000 person-years of work. It creates wages in excess of $1.2 billion and it creates taxes to all levels of government of $856 million. The 28,000 jobs in the gateway are more than those in mining and fisheries combined in British Columbia.

The policies we are proposing through the gateway are to maintain a vibrant gateway economy to provide wages and high-skilled jobs and many employment opportunities, to maintain major sources of tax revenue for all three levels of government, and to prove the competitiveness of Canadian export trade.

The United States ports have certain tax advantages over the Canadian gateway ports. They can issue tax-exempt long-term bonds to finance the expansion of facilities. There are no corporate taxes on port authorities. Municipal taxes are 50% to 90% lower and no dividends are paid by the gateway ports of Seattle and Tacoma. They are also taxing authorities.

To give you an example of the impact of those various things I've outlined, tax-exempt bonds are equivalent to $18.60 per container moving through those ports. Lower municipal taxes result in the region of $5.70 per container. They do not pay dividends or corporate taxes, which equates to $4.30 per container. There's no tax on private capital, which is equivalent to approximately 40¢ per container. Also, the Port of Seattle is a taxing authority. Last year it taxed the residents of King County $35 million U.S. This equates to a further $16 per container.

All of that rolled up is equivalent to $45 per container, or a 23% advantage in taxation alone, given that it costs about $200 to move a container through the port of Vancouver.

.1255

The recommendations we are proposing are general purpose revenue bonds, special obligation tax-exempt revenue bonds, and special development bonds. We are proposing at local taxation - I realize this is not directly related to the federal government - a level playing field with the U.S. Pacific Northwest ports. They pay some 50% to 90% less in local taxation than the Port of Vancouver and Fraser Port.

We recommend the government implement the Standing Committee on Transport recommendations that special payments to the government be discontinued. The Port of Vancouver contributes $89 million in special payments.

We're also recommending that for corporate taxation the current policies continue. Port authorities are exempt from corporate taxation. The U.S. ports do not take corporate taxes, as I mentioned. If gateway ports were required to pay corporate taxes, this would add a further $2 per container to the cost advantages already enjoyed by the U.S. ports.

In terms of benefits, we see the benefits that would be expanded. These are tax revenue benefits that would improve the competitive position of the gateway ports. It would create further job opportunities. To give you one example, we are about to lose one million tonnes of potash to the United States port of Portland. Three million tonnes of potash is equivalent to 120 person-years of work and $2.7 million in taxes to the Government of Canada.

In the recommendations I've outlined, if those were accepted by the government, the cost advantage would be four and a half to one. Overall, for all of the recommendations I've mentioned, the total benefits are seven to one, or $248 million to the Government of Canada.

I'd like to highlight that every dollar added to the cost of the gateway's operations is effectively $1 added to the cost of Canada's export trade.

This concludes my presentation. In the package I gave you there are copies of all the recommendations and further information. Thank you.

The Vice-Chair (Ms Whelan): Thank you very much, Mr. Stark.

We're now going to turn to questions. We'll begin our questioning with Mr. Rocheleau.

[Translation]

Mr. Rocheleau (Trois-Rivières): My first question will be for the university sector representatives. How can one be happy, like many economic organizations, with the Chrétiens'government policies, particularly Mr. Martin's, when we know that they make the needy, social welfare recipients and unemployed grow poorer and are causing problems to provincial governments and federal organizations?

Incidentally, Mr. More talked about it earlier. He indeed indicated that those measures were placing famous federal organizations like the National Research Council, in a very difficult situation. I wonder how somebody can accept such a situation when the federal government is dumping its problems into the provincial backyard, the provinces doing the same with municipalities. According to the Constitution, universities are a provincial jurisdiction and that is why I am asking you.

[English]

The Vice-Chair (Ms Whelan): Would someone from the universities like to respond to this? Mr. Clift.

Mr. Robert Clift (Executive Director, Confederation of University Faculty Associations of British Columbia): I don't think we should be happy. It's clear from our brief we're not particularly happy about that situation. However, we recognize, as everyone has made comment on this morning, that there are problems the federal, provincial and municipal governments are dealing with.

.1300

We are pointing out that the government still has a responsibility, even in times when there is trouble, to have measures to promote economic growth to ensure the economy is prepared for the future. And in our view, this is the role of education and the role of research. In that respect, inasmuch as those measures have negatively influenced what's happened in terms of us preparing our young people and doing our research, we're not happy with them. As for the effect on other sectors, our colleagues in the social welfare sector and in the health care sector are also certainly not happy with those measures.

We're not going to play at beggar's banquet here as to who is poorer. We're saying that our sector has an important role in investing in the future of the country and that in that respect it should be supported.

Mr. Strangway: My point is very similar. The point I was trying to make, whether it's international activities, whether it's spin-off companies or whether it's job creation.... We are - and should be looked upon as - not only a social part of the system. We are, in fact, one of the key economic drivers.

If you look at surveys that have been done recently of graduates of the universities in-province - and this is true in other provinces as well - two years after graduation something like 95% or 96% of university graduates are fully employed. They're creating new jobs and they're making small companies and so on. We are part of the solution; we're not part of the problem.

The other point I was trying to make is that if you look at the productivity improvements, we are doing an immense amount. And in my case, I pointed out 2.3% productivity improvement per year, for ten years, non-stop. It is about as good as most of the private sector has been doing. We've been doing our share in that respect.

However, at the same time I also see that the provincial government is not only passing it on to us.... When I see that the provincial civil service payroll has gone up 40% in the last five years, I have to ask myself this question: where are the provincial priorities?

That's not what your job here is today, but it isn't all a question of it being not passed on to us. It's also a question of an awful lot of it stopping and being spent at other levels. I think it's very important that you understand that. That's why, in looking at the infrastructure program, perhaps looking at overhead on research grants and contracts - or however that would be managed - would be a way of dealing with it without having it taken up and used in the process before it ever gets to us.

[Translation]

Mr. Rocheleau: My second question is for Mr. Finlayson.

Mr. Finlayson, as a resident from Eastern Canada, I am being told that things are not that rosy in British Columbia, even if the medias always portray the situation in a positive light. I am surprised, more so that we are often told that you are taking advantage of a phenomenon that does not exist in Quebec, namely a major immigration of foreign investors, in particular people from Asia. How can we reconcile this positive phenomenon and a so-called mediocre situation?

[English]

Mr. Finlayson: In the 1990s we have benefited from the influx of international immigrants and the investment they've brought. That's helped us support our economy, but it has not been sufficient to offset other things that have been happening. I'm not suggesting that it hasn't been an important part of the story.

The other issue is where the investment is going that is provided by individuals who immigrate to the province. There isn't very strong research on that, but there's some indication that a lot of it goes into assets related to real estate rather than into building factories or building the advanced technology sector, let's say.

The main impact of strong immigration to British Columbia from abroad - and from within Canada, until recently - has been to increase the overall consumer spending and to boost activity in the housing sector, rather than in our major industries.

.1305

So it's been positive, but I guess the message I want to give you is, sitting here in Vancouver reading The Globe and Mail and watching the CBC national news, I see an image portrayed of this province that I feel very strongly is no longer accurate in terms of where we are at in November 1996.

Certainly we escaped the very significant economic downturn that hit Ontario, Quebec and much of the rest of the country in the early 1990s. We did skate through that, largely because of population growth, again. When your population's growing 2.5% a year, you tend to have an expanding economy. Even if people aren't getting more prosperous, the size of the pie is still growing. Indeed population growth is still the number one factor supporting our economy.

I don't happen to feel it's a very sustainable economic policy to rely on our expanding population to drive economic growth. We need other kinds of strategies in B.C., but that's our problem, not necessarily the problem of the federal government.

The Vice-Chair (Ms Whelan): Thank you, Mr. Rocheleau.

I was a bit remiss at the beginning. I should let our witnesses know who our MPs are and where they come from.

Mr. Rocheleau represents the riding of Trois-Rivières in the province of Quebec. Mr. Solberg represents the riding of Medicine Hat in Alberta. Gary Pillitteri represents the riding of Niagara Falls in Ontario. Ron Fewchuk represents the riding of Selkirk - Red River in the province of Manitoba. Ron Duhamel represents the riding of St. Boniface in Manitoba. And my riding is Essex - Windsor in the province of Ontario. That's just so we're all aware of where we come from.

Now I'll go on to Mr. Solberg, please.

Mr. Solberg (Medicine Hat): Thank you, Madam Chairman.

First I'd like to welcome you before the finance committee and say it's a pleasure, as always, to be in the great city of Vancouver.

I have a couple of specific questions, first of all.

Mr. Finlayson, I believe, and Mr. Hansen raised the issue of labour regulations in passing, or it's in their brief at least. I wonder if they could tell me specifically what labour regulations they're concerned about.

Mr. Finlayson: Specifically, the federal government is undertaking a review of the Canada Labour Code, which is the federal labour law that applies to federally regulated industries such as banking, telecommunications and transportation. It only covers about 11% of the labour force, but still, the industries tend to be very important to the functioning of the national economy.

We have no problem with the review being undertaken. It's looking at issues around labour management obligations and rights, and one of the items on the agenda is a possible prohibition of the use of replacement workers, for example, in the event of a work stoppage or strike. We've had experience with that in our provincial labour legislation, and I don't think business would recommend it to the federal government as an approach, although there are arguments on the other side as well.

Secondly and potentially more important is a review that will be undertaken - it hasn't happened yet - of the employment standards component of the Canada Labour Code. It deals with hours of work, overtime, working conditions and all the regulatory issues around that.

Again, there's nothing specific, but we're aware the review is going on and we're concerned, I guess, about what might come out of it.

The Vice-Chair (Ms Whelan): Mr. Hansen.

Mr. Hansen: The key point here is that whatever regulations are contemplated for change, they should be seen in the context of what's positive for the economy. There are some concerns in some of the things that have been talked about on the labour front, but more to the point, it's important that not only labour laws and labour regulations but whatever new regulations are contemplated be checked against the impact on the economy.

Mr. Solberg: I want to go the next step on that and ask Mr. Stark about it.

One of the frustrations for people in my part of the country is that every year - it seems like every year - we're faced with labour walkouts and stoppages at the Port of Vancouver. I didn't hear you address this, but it's a tremendous concern to people in my part of the world.

.1310

I'm wondering if you have any recommendations that would help address this problem, which is chronic and which the federal government doesn't seem to want to tackle, but which certainly has a profound impact on the western economy. In fact, it's ultimately going to work against the port of Vancouver, because people are very serious about shipping as much as they can through the United States because of it.

Capt Stark: It's a very good point you bring up, but I can advise you that now we have a three-year collective agreement with the IWA. But 35 different collective agreements are associated with the port of Vancouver. They include anything from railroads to trucking to towboats to pilotage.

In addition to that, I should also advise you the labour rates in Vancouver - the charge-out rates, not what the longshoremen get - the average charge-out rate is around $35. In the United States the labour charge-out rate is over $60. They have recently come through a bargaining process with the longshoremen in the U.S. where they were given $2 an hour in the first year, and $1 and $1. In Vancouver the settlement was somewhere in the region of 60¢ or less.

I know we're very concerned and we are working through things such as our Gateway Council to try to improve the relationships between labour and management. I think they've come a long way.

I don't know how you get down from 35 different bargaining units to a manageable size, but that's something which because of the size of the port is impacted all the way through. Our focus is on trying to make sure labour understands the issues faced by business today. I think more and more they're starting to understand those issues.

Mr. Solberg: Thank you. I'd like to explore that further with you, but unfortunately we don't have the time right now.

I do want to address something a number of witnesses have mentioned. They feel now, under the present scenario, is not the time for major tax cuts. I want to submit that perhaps the present scenario isn't the only scenario possible. A lot of people, certainly in my party, would argue that right now we have a government that is still too large, it's involved in things it shouldn't be involved in, some of the things it's involved in it runs extremely inefficiently, and it's quite possible to have a much smaller government; in fact it would be a lot more efficient to have a much smaller government.

I'm curious to know whether or not witnesses feel it would be possible to reduce the size of government further, which would allow more money to be refocused on important areas such as the universities, areas such as health care, where people have made it fairly clear they want to see more services, and at the same time allow people to keep more money in their pockets, which obviously would help spur the domestic economy and help job creation. I wonder if any witnesses would care to touch that one.

The Vice-Chair (Ms Whelan): Mr. Strangway.

Mr. Strangway: I certainly took it on directly with respect to the provincial government, which is the one I see most directly. I see I keep mentioning these figures, but I mention again that there has been a 16% growth in people and a 40% growth in the provincial payroll in a five-year period. I see massive attempts to try to bring that under control, but they are bringing that back only to half of what it was they increased it to in the last few years.

Again, I look at the priorities and I look at what I have to do in terms of delivering courses and teaching and research on the front line, so my own particular sense is closer to an awareness of that issue. I suspect there is also some truth to it with respect to the federal government. But I'm less aware of the kind of detail I was giving you on the other level of government.

The Vice-Chair (Ms Whelan): Mr. Ellis, did you wish to comment on this?

Mr. Ellis: I think it's highly desirable that we cut government expenditures. There's no question about that. I agree with Mr. Solberg on that one. Can you do it? I don't know. It's up to you people.

As I understand your platform, Mr. Solberg, your number one is to lower taxes for all Canadians.

Mr. Solberg: Balance the budget is our number one priority. Then, once you run surpluses, it's to offer Canadians lower taxes.

Mr. Ellis: Did you read this article on Saturday, ``Reeling under tax overload'', in The Financial Post? In it they still show Preston Manning as saying number one is lower taxes for all Canadians...simplify and flatten income taxes, cut unemployment insurance premiums by 28%, balance the federal budget by March 31, '69, start a debt retirement program to reduce total federal debt -

Mr. Strangway: It's '99, I hope.

Mr. Ellis: Yes, '99. Sorry, '69...that's a Freudian slip. It comes from age, you see.

.1315

Mr. Hansen: That was the last time the budget was balanced.

Mr. Ellis: And a number of other things. But is that your platform?

Mr. Solberg: Our platform is to balance the budget first and then introduce tax relief - that's correct - in addition to retirement, and refocusing of social -

Mr. Ellis: How practical is it?

Mr. Solberg: I think it's extremely practical if you have the will to do it. I would argue that unemployment insurance is extremely inefficient today, as are regional development subsidies, and that there are lots of things the federal government is doing that provincial governments should be doing today.

That's the approach we're taking. We're not saying this is the present scenario; let's improve on it. We're saying let's find the optimum size of government and determine what things government should be involved in, and leave the rest to lower levels of government and to individuals.

Mr. Ellis: Well, you're in a much better position than we are to work on that, because you sit in the high house, don't you?

Mr. Solberg: I'm just asking for some feedback.

Mr. Ellis: Yes. Well, this article I'm quoting here has one proviso:

But the euphoria over these improving deficit positions masks the more serious problem of total debt.

I think, John Hansen and Mac, that we are in accord on that one.

The Vice-Chair (Ms Whelan): Thank you, Mr. Ellis.

We have a couple of others who would like to comment. Mr. Finlayson.

Mr. Finlayson: I don't doubt for a moment that there are additional expenditure cuts that could be targeted at the federal level. But the federal government is shrinking and has shrunk already, and it is set to shrink considerably. In fact, in Paul Martin's fiscal statement in October he indicated that by 1998-99 the federal program expenditures - that is, total spending minus debt-servicing costs - will be down to 12% of Canada's gross domestic product, which is the lowest in 40 or 50 years.

If you want to push that further, I'm sure you could, but there's a real.... Arguably there are areas - and you identified a couple of them - where federal expenditures should go up. I would personally argue for funding of education - more so than health, by the way, although politically health is a much hotter button.

In fact one of the concerns I have with the Canada health and social transfer is that the federal government is primarily focused on ensuring that most of that money is going to flow into the health care system because that's where it perceives public opinion to be directed. If that happens, we could end up with even a further severe underfunding of post-secondary education, and also the research activity. Primary research must be funded by government. Industry will fund applied research, but it will not fund primary research.

So I'm not sure. I've read your platform, and while I have some interest in it, I'm not sure where that extra $10 billion or $15 billion of spending cuts is going to come from, and I'd be pleased to be enlightened on that.

The Vice-Chair (Ms Whelan): Thank you. Mr. Lewis.

Mr. Lewis: I could make a couple of comments, and particularly speaking, from a large business perspective.

Tax rates are one thing, and income tax rates are one thing, and cash taxes that are actually paid are another. In my material I indicated that half the cash taxes we've paid are taxes on income. The other half of the cash taxes we've paid are taxes that are not related to income. They're merely related to the employees we have, in the form of payroll taxes, and related to the capital we have invested in the business, in the form of capital taxes - both federal and provincial levels - and related to the consumables we purchase and use in the business.

In that we're in a very competitive business, and we look at cash taxes, and generally that relates to the amount of income taxes you pay. And when we are looking to attract investment dollars into our business to support $3 billion worth of capital spending in the next year and our two major competitors will be AT&T and the new merger of MCI and British Telecom, the two largest telecommunications companies in the world, both have much more favourable tax regimes in the area of deductibility of capital expenses. In other words, in both the United States and Great Britain, deductibility of capital expenditures is at a far faster rate than we have here in Canada. Yet we're faced to compete with those people, we're faced to raise capital in the same markets, and we're faced with the same rapidly evolving technology. There's a requirement to quickly replace equipment, otherwise we lose the leading edge position we have.

.1320

In the business of telecommunications there is absolutely no magic to where the switching centre is located today - it can be placed anywhere in the world. I would suggest that as a telecommunications industry in Canada we have supported Canada. We employ Canadians, we buy Canadian, we pay our taxes in Canada, but I think what we're looking for is a level playing field with our major competitors.

On whether there should be a tax rate decrease, I am inclined to say that potentially we can manage with the tax rates we have right now until the deficit is brought under control, until we come to a position where we're actually starting to reduce the debt and relieve ourselves of this $40 to $50 billion annual debt-servicing cost. That will be the time we can then see further growth in Canada. In the meantime, we do need the advantage of a level playing field with our major competitors.

The Vice-Chair (Ms Whelan): Thank you, Mr. Lewis. Mr. Stark.

Capt Stark: Certainly from the point of view of transportation we very much believe that the government is on the right track in terms of what has happened with airports, what is happening with Bill C-44, the Canada Marine Act, and what has happened with the coast guard in terms of moving on to cost recovery, and so on. We believe very much that the government staying involved in policy and safety is the way to go, removing themselves more and more from operations.

The Vice-Chair (Ms Whelan): Mr. Campbell, do you wish to comment?

Mr. Mac D. Campbell (Director, Vancouver Board of Trade): Yes.

One major area of cost reduction we have been debating is interest. That's not just related to the debt; it's the level of interest rates. John Ellis mentioned the psychological potential of a minimal tax reduction in that it would have a beneficial impact on consumer expenditures.

The federal government, Minister of Finance, and the Bank of Canada have a band for acceptable inflation levels, which is currently 1% to 3%. One of the topics we have been discussing is the wisdom of moving that down to 0% to 2%, yet keeping the average level at about 1% level of inflation, which is where it is today.

Right now we have historic high long-term interest rates, bond rates, and those rates haven't come down anywhere near the short rates. It's really the long rates we're dependent on, in terms of job creation.

We think this is something the Minister of Finance and the government and the Bank of Canada should consider - moving that band down to 0% to 2%, albeit keeping our current 1% almost as the operational level.

But there is another psychological benefit that could help the bond market, and if you can take another point or point and a half out of the long-term bond rates.... Right now you're running - as John's report indicated - $100 million a day in interest levels. There's a big saving, and it's something relatively easy for the government to address.

The Vice-Chair (Ms Whelan): Thank you, Mr. Campbell. Mr. Hansen, did you wish to comment as well?

Mr. Hansen: Yes, I did, Madam Chair. I'd like to respond a little further to Mr. Solberg's question, and to Captain Stark's comments about transport.

Some of the things that have been going on in transportation management in Canada we think are exactly the right things to happen, where airports and ports and other such services have been devolved from government operations. The government then focuses on the regulations and policy and safety and so on - an overview of the system, and those kinds of matters the Government of Canada truly has a mandate and a functional responsibility for.

Perhaps there are other departments that ought to be considered in the same context - human resources, perhaps. Some of the housing issues the government is involved in - CMHC and those kinds of operations - maybe should be looked at in the same way.

The Vice-Chair (Ms Whelan): Thank you, Mr. Hansen. Thank you, Mr. Solberg.

Mr. Duhamel.

[Translation]

Mr. Duhamel (St-Boniface): Thank you, Madam Chairman. I really appreciated this morning's presentations.

[English]

I've got three brief questions. The first one deals with interpretations I've given. If I've not done that well, please correct me; I won't be offended.

It seems to me that most of you are saying the current course is not a bad one, it's really quite sound; continue the plan. There may be some adjustments that are required, but I have not heard any major adjustments being suggested.

Again, in interpretation, most individuals have not suggested any major tax cuts. There have been some suggestions by Mr. Ellis, perhaps, for certain selected strategic ones. Yet as we listen to all of the presentations there's clearly a need to invest additionally in certain areas.

.1325

I'm going to comment now on David Strangway's presentation. The area of research and development touches all of us, and indeed in the area of infrastructure.... The question I want to ask on that particular point is twofold. Are my interpretations reasonably accurate in terms of what I've just said? And secondly, if it is true that we need to invest additionally in research and development - I believe that to be true, including the infrastructure - where would we get that money from? Do you think it's reallocations only? What are we talking about in terms of dollars and cents? Because I've also read the brief, and while there are some interesting figures there, I'm not sure that we have a solid figure, not only for your university, but for the several universities we have throughout the country. I think there are probably about 80 or so degree-granting institutions, if my memory serves me correctly. That's the first point.

I would also like to know how well we compare with our competitors in terms of research and development. Mr. Strangway, you've indicated that you've just come back from Japan, from doing some sizeable additional investments in that area. But how do we do on a per capita basis or by some other measure? How do we compare? How are we doing?

A final question, if we have time, and just a brief example or two of over-regulation.... I keep hearing that from a number of witnesses and people who talk to me. Just give me a couple of concrete, specific areas where we are over-regulated, where it's costing you a lot of bucks and where we're not as efficient or as competitive as we might be as a result.

The Vice-Chair (Ms Whelan): Mr. Strangway.

Mr. Strangway: Let me pick up on your second question first.

There are a lot of countries around the world that assess their level of R and D expenditure as a unit called GERD, gross expenditure on research and development, relative to the gross domestic product. That number is a very interesting number, because in the more developed countries it is typically in the range of 2.5%, and in some cases it's rising. In Canada it's about 1.3% and falling.

When I visit Taiwan, I find that they're at 1.5% or 1.6% and they have a national policy to reach 2.5% very soon. When I visit Korea, they've decided they're going to get to 3% in the next two to three years. When I look at Japan, they are already in that range, and they're saying there's not enough of it going into basic research, so they're going to have to double the amount that's going into the basic research. And I don't know where that will put this GERD product for them. It will probably put them around 3% or something of that sort. If you look south of the border, they're looking at numbers of around 2.5%.

So if you look at either the developed economies or at the ones that are the fast-moving economies where things are really beginning to happen in a major way, there's where they are putting their money, and they're putting in that kind of amount. We are at about half of that level in this country. So the -

Mr. Duhamel: Just for clarification, that includes both university-based research as well as private sector research.

Mr. Strangway: That includes all of it. Part of the issue in Canada, of course, is whether there's enough private sector spending going in. But we are still low with respect to the amount that's going in from the government side as well. I think we have a long way to go if we're going to play in those leagues, in effect, and if we're going to be fully competitive.

In terms of how much needs to go into an infrastructure program, that's a very tough question. I can give you a statistic that relates to our university. We now have about $140 million a year in research grants and contracts. Most of it, by the way, is used for employment. We hire people with it. We hire technicians, secretaries, clerical people, all the different kinds of people you hire with this.

If we were in another jurisdiction, for every grant dollar we brought in we would have an overhead dollar to go with that - or an infrastructure dollar or whatever terminology you want to use - that would typically be in the range of 50¢ to 60¢. I don't know exactly how I can multiply that across the country, but we're probably 5% or something of the national effort in this area. You're talking about those kinds of numbers.

.1330

In the past we have always depended on the provincial governments to make up the difference in the infrastructure, and of course that's one of the issues they have never acknowledged: that they are making up that difference. So we as the deliverers of research and development again find ourselves caught very much in one of these federal-provincial issues, where the feds say the provincial governments provide it, and the provincial governments say no, we don't, we never have provided it, we don't provide it, and you just get to spend whatever revenues you get from them.

That would give you at least a sense of the scale on the infrastructure question.

On your third question, I suspect that's actually better answered by some of my colleagues. I don't think it was particularly directed at me.

The Vice-Chair (Ms Whelan): Mr. Clift, do you wish to comment?

Mr. Clift: Mr. Duhamel may have to repeat his third question. I've forgotten it.

Mr. Duhamel: The third question was on over-regulation. There has been some reference to it. I just wanted an example or two. But my major question was on the whole notion of research and development infrastructure: how much additional investment is required to make us competitive? It's useful to have some monetary target.

If we can't get it here today....

Mr. Strangway: I could follow it up.

Mr. Duhamel: I'd appreciate that. Thank you.

Mr. Clift: I won't speak to the regulation question, really. The regulations for the academic community as they're applied nationally are fairly specific, and to a necessary purpose. We have some problems and we had a bit of a run-in this summer on some of these regulations, but those problems are being ironed out.

As far as a dollar value is concerned, I was just looking at the brief submitted by the AUCC-CAUT-National Consortium of Scientific and Educational Societies. They take a different approach from the one we have recommended. We've recommended restoration to the funding councils. Here are some quick figures. Restoring to 1994-95 levels would be in the area of $300 million to $400 million. I see by looking at the joint brief from the AUCC, etc., that in fact they're asking for a similar amount of money, but it's directed in particular ways.

Now, that's going to go part of the way towards addressing this issue Dr. Strangway has brought up about our overall spending as a portion of our economy. It's not going to get us there, by any means. But we've also recommended in our written brief that after we are back to a level we think we can build on, we need to sit down and figure out how we move from there.

It's very difficult right now because in the research community everybody is running around trying to make up, trying to figure out what to do, and nobody has much time to think about our broader visions and how we get to these international spending levels. Indeed, a lot of discussion has to take place in the private sector as well. We aren't alone in this. These things have to be worked out.

As for how we deal with these things, one of the other things we recommend in our brief is that when the CHST came into existence health care spending and social welfare spending were fairly prescribed. They were also prescribed by the Canada Health Act and the welfare act. But we don't have a similar envelope for post-secondary. As has been mentioned, money is being redirected from other areas in part because of this problem.

We made presentations guess, to Mr. Axworthy's commission two years ago now, I guess, and made some suggestions last year. We're recommending in our brief that an envelope be designated for education within the CHST. Once again, with Quebec there would be a different arrangement. We're not suggesting that this is the same arrangement for Quebec, but certainly for the other provinces.

That's a way the spending gets focused where it needs to be. If we don't make advances in terms of the money available, at least it's clear we're not eroding the base we have already.

The Vice-Chair (Ms Whelan): Mr. Hansen.

Mr. Hansen: I'd like to respond to Mr. Duhamel's question about regulation and to give one example. In environmental regulations, environmental assessment for major projects, most provinces have a pretty well-developed process for environmental assessment. This province certainly does. Yet there is constant friction between the federal process and the provincial process. If a project that's going through has some implications for fisheries, for example, where the federal act will come into play, it becomes extremely difficult for a proponent and the officials who are taking the project through to meet all the federal requirements and then the provincial requirements on top of that. I think some positive things could be done to expedite, to harmonize, those kinds of processes and to reduce some of the regulations and the overburden in that.

The Vice-Chair (Ms Whelan): Mr. Lewis.

.1335

Mr. Lewis: Maybe I could just make one comment from an industry point of view on scientific research and experimental development, which is a policy set out in the Income Tax Act. There are guidelines within the Income Tax Act as to what applies. The reason for this is that there is a tax incentive program that allows for a reduction in taxes paid as a percentage of R and D spending.

We found that while the act has not changed substantially since this was introduced into the act in 1975, the administration of those regulations by Revenue Canada has changed considerably over time.

Right now, we're in a position in which virtually everything we suggest is an R and D expenditure. It's generally in the area of applied research to a limited degree, but it's more substantially in experimental development and the development of new products.

But everything is being challenged. So I am sort of looking at this disconnection between Finance wanting a policy to encourage research and development and Revenue Canada, which is charged with the responsibility of administering a tax incentive program. I believe Revenue Canada finds itself in a bit of a paradox, which is to protect the fisc and also administer a tax incentive program.

So from the point of view of a large corporation, we're almost getting to the point at which we'd say you should do away with the R and D incentive program in the tax act. It's becoming too costly for us to administer to meet Revenue Canada's requirements.

The Vice-Chair (Ms Whelan): Mr. Pillitteri.

Mr. Pillitteri (Niagara Falls): Thank you, Madam Chair.

Thank you very much for the presentations you made here this morning. Most of you say we should keep the course because we are on the right course. I applaud you for saying that.

One thing that is puzzling to me this morning is that presentation by Mr. Stark, not that I want to take exception to it. It is that everybody came in here mostly saying to keep the course, but Mr. Stark came in here actually asking, in essence, for some subsidies, either by lowering taxes or lowering fees. You could call it a cut-down or a subsidy.

You know, Mr. Stark, you applaud the privatization in the Canada Marine Act, which will, in essence, streamline a lot of the process. But something is puzzling to me about what has happened in the past in the port of Vancouver. If you were to ask for all of this, and if it were to be granted to you, then in essence, the ones who are going on strike and so on, and saying that the port is making money, would show a spiralling effect: let's go out to get more by having a few more strikes.

But here's the question I'm going to be asking you. You have some 35 agreements. What about maybe trying to streamline some of these agreements? If you take the view that most agreements don't last more than two or three years on average, then an agreement would be coming up once a month on average in the life of 35 agreements of three-year terms.

I'm a businessman, and I do export to the Pacific Rim. The people at the other end ask me not to use the Vancouver port because they don't want to be stuck in there. The simple reason is that they don't know if it's going to leave Vancouver or not because they don't know which agreement.... Business people abroad are not really watching the issue of which agreement is coming on. There's just a label or tag on the outside. They say they don't want the response of someone saying that maybe it'll go through or maybe it won't. When business people make a decision, they want to live with that decision.

I just wonder if there shouldn't be more of an effort to try to consolidate those 35 groups of agreements that you are trying to target in terms of finding out what the real problem is and targeting more of the issue of why you have this label. Let's face it, even with those things coming along, you're going to leave that label until we start seeing it in the headlines, we start seeing that there are no strikes going on in Vancouver and everything is moving through.

I see this in the agricultural sector, and all sectors, where people have to depend on moving. Some people cannot have stuff waiting in a port for two or three weeks or a month in the elements.

.1335

I just wonder why, in trying to address these issues, you're not asking for a tax comparison specifically - what a country is paying - since you are in competition with the port business in the United States. I just wonder if you'd like to answer that.

Capt Stark: That might take a rather long answer, but in short, I do have to point out that, as I said earlier, the rates charged in the United States in the Pacific Northwest are over $60 an hour for longshoremen to handle grain through Seattle or Tacoma at the port itself. I'm not talking about transportation to the port. You could pay probably two to three times the cost of moving that grain through the port of Seattle.

In terms of 35 labour agreements, I mentioned that we have labour agreements with CN and CP that go all the way back across this country, so it's rather difficult for the port itself to be able to get in and mix it up. Railroad agreements are not easy.

We are trying in the Greater Vancouver Gateway Council. I think we have a group together that's working hard to get a better understanding. It's unfortunate that we have had a handle from several years ago in terms of our productivity and reliability.

I disagree that this is the case today. We have gone back into the prairies to meet with farmers, shippers, importers and exporters to try to get them to understand that there is a better labour climate here today than there may have been a number of years ago in terms of the number of days lost, which are not as great. I can't give you the exact number, but I can provide you with copies with numbers for over the last few years.

I think today that people are working a lot better. I've been here now 11 years in this port, and I've seen a big change in people working together and understanding that it's to everyone's benefit when we have labour sitting on our council and travelling with us on marketing missions, whether it's back into the prairies or to the Far East. There are a lot of things going on, but it's not easy when you have pilots in one collective agreement, tugboat companies in another, railroads in another and on and on. But overall, I think there's a better climate of understanding.

What we are trying to do as the Gateway Council is to point out to the government that every job coming through the port is important. It's important for us to keep down our costs.

We are losing a million tonnes of potash, as I mentioned earlier, out of Saskatchewan; it's going through Portland. One of the big issues is that the port of Portland is able to issue tax-exempt bonds. They're able to raise capital at about half the cost of that of our terminals.

We have an economic impact model - we can show it to you - of why those jobs contribute very significantly to all levels of government. If we lose a million tonnes of potash, which we will, then we are going to lose probably 40 or 50 jobs out of that, and all of those dollars are lost to the Canadian economy.

So we're not looking for subsidies, but we are trying to create a level playing field, at least with U.S. ports. They, as I mention, are tax authorities. When you pay your house taxes in Seattle, $300 of that goes to the port. We are not looking for that.

We are concerned about trying to show to all levels of government that the taxation bite is potentially going to hurt. The dollar, where it sits today, is quite a benefit, because all transportation, as you know, is done in U.S. dollars.

We had a dollar that was 73¢ or 74¢. It's now getting close to 75¢. As the dollar rises, of course, that affects the cost of transportation, because we do all our business in U.S. dollars.

So overall, we are doing our very best to work together here. As for the number of collective agreements, I think we do have a leadership role in the port and in the industry here, but combining collective agreements is a lot easier said than done.

The Vice-Chair (Ms Whelan): Thank you, Mr. Stark.

Mr. Pillitteri: Just to make a comment on that question, I do say one thing. Just for the record, I'll have to say that, yes, I am a Canadian, and yes, I do export through a Canadian port. I even know that it costs me over $230 per container. I just want to make that clear.

The Vice-Chair (Ms Whelan): Thank you, Mr. Pillitteri.

Mr. Pillitteri: But the issue is that we're getting it from the other side.

The Vice-Chair (Ms Whelan): Thank you, Mr. Pillitteri. Mr. Fewchuck.

Mr. Fewchuk (Selkirk - Red River): Yes, on that point, my people were here a long time ago too.

Anyway, Norm, on the ports, what do you see for the port of Churchill in Manitoba? In the direction we're going, do you think there is an opportunity for growth there, dealing with the ports?

.1345

That's a little bit different. I just thought I'd interest you -

Some hon. members: Oh, oh!

Capt Stark: That's a good question.

Ports are important to this nation. I'm going to give you a bureaucratic answer.

Some hon. members: Oh, oh!

Capt Stark: Ports today are being pushed more and more to be competitive and self-financing. If Churchill can meet the criteria for ports that the government is setting today under Bill C-44, then Churchill should be able to continue and prosper. And I believe they are good criteria.

Mr. Fewchuk: I'll go on to the universities, David.

I was a local politician for a number of years. I started in 1976 or 1977. It's been quite a while. You sit on the school boards and the hospital boards and then you go to the province and we tax the people like I knew on our land. Of course you know what happens at the municipal level: you just get the bill from the school board and you must pay.

In all my experience, I found the biggest problem was trying to negotiate with the provincial people for this money, for the school teachers, for the union contracts and so forth down the road. I don't think it's much different from what I see here today.

We, as a federal government, are sending the money to the provincial people. You don't hear it in so many words, but it's not going to the right places. In the last three years I've been here, I haven't heard many of these different groups here trying to really put this together and speak to the provinces to tell them there are sufficient funds, but let's get it to places where it's supposed to go.

I'm just looking for support. I don't hear this coming from all these groups. I'd really appreciate it.

Mr. Strangway: You recommend that and I'll be delighted.

Mr. Fewchuk: Thank you.

The Vice-Chair (Ms Whelan): Mr. Fewchuk, the time is quickly approaching 11 o'clock, so I'd like a brief comment from everyone to sum up.

I'll start with Mr. More and Mr. Clift. If there's anything either of you have to say, take a minute or two to sum up and then we'll go around the table.

Mr. Clift: I'll try to keep it very brief, since we've actually worked most of our comments into the questions.

Once again, thank you for the opportunity to be here. Members said they had heard staying the course was the answer, and that may be in some areas, but when it comes to the CHST and the effect on education, our impression is it's not good enough and things have to be done. So please don't leave with the impression that it's all okay on the education side. We don't think it's okay. That has to be addressed.

We thank the committee for its support last year, and we hope we can count on support this year in the importance of research and development to our society and to our economy. We hope you'll take to heart some of the recommendations that we, Dr. Strangway and our national organizations have made with respect to how to improve that.

The Vice-Chair (Ms Whelan): Thank you, Mr. Clift. Mr. Ellis.

Mr. Ellis: In the summation I'd like to introduce a new point, Madam Chairman.

Some hon. members: Oh, oh!

Mr. Ellis: Because of what is regarded as punitive taxation, there has developed in this country a tremendous underground economy. Government and everybody is fully aware of this, but are they doing the right thing about it?

I'm sure many erstwhile honest taxpayers are now happy to try to beat the GST, for instance. The cash business going on in this country has probably more than offset any tax cuts you can think of. I just put this out as an admonition that the government should be paying very close attention to this. I'm sure it's a horrendous amount of money. I hesitate to put a figure to it, but it's probably in the billions.

Thank you.

The Vice-Chair (Ms Whelan): Thank you, Mr. Ellis. Mr. Finlayson.

Mr. Finlayson: Thank you, on behalf of my organization, for the chance to be here.

I will leave you with a fairly upbeat message. If the government is successful in moving toward a balanced budget and getting that all-important debt-to-GDP ratio falling, a huge fiscal dividend will accrue to the federal government. The political system can sort out how that will be spent, whether it's through lower taxes or increased spending, but if your committee comes back here in three or four years, the financial context within which we'll be functioning is going to be far more favourable than it is today.

.1350

We really are poised. Just as the effect of compound interest rates drove the debt up during the 1980s and the first half of the 1990s, if we get the debt-to-GDP ratio capped, it will begin to melt at a very rapid rate, if we are able to secure several years of balanced or close-to-balanced budgets.

The gloom-and-doom environment we've been functioning in in fiscal policy for as long as I can remember could in fact change very radically, provided the current policies in place at the federal level are largely maintained.

The Vice-Chair (Ms Whelan): Thank you, Mr. Finlayson. Mr. Strangway.

Mr. Strangway: I'd like to quickly summarize.

One of my principal points was that we in fact have changed dramatically in this period of time, and it's important to remember that.

I also like to point out, sometimes somewhat fervently, that every student who enters a college or university is a success and every person who enters a hospital is a failure, because the objective of course is to keep people well and keep them out. There was a time, centuries ago, when the Chinese had the fee for the medical people paid on the basis of how well their patients were. That was an interesting way to go.

I'm not here to argue against health care and for universities, but I just want you to understand that's part of the trade-off being made.

Secondly, innovation and ideas are absolutely crucial to the future of this country. When you look at us, think of us as long-term investment, because we are central to that. We're not the only sector that plays a role - obviously many sectors do - but we are one of the most essential sectors to the ideas and innovations that will in fact save this country in the longer term.

Finally, I am very concerned, although we didn't discuss it much in the question period, about the international dimension of things. If we are going to be internationally competitive, our young people have to have chances to study and engage in things in the international context. They have to be able to move back and forth. I see all of that being resisted in terms of support for young people to be able to do those kinds of things. The words are there, but the dollars are going the other way.

Thank you.

The Vice-Chair (Ms Whelan): Thank you, Mr. Strangway. Mr. Lewis.

Mr. Lewis: I believe reducing the deficit and debt-servicing costs is the right direction. I would also suggest the private sector would like to see less government involvement and less government regulation in the business sector. The market forces can dictate more of the business environment with less government involvement.

The Vice-Chair (Ms Whelan): Thank you, Mr. Lewis. Mr. Stark.

Capt Stark: We are certainly very pleased with the transportation policies we see today, and we encourage the government to keep on track.

One thing I didn't talk about was regulation, but as John Hansen from the Board of Trade mentioned, we should find ways to harmonize the various levels of regulation at the federal, provincial and municipal levels. There are ways that can be done.

Thank you.

The Vice-Chair (Ms Whelan): Thank you, Mr. Stark. Mr. Hansen.

Mr. Hansen: We think it's a very good news story so far. There's light at the end of the fiscal tunnel. We can look forward to a balanced budget probably by 1999 or the year 2000, and I think at that point there will be a change in environment in Canada. A degree of optimism will show that will help the economy and help people make investment decisions and so on. That's very positive.

In the meantime, our recommendation would be not to undertake any across-the-board, major tax with reductions. Of course there are always opportunities for fine-tuning, and I think that ought to be taken into account along the way.

The Vice-Chair (Ms Whelan): Thank you, Mr. Hansen. Mr. Campbell. No? Okay.

I want to thank all of the witnesses for appearing before us today. It was a very interesting and well-thought-out discussion. We appreciate your presentations.

Any presentations that were not completed in full today we will definitely read in our record. If you have any other comments, don't hesitate to submit them to the committee within the next 10 days.

Thank you very much. This meeting is adjourned.

The committee will be reconvening at 11 o'clock. We'll take a short break.

Return to Committee Home Page