FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 17, 1998

• 0909

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order.

I would like to welcome everyone here this morning. As everyone knows, the finance committee has been travelling across the country seeking input on Canadians' priorities in reference to the 1999 federal budget. On behalf of the committee, I'd like to welcome everyone here.

This morning we have the pleasure to have with us representatives from the Canadian Automobile Association, Canadian Chamber of Commerce, Canadian Taxpayers' Federation, College of Family Physicians of Canada, Conference Board of Canada, Juvenile Diabetes Foundation Canada, and University of Toronto.

We will begin with the Canadian Automobile Association. Elly Meister is vice-president of public affairs and communications, and Jody Ciufo is manager of public and government affairs. Welcome.

Ms. Elly Meister (Vice-President, Public Affairs and Communications, Canadian Automobile Association): Thank you very much.

• 0910

I'm here today representing the Canadian Automobile Association and its eleven member clubs across Canada, and more importantly, the four million Canadians who are motorists on our roads.

We're pleased today to present our views on the 1999 budget. The association congratulates the government for its success in balancing the budget and eliminating the deficit. That's the national deficit. We remain very concerned, however, that the highway deficit continues to grow. CAA had earlier predicted that the continued neglect of our national roadways would lead to skyrocketing costs down the road. This lack of investment in highway infrastructure is Canada's hidden deficit that deepens while our federal books are officially balanced. Each year, on average, the federal government collects more than $5 billion in fuel taxes, but spends less that 6% of this money on highway maintenance.

The last report on the status of the national highway system identified 38% of the system as substandard, with a cost of $12 billion to bring it up to standard. Over the past ten years, these costs have escalated to $17.4 billion according to the council of ministers responsible for transportation and highway safety in a report that's soon to be released on the national highway policy study. We expect that the physical condition of our national roadways will have deteriorated as well.

For the 1999 budget, CAA calls on the government to reinvest a portion of its fiscal dividend in the national highway system. Each year in our member opinion survey, CAA members express their preferences for the federal government to be involved with the national highway system. Last year, 87% of respondents said it was important for the Canadian economy to have a national highway system that was well paved and free of congestion, while 85% believe that the federal government should play a role in funding our national highways.

This level of support translates into almost 3.3 million CAA members calling on the federal government to address these key routes. The council of ministers responsible for transportation and highway safety also presented impressive statistics showing that a $17-billion investment in our national highways over the next ten years would generate a $30-billion economic benefit. Long-term jobs, improved interprovincial and international trade, increased tourism, and increased productivity would accrue to all Canadians, not just motorists.

Internationally, Canada compares very poorly with other federal governments that pay a larger proportion of highway funding. According to the last national highway policy study, the federal government funds only 6% of the total expenditures on all highways in Canada, leaving provincial governments with 94% of the cost.

Most relevant to our economic competitiveness is the aggressive national highway program adopted by the United States to improve citizens' prosperity and safety. Legislated by Congress, total federal allocations for highways are expected to exceed $19.7 billion in 1998, which is 7.9% more than that of 1995, which is the latest year for which final numbers are available. In a recent column in the Globe and Mail, Jeffrey Simpson summed up the issue:

The United States is building transportation “gateways” feeding border crossings; Canadians are merely thinking about what to do...Ottawa is doing next to nothing, except collecting a whole bunch of money from road users without putting anything substantial back.

This speaks directly to CAA's position on taxation. Motorists shoulder an inordinate tax burden, most notably through the federal excise tax on gasoline, which now stands at 10¢ per litre. In 1995, the finance minister increased the excise tax by 1.5¢ per litre, or 17.6% specifically, to help reduce the deficit. Since then, motorists have contributed an extra $2 billion directly toward deficit reduction. This is in addition to the billions of dollars that drivers contribute to general revenues through other taxes and user fees. With the deficit eliminated, it's time for the government to stop penalizing motorists and reduce the excise tax on gasoline.

• 0915

How can we help Canadians prepare to take advantage of the opportunities offered by the new era? As we collectively emerge from the tradition of debt, Canadians can more fully realize new opportunities if they have the ability to move freely, affordably, and safely. Mobility is impaired by financial barriers in the form of excessive taxation, physical barriers such as congestion, and safety barriers.

Investing in our national roadways will ease the congestion in many of Canada's most travelled routes. Although it accounts for only 3% of all roads, the national highway system, which includes the Trans-Canada, carries 26% of all the traffic in Canada. Overly crowded roadways cause countless hours of personal time lost, huge losses in productivity, and greater emissions from idling vehicles.

The national highway policy study of 1988 estimates that bringing national roadways up to standard will save 160 lives, prevent 2,300 injuries, and save $20 million in property damage each year. We know how to do this: wider lanes, median barriers, straighter roads, and fewer roadside barriers. All we lack is the federal commitment to funding.

What is the best way for the government to help ensure there's a wide range of job opportunities in the new economy for all Canadians? The government can best achieve a wide range of job opportunities by ensuring a first-class infrastructure to set the stage for economic success.

A 1996 Transport Canada report noted that:

The decline in the rate of public investments in infrastructure coincided with a decrease in productivity growth, suggesting a potential relationship between the two.

Comprised of 24,500 kilometres of key trade and tourism routes, the national highway system facilitates international and interprovincial trade, delivers goods to markets, helps attract international investment in Canada, fosters increased tourism, and provides jobs in a number of industries.

Each year's delay in spending on the national highway system brings a delay in the corresponding benefits of economic prosperity, enhanced mobility, greater safety, and cleaner air. CAA urges the federal government to take action in the 1999 budget to help Canadians realize these benefits earlier and avoid even greater escalation in repair costs down the road.

Thank you, Mr. Chairman.

The Chairman: Thank you very much.

We will now hear from the Canadian Chamber of Commerce. Ms. Nancy Hughes Anthony, welcome.

Ms. Nancy Hughes Anthony (President and Chief Executive Officer, Canadian Chamber of Commerce): Thank you very much, and good morning. On behalf of the members of the Canadian Chamber of Commerce, I'd like to thank you for providing the opportunity for us to appear before you today and give you our views on the upcoming budget.

My name is Nancy Hughes Anthony. I'm the president and chief executive officer of the Canadian Chamber of Commerce. With me is Don McIver, who is chief economist with the Sun Life Assurance Company of Canada and a member of our economic policy committee.

I'd like to start by giving you a very brief description of who we are and who we represent.

[Translation]

The Canadian Chamber of Commerce is the largest and most representative trade association in the country. Our members represent the full range of business activity in Canada and we are thus in a position to speak on behalf of the business community.

With our network of 500 local chambers and offices, we have partners in all federal constituencies. Our network has more than 170 members and represents businesses of all sizes active in all sectors throughout the country.

[English]

I hope, Mr. Chair, that you and the members have in front of you our detailed pre-budget submission, which is called “A Business Plan for Canada”.

I'd like to use the time available to us today to give you the flavour of what our members, large and small, from ridings all across the map told us at our recent annual meeting in September. I expect that much of it will sound a lot like what you hear directly from your constituents.

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In a nutshell, our members are concerned about the size of the debt, the high levels of taxation, including unemployment insurance, and the large number of professionals who leave Canada because of the excessive level of taxation in this country.

Not surprisingly, business people expect to see the government operate in a businesslike way. Entrepreneurs have to respect the rules of the marketplace and manage their finances carefully. As a matter of principle, they expect and demand the same from people they elect as the stewards of their tax dollars.

That fundamental belief was what caused them to become the most aggressive critics of deficit spending, and that is what made the Canadian Chamber of Commerce such an outspoken voice on that particular issue for so many years. Our members were pleased to see the first balanced budget in years, and they said so in no uncertain terms. But they hedged that enthusiasm by making it clear that they weren't comfortable with the way the result was achieved.

Our members and their employees pay into a fund that was intended to serve as a cushion for people who are temporarily and unexpectedly between jobs. When our members realized that the employment insurance program now brings in over $6 billion a year in excess funds, they reacted angrily. They told us they wanted an end to this overtaxing.

Our members want to see the excess returned to the people who made the overpayment. Specifically, they want the money returned in three ways: debt repayment, employment insurance premium reductions, and personal income tax reductions. Further, they want to see the employment insurance fund restored to its original purpose. They do not under any circumstances want the money spent on any new programs. Reallocation, yes; new spending, no.

[Translation]

I repeat, Mr. Chairman, that the government must continue to apply its financial restriction policy and avoid at all costs spending on new programs.

However, the government must be able to reallocate the funds it now has as new priorities emerge.

[English]

Our presentation to you today provides very specific recommendations for your committee for the next budget. We also provide you with a formula to use if the budget surplus is greater than we expect or alternatives if it is less than we expect. We call this our Chamber of Commerce calculator.

Our message to you is simple: it's payback time for Canadian taxpayers.

Mr. McIver will now go over the Chamber of Commerce's recommendations for your committee in detail.

Mr. Don McIver (Chief Economist, Sun Life Assurance Company of Canada): Thank you.

Our recommendations reflect our policy priorities: no new spending. This does not mean that the government cannot fund new priorities. In fact, if the government chooses to reallocate moneys from existing programs to new programs, well then, so be it. But we repeat that the business community across Canada has no appetite for new spending.

Our recommendations also reflect our concern for debt reduction. There's a need for personal tax reductions to restore our standard of living and the stem the flow of professionals to the United States. There's a need for measures that restore Canadians' incentive to save and alleviate the distortion of income distribution in Canada. There's a need to re-examine the EI program to bring it back to its original purposes. There's a need to reform a non-competitive and outdated tax structure in Canada.

Since the exact level of the budgetary surplus in 1999-2000 is, of course, unknown at present, the Canadian Chamber of Commerce has provided the government with three distinct scenarios for three different economic environments. Each scenario is based on a 1999-2000 budgetary surplus of either $4 billion, $3 billion, or $2 billion beyond the $3-billion contingency fund the government sets aside on an annual basis. The costing for each scenario was derived from the fiscal update delivered to you in October of this year by the finance minister. The underlying principles in each scenario are the same. The following recommendations assume a budgetary surplus of $4 billion as well as a contingency fund of $3 billion.

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First, put the entire contingency fund of $3 billion, plus an additional $500 million from the budgetary surplus, toward debt reduction. So 50% of the total surplus would be represented by debt reduction.

Second, reduce EI premiums by 15¢.

Third, eliminate the 3% general surtax completely. This was introduced as a deficit reduction tax, and is currently aimed at professionals, who are precisely the people we want to stay in Canada.

Fourth, increase basic personal exemptions by $500 for all taxpayers. This includes an increase to the “married” and “equivalent to married” amount.

Fifth, increase RRSP contribution limits by $1,000 to $14,500.

Sixth, introduce the indexing of RRSP contribution limits after contribution limits have been raised further over the medium term.

Seventh, fully index personal income tax brackets and credits to the CPI over the medium term.

Eighth, increase the foreign content of RRSPs to 30%.

Ninth, there should be no new government spending.

In addition, the Canadian Chamber of Commerce strongly recommends that the government consider changes to the structure of the EI program to bring it back to its original insurance-related purpose. It should manage the EI account as a fund separate from the government's consolidated revenue fund. We would like an overall revamping of the EI program, with premium reductions spelled out during the overhaul.

We also urge the government to begin a process of comprehensive tax reform. Steps need to be taken to benchmark Canada's tax structure to that of other industrialized nations and improve Canada's competitive standing with respect to tax policy.

That concludes our formal presentation, Mr. Chairman. We would welcome any questions you might have.

[Translation]

Ms. Nancy Hughes Anthony: Thank you, Mr. Chairman. We'll now answer any questions you may have.

[English]

The Chairman: Thank you very much, Ms. Hughes Anthony and Mr. McIver.

We'll now hear from the Canadian Taxpayers' Federation. Mr. Walter Robinson, welcome.

Mr. Walter Robinson (Federal Director, Canadian Taxpayers' Federation): Thank you, Mr. Chairman.

[Translation]

It is a great pleasure to appear before you this morning to put forward our positions regarding the 1999 federal budget.

My presentation will be in English but I will attempt to answer questions in the language of your choice.

[English]

Since I appeared before you last year, we have moved from a budget deficit to a budget surplus. In this era of surpluses—we prefer to call it overtaxation—there's no shortage of groups and individuals urging you to fund a variety of projects and causes. Yet, as the saying goes, the more things change, the more they remain the same. This is especially true with respect to the government's fiscal policy.

The budget was balanced on the backs of Canadian taxpayers. The finance minister has all but stated as much. Record government revenue, which is up 32% since 1993, is the main driver for our fiscal success. Contrary to the feverish spin-doctoring from the finance department or the PMO, the government's expenditure reductions were mainly accomplished at the expense of the provinces, the Canadian military, and several crown corporations.

Personal tax revenues are up by 38%, now accounting for 8.2% of our gross domestic product, which is up from 7% in 1993. This represents an alarming 17% increase. GST receipts are also up by 24%, while corporate tax collections have taken off: they're up a whopping 140%. The situation has taken a toll on Canadians.

Canadians languish under the highest personal income tax burden in the G-7. We start to pay taxes at half the income level at which many other nations start to levy taxes. Bracket creep, the enemy of the poorest in our society, continues to erode incomes and benefits for those who can least afford to tighten their belts any further.

At last count, the Caledon Institute estimates that 3.5 million Canadians—fully one-fifth of all Canadian taxpayers—have been pulled onto the tax rolls or pushed into higher tax brackets due to bracket creep. Even the Department of Finance admits that close to an extra $10 billion have been collected due to the non-indexation of tax brackets.

I would be remiss if I didn't remind the committee that you people estimated last year that 840,000 low-income Canadian families—these were not individuals, but families—were pulled onto the tax rolls because of this insidious hidden form of taxation. Yet it still exists.

We have compiled research from various think tanks and multilateral institutions in our pre-budget submission that reveals this country's punishing fiscal policy and Ottawa's insatiable appetite for tax revenues. Taxpayer emancipation is desperately needed because tax freedom day in this country is still halfway through the year. Real incomes of Canadians continue to decline. More of us are engaging in tax avoidance. The brain drain has become the brain train, with the train leaving the station every fifteen minutes. And we also continue to punish the poorest in our society through regressive tax policies. This situation is not conducive to our economic health, a point to which I'll return in a moment.

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Speaking of health, which is without a doubt the number one preoccupation of Canadians—and I'm sure you've heard that throughout your travels this fall—our submission also includes an analysis of the current debate surrounding our health care system. We fundamentally believe Canadian legislators are too focused on four-year electoral timeframes to adequately address the real issues in health care. The challenge is not to funnel a few billion dollars back into the system, because unplanned cash infusions in any public policy area merely perpetuate the status quo. The real challenge is to objectively assess the ability of the single-payer system to finance an estimated $1.2 trillion in unfunded medicare liabilities. These are expenditures that we know we will incur, but we are ill-equipped to fund them at this time. This is a cross-generational issue that politicians of all stripes refuse to address, and it constitutes the single largest abdication of leadership, both moral and financial, in the history of this country. It's even larger than the intergenerational transfer of debt and public pension liabilities currently under way.

Returning to the economic health of the country, the time has come for substantive tax reductions for all income earners. To set the record straight, our submission shows that the majority of Canadian taxpayers did not receive tax relief as indicated in the 1998 budget. Yes, it is true that the 3% surtax was phased out and that the basic personal income exemption was increased, but these measures were staged over multiple years and/or clawed back at higher income levels. Moreover, these measures were eroded when bracket creep and the CPP premium increases were factored into the total tax picture.

To this end, we propose $10 billion in tax relief measures. To account for the fiscal impact of these measures, we identify over $12 billion in possible departmental expenditure reductions, accelerated alternate service delivery initiatives, and the disposal of crown assets. Specifically, we recommend the following: a 10% across-the-board personal income tax cut, which would effectively reduce the major tax brackets by 2%, from 17%, 26% and 29%, to 15%, 24% and 27% respectively; full indexation of tax brackets and all credits for inflation for the 1999 taxation year, an idea that would put an end to the stealth taxation known as bracket creep; and removal of the remaining 3% and 5% federal surtaxes, since the raison d'être for these taxes has ceased to exist now that we have a balanced budget.

We also reiterate our call for the taxpayer protection amendment first proposed to you in 1996. It would forever outlaw deficits, commit the government to a legislated schedule of debt reduction, and require tax increase proposals to be approved through a national referendum. Legislation of this nature exists now in two provinces, and is on the books to be approved in Ontario.

Our proposals would restore economic confidence, provide a stimulus for investment in job creation, and address longstanding taxpayer demands for tax relief. I must reiterate that we propose to address the fiscal impacts of these measures through expenditure reductions in existing budget envelopes. Other candidates for savings can also be found in the successive reports of three auditors general.

The $10.4 billion level of overtaxation—we heard about it last Friday—that the government has currently racked up in the first six months of this fiscal year is primarily due to high EI premiums. We encourage the government to accept the anticipated call for massive EI premium reductions from the employment insurance commission. Indeed, it was Finance Minister Paul Martin who told the Ottawa Citizen in March, “I really do start on the premise that government is not entitled as a matter of right to the money.” We wholeheartedly agree. And it was Paul Martin who also stated, in the economic statement presented to you last month, that “with the budget in balance...”—which it most definitely is—“...Canadians have a right—and we have a responsibility—to ensure that more money is left in their pockets”. Again, we wholeheartedly agree.

We agree that it is time to cut taxes. As the ancient Chinese proverb states, “It is not the heavily taxed realm that executes great deeds, but the moderately taxed one.”

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On behalf of our 80,000 supporters,

[Translation]

thank you for your attention this morning. I'm looking forward to your questions.

[English]

The Chairman: Thank you very much, Mr. Robinson.

We'll now hear from the College of Family Physicians of Canada, Dr. Jacques Lemelin. Welcome.

[Translation]

Dr. Jacques Lemelin (Associate Professor, Department of Family Medicine, University of Ottawa, Canadian College of Family Physicians): Thank you.

I am a professor at the University of Ottawa in family medicine and a member of the Canadian College of Family Physicians, and I am also one of the college's researchers.

First of all I'd like to give you a rapid overview of family medicine in Canada. I intend to describe its importance and the position it occupies within Canadian health research institutes.

[English]

Let me start with a brief description of a primary care laboratory. If you see this yellow sheet, this is a diagram that was first used by Dr. Kerr White, who is a physician from Ottawa who unfortunately now works in the U.S. He used this diagram to present the proportion of the population that sees family physicians versus specialists.

Of 1,000 people, you can see that as the square gets smaller and smaller, patients get more and more ill and there are fewer and fewer of them. The population in the smaller squares have more advanced and more serious stages of illness. This is the area where for example research on heart transplants or cancer treatment is being carried out.

The population in the larger squares is not ill at all, or at a very early stage of illness, and the research done in this area is mostly in the area of heart health promotion and prevention research. I should point out here there was a report, the Ekos study that was commissioned by the Medical Research Council of Canada, which showed that the opinion of 80% of Canadians is that research funding should be spent more in the area of prevention and health promotion.

Another field of research that is done in the larger block is research aimed at closing the knowledge-to-practice gap. We have a lot of information on what should be done in terms of prevention, in terms of day-to-day medical care, but for many different factors—patient factors, physician factors, environmental factors—these things are often not carried out. The research in the larger square is measured by family physicians and in the smaller square by biomedical bench researchers and on a much smaller population. This imbalance in research causes a serious problem, because obviously the vast majority is done down here, virtually all of it.

When a GP sees her patient in the office and tries to apply research findings from the small square to a problem the patient has in the larger square, it often doesn't fit and leads to over-investigation and over-prescribing of medication. For example, a bronchitis patient in the smaller square who is hospitalized with serious chronic pulmonary disease is quite a complex problem that requires laboratory work-up and the prescription of antibiotics most of the time. To use the research findings from here to apply to a patient you see in your office, then you tend to over-investigate and over-prescribe. The result is you get a care that is lower in quality and higher in cost. Research on patients that are seen in this square needs to be done in this square. In this way, the research findings are applicable to this population.

Until now virtually all the research funding goes to the small squares, and we hope the Canadian institutes for health research will promote a more balanced approach to health research funding.

Let me briefly give you a few examples of some of the areas where research is being carried out. One is a study by Jimenez et al looking at the impact of being a witness to conjugal violence in mental health of children. Another example is a randomized trial of pharmacists' consultation with family practice setting for seniors on multiple medication. This is a huge problem in Canada right now. It's costly and it results in poor-quality health. Another one, from McGill University, is the doctor-patient relationship within the context of socio-cultural differences between the doctor and the patient, again an increasing problem in Canada. A further one is on the ideal frequency of follow-up visits for hypertension. You can see a patient with hypertension every month, every two months, every six months. It's the physician who decides. And if no guidelines are found to do this, again you have higher cost and lower quality.

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Canada definitely will benefit from a robust primary care discipline that can draw from its own research base. And only a more balanced approach to health care funding will make this possible.

We left with you some documents: a copy of Kaléidoscope from the College of Family Physicians and also the current index of all of the research projects that are being carried out by family physicians in Canada. The section of researchers of the college numbers over 400. There is a growing effort to provide for doing good research in primary care, but the funding needs to be there.

Thank you.

The Chairman: Thank you very much, Dr. Lemelin.

We will now hear from the Conference Board of Canada, Mr. Paul Darby.

Mr. Paul Darby (Director, Economist Services, Conference Board of Canada): Thank you very much, Mr. Chair. And let me say how delighted we are to be here this morning in terms of giving you some perspectives on our own outlook for the Canadian economy.

My remarks are offered in the context of a previous hearing that you must have had with a number of forecast agencies that would have come in around a week and a half ago, I believe. In general, this morning I thought I would give you some general remarks about our sense for the overall direction of the Canadian economy. I've included, hopefully, in your briefing kits a copy of the executive summary of our last Canadian outlook, which would give you a more detailed perspective.

This morning I think I want to address particularly a couple of issues around why the Conference Board has for a number of months now really felt that the chances of having a recession, or a severe slowdown, next year are quite slim. This news may now be becoming old as we look at some of the most recent economic indicators, but let me just go over some of the reasons why we would take that view.

I think the fundamentals right now for the Canadian economy are generally very sound and most markets in Canada are not characterized by excess demand or a speculative run-up in prices. We don't have the excesses in markets that you would normally expect to see before a substantial downturn. The federal budget is in surplus, and of course we applaud that. That means it's much less likely that we're going to be seeing some severe fiscal restraint next year, which helps to generate some growth.

Corporate balance sheets are pristine. If you look at debt-to-asset ratios, they've rarely been better. The Canadian banking system is in wonderful shape. We only have to compare it to the savings and loan issue in the United States before the last downturn. If you look at housing markets, housing prices have not been driven excessively high. There may be increases in some markets, such as the Calgary market, where we're see large increases, but in general across the country, if anything, housing prices have been stagnant.

Commercial real estate is certainly not in the midst of any speculative boom. We don't have over-investment. We haven't seen prices bid up to fantastic levels. We know there's going to be a lot of energy investment going ahead next year, but sound energy investment based on $15 oil that won't be turned off in a hurry.

To reiterate, as we look forward we can't help but feel that the fundamentals in the vast majority of important markets in Canada are in fact in excellent shape. Certainly there were three problems that we could identify as we look back. Two of them have now been corrected, in our view at least.

We certainly had excess inventory moving into the summer months of 1998, but I would suggest that's been mainly worked off now in the second and third quarters. It was one of the major sources of the weakness that we saw through the summer months in Canada. Certainly there was a cost to bringing those inventories down, but it wasn't enough to drive us into a recession.

I think it can be argued that the stock market had been bid up too high, and if you look at the price-to-earnings ratios there's hardly any argument around that. Certainly the fundamentals on the stock market look a lot better now after the most recent correction, even though that would be obviously painful in terms of some wealth impacts. But as we look ahead into 1999, I don't think we're looking for much more severe corrections on the stock market.

• 0945

I guess the one outstanding concern we might have is that consumer debt loads are still very high. Savings rates, as you know, are very low. That remains okay as long as we don't have any substantial increase in interest rates. If we look at the carrying costs on household debt under current interest rates, they seem to be supportable.

I think another important issue we have to keep in mind is that income is remaining in the system in spite of some of the concerns around stock market declines and international financial crises. The stock market correction certainly generates wealth effects. These are not unimportant, but we've seen little direct impact on take-home pay, which I can assure you has a much more substantial impact on spending and is much more likely to drag you into a recession.

Many jurisdictions, as we know, have introduced tax cuts. Ontario certainly comes to mind. This helps keep income in the system.

Finally, if we look at employment growth, certainly as we look ahead to 1999, we must be optimistic based on a substantial number of non-residential construction projects, which generate jobs, and of course exports based on the lower dollar. All this helps to keep household spending alive.

A very crucial factor comes from the inflation rate in Canada, which remains subdued. I think this is very important. If you look at the concerns that were generated by the decline in the dollar, we heard comments such as “Canada is now poorer on the world stage”. This is undoubtedly true if you're planning a trip to Florida. This is in many ways undoubtedly true if you're looking to import goods from abroad.

The way in which the low dollar would generally operate to in fact make the bulk of Canadians poor would be through imported inflation. You would be looking to see the CPI rising because of higher import prices. As of yet there is absolutely no evidence of that in the numbers.

As we do our forecast, looking ahead we do see some slight increases in the CPI, but nothing major. I think it's important to remember as commodity prices have fallen on average around 40% to 60% worldwide, the cost structure of our suppliers has certainly benefited. The manufacturers in the United States and Germany are facing much lower input costs because of these lower commodity prices, and in many ways that is balancing the increase in prices we would expect to see from the lower dollar.

It is difficult to overemphasize this point. If you were living in Indonesia right now, for example, with inflation rates pushing up to 40%, you would certainly feel much poorer in terms of your real take-home pay. In Canada, there's no evidence of any increase in inflation.

We do believe growth will be slower next year, although again we have to be careful not be overly pessimistic. Confidence has certainly been hurt. The Conference Board of Canada, in fact, undertakes surveys to determine both consumer and business confidence. The consumer confidence index did take a record decline, or a near record decline, in the third quarter, while business confidence did post a record drop. We believe that's got to have some impact on consumer durable spending, on housing, and perhaps on investment.

We also are obviously suffering lower exports to east Asia. We're looking at slower U.S. growth, which will also slow down our export performance into the United States. The lower commodity prices have hurt to some extent investment and activity in the resource sector—oil and gas drilling, some of the mining operations, and investment. We also have, I think, satiated consumers to some extent. I really can't expect consumption of cars—autos and parts—to continue at double-digit real rates of growth in 1999.

But I want to repeat that even though we are forecasting slower growth next year, I think you should take any wild talk of a recession off the table.

Thank you very much.

The Chairman: Thanks very much, Mr. Darby.

We'll now hear from the Juvenile Diabetes Foundation, Michael Giroux, or Alan Patt.

Mr. Alan Patt (Volunteer Vice-President, Juvenile Diabetes Foundation of Canada): Good morning. My name is Alan Patt. I'm the volunteer vice-president of the Juvenile Diabetes Foundation of Canada. With me this morning is Elizabeth Braden, one of our directors.

JDF is grateful for this opportunity to present its recommendations to the Standing Committee on Finance in its pre-budgetary consultation phase.

JDF is a voluntary health organization comprised of chapters across Canada and around the world, whose mission is to find a cure for diabetes and its complications through the support of research. In fact, JDF gives more money directly to diabetes research than any other non-profit, non-governmental health agency in the world. Since its founding in 1970, JDF has contributed approximately $435 million to diabetes research, and by the year 2000, JDF expects to fund in excess of $100 million per year for diabetes research.

• 0950

Diabetes is a chronic metabolic disorder, an auto-immune disease that adversely affects the body's ability to manufacture insulin. Diabetes can be treated and managed, to a degree, by multiple daily insulin injections, but insulin is not a cure.

There are 2,250,000 Canadian diabetics, and 60,000 new cases are diagnosed each year. It does not differentiate between gender, age, or race.

Diabetes has both a health and an economic impact on Canadians. Diabetes reduces life expectancy by up to 30%. It's the number one cause of blindness and of end-stage kidney failure. Indeed, 40% of all new dialysis patients have diabetes. Diabetics are two to four times more likely to die from heart disease, or to have a stroke. It's the leading cause of non-traumatic amputations. More than half of all lower-limb amputations in Canada occur among diabetics.

It's a leading risk factor for premature development of heart disease in women. Indeed, each year more women die from diabetes and its complications than of breast cancer and of AIDS combined. Diabetes has reached epidemic proportions within the Canadian aboriginal community. In some communities, more than 50% of the members are diabetic.

These are the human and the health costs. The economic costs are equally frightening. It is estimated that diabetes costs the Canadian health care system in excess of $3 billion annually. Indeed, one out of every seven dollars spent on health care is diabetes-related.

Drug costs for diabetes are four times higher than in the non-diabetic population. Diabetics have an absenteeism rate two to three times higher. If a family has a child diagnosed with diabetes at the age of three, it is estimated that they will have lifetime expenditures of over $200,000 for insulin, syringes, and other supplies.

Before going further, it is important to note that the dollars raised in Canada by JDF stay in Canada. We are doing our part to raise money, to support Canadian research and to find a cure and prevention for diabetes and its complications. We now ask that the government do its part.

Mr. Chairman, I do want to express our appreciation to the government for beginning to reverse the trend of budget cuts to the Medical Research Council of Canada by returning the funding in the 1998 budget to 1994 levels. However, this must be but a first step. As the primary federal agency responsible for funding health research in Canada, the role played by the MRC is essential. However, in recent years we have seen a series of unacceptable cuts to the MRC. The results of these cuts are far-reaching. The difference in per capita spending on health research between Canada and other western industrialized nations is now at an all-time low. For example, in fiscal 1994-95, the Government of Canada, through the MRC, spent $1 on health research per capita, compared to $6.50 per capita in the United States through the National Institutes of Health. In 1997-98 that ratio had fallen to $1 in Canada to $8 in the U.S.

It now must be noted that in the U.S. budget agreement of October 1998, the almost 15% increase to the NIH represents an additional $2 billion U.S. for health research. If we use the famous ten-to-one population ratio, U.S. to Canada, the impact of this increase is that the one-year growth at the NIH is more than the total MRC budget of approximately $250 million Canadian.

Another result of decreased funding to the MRC is the brain drain we are witnessing across the Canadian research community. This loss of jobs and of Canadian talent represents lost potential, economic stagnation, and the fear that we truly will look back at Banting and Best as being the last great reference point for diabetics, more than 75 years ago.

Finally, I would like to turn for a moment to some of the research that is currently under way, and share with you what is indeed a time of increased hope for diabetics and for their families.

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Thanks largely to JDF-funded research, we have witnessed a significant enlargement of our scientific knowledge base. This base has led to improved treatment and preventative measures. More importantly, it has provided researchers with the scientific foundation necessary to make significant advances in preventing, reversing and curing diabetes and its complications.

The following areas of research represent hope for the future, but do require significant further funding to bear fruit. Cell engineering to restore and replace beta cell function has been successfully demonstrated in an animal model with salivary gland cells. Techniques of genetic transfer cell engineering hold significant promise. Progress in transplanting solid organs, such as kidneys, without immune suppression, will have significant impact on our ability to restore and replace beta cell function through transplantation of pancreatic islets. The development of new tests to discover auto-antibodies leading to the identification of children at high risk for developing type-one diabetes could lead to therapies that delay or prevent the onset of diabetes. These breakthroughs may provide people with diabetes a better chance of living a normal, longer life without suffering the high-risk complications.

We have included as an appendix to our presentation a list of the research that JDF is currently funding across this country. JDF has been a long-time advocate of federal support for biomedical research. Similarly, JDF has also long done its part to fund research towards a cure. We do, however, view biomedical research as the collaborative responsibility of both the public and the private sectors. To this end, JDF has been, over its history, the largest non-profit, non-governmental contributor to diabetes-related research in the world.

The value of biomedical research goes far beyond our ability to cure devastating diseases and to achieve savings in health care costs. The Canadian biotechnology industry is one of the fastest growing components of our economy, and it is critical to our status as a global leader and as a competitive player in the exploding technological field. We need to significantly increase the federal government's support for scientific research to ensure the continued growth of this promising sector of our economy. In addition, JDF strongly supports the move towards the establishment of the Canadian institutes of health research. The development of networks of research will provide the framework necessary to foster scientific breakthroughs. However, we must ensure that the CIHR is given adequate financial resources to achieve its objectives.

Mr. Chairman, JDF believes that health research needs to be a cornerstone of any budgetary discussion. In the case of diabetes research, the 2.25 million Canadian diabetics and their families deserve a significant government investment not only in their health, but also in the future viability of the health care system.

Thank you.

The Chairman: Thank you very much, Mr. Patt.

We'll now hear from Professor Peter Dungan from the University of Toronto. Welcome.

Mr. Peter Dungan (Associate Professor of Economics, Institute for Policy Analysis, University of Toronto): Thank you, Mr. Chairman, and thank you very much for the invitation to appear before the committee today. Speaking as an academic, it's always a treat to be considered relevant, so it's very nice to be here.

My little group at the Institute for Policy Analysis at the University of Toronto conducts ongoing research of the economy. My colleague, Professor Tom Wilson, was before you a couple of weeks ago with his views on the outlook for the economy and on some measures that should be included in the next budget. I simply draw your attention again to his remarks.

I would also like to say that our work very much backs up what you just heard from Mr. Darby of the Conference Board of Canada. You should not be excessively concerned about a deep recession next year. The economy is in for a bit of a rough patch, but it is not a major downturn. It's sometimes difficult to say not to listen to the pessimists, the gloom-and-doomers, that things will be all right. That always looks like wimping out or however you might want to describe it. But sometimes it's right, sometimes it actually happens that way. There are very good, solid reasons behind the health of the Canadian economy. One should be honestly concerned and a little cautions, but should not be giving strong acceptance to these ideas that we're in big trouble. We are certainly not, as far as our research indicates.

What I would like to discuss with you very briefly today is a particular piece of research that my institute has been doing over the last year, and it was published a couple of weeks ago by the C.D. Howe Institute. I had asked that copies of this study be forwarded to the committee, but I understand that somehow or other they may not have arrived here. I apologize for not following up and double-checking that this was the case. If indeed they're not here, I'll make sure they get here very quickly. That may have been the result of a miscommunication between myself and the C.D. Howe Institute, but I'm sorry they're not in front of you.

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Basically, this study—and I will just summarize it very quickly—was a study of the Canada Pension Plan payroll tax or payroll contribution hikes that will be occurring over the next several years, and their likely impact on the Canadian economy. Although this may not be directly relevant to the budget discussions for the next year, it provides some background that I think is extremely important for federal fiscal policy for the next few years. This thing is going to be happening in the background, so it's important that we understand its effects.

Our study was conducted with a computer simulation model of the Canadian economy that we have worked on, built and maintained at the university for over twenty years. We've used it repeatedly to examine budgets and various other fiscal and policy measures. The reason I'm telling you this is that, in quite a few groups I speak to, as soon as I say the word “model”, I immediately lose some credibility and some interest. If I say “computer model”, then I lose all credibility and all interest. The point is that these tools have been used. They are used by other organizations, like the Conference Board, to analyse complex policy issues. They're the only tools we currently have, imperfect as they may be, in order to fix real numbers on things. They're not there so that we can simply say this is good, this is bad, or this will hurt a lot or a little, but so that we can actually say we have some rough numbers—very rough—about what the actual effects of these policies will be.

We ran the CPP reforms that actually began in 1997 and through 1998, through our model. We got good news and we got bad news, as usual. The good news is that in the long run, the CPP reforms rescue the plan. They put it on a basically sound fiscal base. They also cause the economy, over the next twenty years or so, to accumulate additional capital and additional savings, both domestically and abroad. Those are things that are fundamentally needed to support the baby boomers when they start to retire—and that includes me.

The bad news is that there's a short-term transition cost that is potentially serious. That short-term transition comes especially from the increase in contributions from employers, which are part of the package. Why is this a problem? First of all, how big a problem is it? Our estimates are that the problem peaks in 2003, at a loss relative to what otherwise would be the case of about $13 billion of GDP, and almost 200,000 jobs. Mind you, that's temporary. Another two or three years after that, the effect is over, it's gone. This is a temporary effect, but it's big enough that I worry about it. It makes me think the economy will not perform as well as it otherwise could over these next several years.

Why does it happen? Effectively, a payroll tax on employers, or any increase in contributions whatsoever, is going to remove purchasing power from the economy. That causes less demand for goods and services, which will weaken the economy. If it's just that, there are some offsets. The Bank of Canada may step in and say weaker demand means lower prices, and may consider lowering interest rates. That will help. But a tax on employers especially is likely to be passed through into prices. That will mean higher prices, which make things worse for consumers. The Bank of Canada then has to say there is inflation and that it should raise interest rates, not reduce them.

The other thing is that it's a direct cost on employing individuals. Firms are pushed to the wall by competition, and they are just scraping by. We have a global economy in which everybody.... There's very little fat out there to trim. If you increase the cost of employing an individual relative to using more capital or something like that, people are not going to be hired. It's not so much lay-offs; there will just be fewer hires over the next few years. Of course that rebounds through the economy in additional reduced purchasing, fear of people pulling in their consumption as a result of being laid off. So it gets worse and worse.

What can we do about this? Frankly, if there were no other way around it, I would say we have to go the route of short-term pain, long-term gain. The CPP must be rescued. The thing is, Canadians are almost too wedded to short-term pain these days. We don't feel good unless there's short-term pain.

There are some alternatives. My study goes through several of those, from more drastic to less drastic. We could look at restructuring the Canada Pension Plan into a more privatized system, which would basically put the employer out of the loop. That would reduce the short-term adjustment costs, but it's a whole other problem we need to discuss at another time.

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We could move some of the burden to the personal income tax and off the payroll tax. After all, a tax is a tax, and that would be fairer and would reduce this short-term problem. We can discuss that further if you wish.

The third and perhaps easiest method is this golden opportunity we have in front of us. We have to increase payroll taxes to fund the CPP, but we have another payroll tax, employment insurance, that is sitting there with a surplus. If we reduce EI premiums by 20¢ to 30¢ per year over the next two or three years, we can undo most of the ill effects of the CPP increases. It's that final point that I'd like to bring to your attention. There are many compelling reasons to consider employment insurance contribution reductions. One of them is that such a reduction could play a part in rescuing the Canada Pension Plan, sparing the economy the short-term damage that rescue would otherwise entail.

Thank you.

The Chairman: Thank you very much.

We'll now proceed to the question-and-answer session. We'll have a ten-minute round, beginning with Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman.

Ladies and gentlemen, thank you for your thought-provoking presentations here this morning. They will certainly stimulate a lot of debate, I'm sure.

The basic thing I'm hearing from quite a few of the groups, too, is that overtaxation is a fact of life in Canada. It's creating an underperformance when comparing us to the United States and so on. We have an underground economy in this country that's growing by leaps and bounds. It's fueled by high taxes, increases in the CPP that the professor was just talking about, and high EI rates that of course need to come down—the actuaries are telling us that—especially for self-employed people, who are paying both portions, both sides of it. The CPP, in partnership with increased private savings in RRSPs, is probably the answer. To get to that end, we're talking about changes in the foreign content ruling. To what extent do we go with that? Do we take the cap right off altogether? Just where do we go to ease the burden on people, yet maintain the safety net that people have come to know and like in Canada? I'll just toss that out for everybody's comments, please.

The Chairman: Who would like to...Mr. McIver?

Mr. Don McIver: I'll take a crack at that.

I think we really are talking about an immensely complex issue when we talk about the foreign component of Canadian savings. The reason I say it's immensely complicated is that it really has to do with demographics, the whole process of aging and the needs of Canadians collectively. When they have reached a stage collectively at which the proportion of retired people is much higher than it is today, there is going to be a need to be able to call upon resources that are simply not being produced within the country.

If we use the extreme example, let's assume that everybody has retired and everybody's clutching a piece of paper that says they're entitled to a financial asset. If that were the case, there would be no production that year, so what asset would they be entitled to? To my mind, it's that sort of fundamental argument that says that as the average age of the population gets older, we are going to have to call in investments that we have made in countries whose population may have a younger demographic profile. If you look at it from that perspective, apart from any other issues about the equity to an individual, the fairness to an individual to invest wherever he wants, you recognize that we're inevitably going to have to move in that direction.

The Chairman: Mr. Robinson.

Mr. Walter Robinson: To answer your question, Mr. Ritz, we've pointed out in our submission that the creation of our public pension system and health care in the 1960s was aimed at shared values and compassions and a realization in Canada that we will take care of individual needs in the future when we need them in terms of pensions and health care. Especially with an aging population, we draw upon those in a larger and larger way on an annual basis, from a collected pool of resources.

As my esteemed friend from the Canadian Chamber of Commerce has noted, the ratio of working Canadians to retirees during the 1960s, when these things were adopted, was nine to one. Today, we're at about six to one. By 2015 we'll be at five to one. Given current demographic projections, we're at three working Canadians per one retiree by 2050. We will have a larger group of individual needs to fund from a smaller pool of collective resources, to state it another way. We think the answer there is capitalization of these unfunded liabilities.

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The arguments we make with respect to health care—which is a much more serious problem than the Canada Pension Plan and our national debt combined—are very simple. We implore you to look at the cross-generational impacts of your policies. Please stop looking at four-year electoral timeframes to solve and put band-aids on these problems. The C.D. Howe Institute has shown that progressive generations of Canadians will pay more and more taxes as a percentage of their income to fund these programs.

People say we're driven by ideology on this. We're not driven by ideology; we're driven by arithmetic. The future doesn't add up. So to answer your question, we're asking you to take a look at the cross-generational impacts in regard to your problems, and to stop resorting to hiking taxes. Look at more fundamental reforms to the funding pillars that structure these programs if you want to perpetuate these values of compassion, and not only for this generation, but for all of our children. That's all we're asking.

The Chairman: Anybody else?

Mr. Peter Dungan: Perhaps I could back up what both speakers were saying, in terms of our longer-term modelling research. There is a tendency to think that if you've arranged the financial elements, if the financing is there for say the Canada Pension Plan, that somehow the problem of the baby boomers is solved, is settled. Well, it's not. If you think ahead to 2030, 2040, there will be fewer people working for, in a sense, the number of people who want to consume a share of the pie. No matter what financial arrangements you will have made earlier, you will have a sharing problem. You will have more people who want to eat, and fewer people who will be producing the stuff to eat, in a sense, at that time in the future. How do you get that to be a less serious problem, or how do you reduce the seriousness of that problem?

There are only three solutions to this. One is to let more people work. Maybe we're looking at 66- and 67-year-olds working out there. That's a possible solution, and we should consider it. The second option is to make sure the people who are working that far in the future are as productive as possible. How do you get to that? You have to make sure your economy is investing in building up capital over the years in advance. And the third method is to have people in other countries work for you. That means that in the years beforehand, you must have been putting your money abroad, investing in other countries outside. India and China don't have a baby-boom problem. They have very young populations. With any luck, with some of our capital to help them now, they will be very productive in thirty or forty years' time, and will be happy to pay us the interest on what we've loaned them now from a very productive economy.

In terms of all this inter-generational stuff, the point I'd like to reiterate is to keep your eye on who's going to be doing the production and where it will be coming from in the years to come. It's not just a financial matter; it's a real one.

The Chairman: Thank you, Mr. Dungan.

Actually, if I may, I've asked Mr. Ritz if I can jump in here for a second in reference to the fact that these pre-budget hearings really provide our committee with an opportunity to get a sense of where people from, where different groups and different perspectives come from, and what they indeed bring to the table. We get people who are concerned about health and talk about health care funding. We get the Canadian Chamber of Commerce talking about all sorts of issues. And we get Mr. Robinson talking about taxes. What has become apparent to me, though, is that while we all come to the table to express our views on various issues, there seems to be a lack of an overall vision, if you want to call it that.

What exactly is it that we're trying to achieve? As Mr. Robinson correctly pointed out, it can't just be decisions based on an electoral map. I think this committee views issues more from a generational point of view, as some of our recommendations from last year's pre-budget consultation would indicate, for example.

I've given some thought to this particular issue, and I've come to the conclusion that the time has come, at this point in the history of our country, when we really ought to have a productivity covenant, where a government decision has to meet a fundamental test. That test is how that decision enhances productivity. When all is said and done, if we are not able to increase our productivity levels, then our standard of living will drop.

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Ultimately, everyone who appears in front of this committee is driven by that particular agenda: the ability of government decisions to enhance and improve the quality of life for the people of Canada.

I'm just wondering what you think about this idea of a productivity covenant, where every single decision we make as a government must meet the test of productivity. In the final analysis, if we're able to increase our productivity we will increase our standard of living.

We should also take some time to get rid of the public mythology that somehow productivity is a bad word, that we're talking about people not being productive or not wanting to work. That has nothing to do with that at all. It has to do with modernization of our economy and using our resources as wisely as possible. History teaches us that every time we've seen productivity gains and our standard of living has increased there has been innovation in society. People fought against tractors coming onto the farm, for example, because they said they would take jobs away. If we had kept that kind of feeling about employment issues we would be in a real mess today.

I just want to get a kind of feeling from you, Ms. Hughes Anthony.

Ms. Nancy Hughes Anthony: I'm very happy to hear you say that, Mr. Chairman, because I feel very often this issue of productivity is put on the shoulders of the business community. They will accept it and do accept it, but I think you're talking about a wider concept and something where the public sector and the private sector are in a kind of partnership to achieve these goals for the betterment of the economy. I'm very supportive of that kind of dialogue. I would suggest it would be important to have a discussion around terminology, definition and what we're talking about, so we can set a kind of platform for action.

So I do support your suggestion. I think it's something that both business and government could work on co-operatively.

The Chairman: Mr. Lemelin.

Dr. Jacques Lemelin: You might wonder what primary care research might possibly have to do with productivity, but if you have a healthy population they're much more productive. On a very easy and clear-cut example, presently I'm involved in a research project trying to improve many different aspects of prevention, many different preventive manoeuvres. One of those is making sure people get their flu shots, especially in the high-risk population. This applies more to the elderly, but also to people who have concurrent illnesses.

If this were applied to the general population, it's been shown that people who have had their flu shots miss 40% less work than those who have not, and they also have 25% fewer colds. It's something simple, and many companies know this and provide flu vaccines to all their employees. It's a very good investment.

If you did that to a large proportion of the Canadian population, think of the increase in productivity you might have. That's just one example. Prevention affects a lot of young people, so if we do more research in trying to get these things done it will affect productivity in a very positive way.

The Chairman: Mr. Darby.

Mr. Paul Darby: I think the Conference Board, as well as other academic institutions or quasi-academic institutions, would welcome the government paying attention to productivity, probably from the perspective that the record has not been good in Canada. In many ways the record has not been good in the developed countries around the world.

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When we look at records on productivity growth for the 1990s we don't see, in United States, Canada or many other countries, the kind of productivity dividend we expected to get from the introduction of the computer chip or telecommunications equipment, for example. It's just not showing in the numbers, although there is much debate around whether or not that's a measurement problem—and I think there is a lot of that.

If we just compare Canadian performance on productivity with the United States, which I think is obviously a very relevant comparison and presumably we have more or less the same measurement problems as well, our record is not good. In manufacturing, where it can be well measured, over the 1990 to 1996 time period, Canada under-performed the United States in terms of total factor productivity, which is in some ways the best measure—labour, capital, land, buildings—in 13 out of 13 categories.

In Canada we have not seen the gains in productivity we expected to get as a result of the free trade agreement. We have not seen the productivity gains we expected to get because of NAFTA. We have not seen the productivity gains we expected to get through the introduction of the goods and services tax. So from our perspective—is crisis too strong a word?—there's a bit of a productivity problem in Canada. The government should spend a little time looking into that, or at least help others do the same, because if we continue to under-perform in terms of productivity growth in Canada over any long period of time, we will be in very deep trouble. The dollar won't be at 65¢, it could be at 20¢.

So we would applaud at least some attention being paid to productivity issues. That said, it's a very difficult issue. There are measurement problems and there are issues around there being no magic bullet here. In many ways the private sector would like to be left some room to grow and find their own productivity solutions, but I think it is something the government will have to start paying some attention to.

The Chairman: Mr. Robinson.

Mr. Walter Robinson: Mr. Chairman, your intervention was timely. I would just like to pick up on Mr. Darby's comment that the issue with productivity is one of measurement.

The recent Auditor General's report dealt specifically with moving to a financial information system and reporting from the bureaucracy back to you, as parliamentarians, to look at the ramifications of public policy and whether they are working or not. You are not provided with that information from our federal public service in an intelligible fashion to make decisions on the ramifications of policy. The Auditor General's report pointed out that for 30 years we've had two royal commissions, two kind of quasi-commissions of inquiry, and one parliamentary committee, to look at measurement of our decisions on national productivity.

So I would encourage you, if you wish to go in that vein—and we would support you on that—to demand from the federal public service that they provide those measures to you. They've been studying the issue for 30 years. You could move in that vein, but you need to demand that information from our no doubt hard-working public service to make an accurate assessment of productivity and the ramifications of your decisions.

The Chairman: Mr. Dungan.

Mr. Peter Dungan: I certainly agree with you that productivity is very important. For many years the first problem has been jobs, and not surprisingly governments have concentrated on the issue of trying to get the economy back to work—more here than in the United States. But the work we do—and again, I think we'd agree with each other here—suggests that in the long run jobs are not the problem. People will get back to work one way or another if you just stop kicking the economy in the teeth. The question is, what kinds of jobs will they get back to? Will they be high-productivity jobs or low-productivity jobs? Will they be ones that generate higher incomes or lower incomes? So the real long-run possible interventions of government are to try to make sure the jobs are as high-productivity as possible.

The real issue, for example, with the free trade agreement wasn't jobs, jobs, jobs, as it was said at the time; it was productivity, productivity, productivity. Although we haven't seen those gains yet, I think they're still potentially there.

The one thing I would add is although we still have a major problem ahead of us, some of the work we've been doing suggests one of the ways in which you actually see this productivity is by getting all your people back to work in the first place.

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If the effort is made to get our unemployment rate down—we pushed the Bank of Canada on this too—to the point where labour is a scarce commodity in Canada, then you'll start to see some labour productivity gains. It will start to become more of a pay-off to firms to invest in those kinds of productivity gains. The two issues are connected, but we're 100% behind you that productivity is a key issue to look at in everything.

The Chairman: Mr. McIver.

Mr. Don McIver: I really would like to echo just about everything that has been spoken already. Certainly when we talk about questions of measurement and definition, they're very mundane and we certainly need the building blocks there, but there is a very very broad issue here.

One issue that the Chamber of Commerce's presentation reflects, as well as its longstanding policies, is at this time the Canadian framework creates a good deal of disincentives to labour mobility in talking about regional programs. We talk about the EI program and the problems that are ingrained in it that create disincentives for people to work or to move to another part of the country in order to work. That's one issue.

The taxation policies fit into exactly the same set of fundamentals. I won't go down the list, but where there are discouragements for Canadians in certain income classes or in certain forms of income to work at the maximum, those are the types of components of the Canadian tax structure that are the most costly and fundamentally affect and undermine the productivity of the Canadian economy. We always have to bear in mind also that we're sitting right next door to one of the most productive countries in the world.

The Chairman: Are there any further comments? Mr. Patt.

Mr. Alan Patt: Mr. Chairman, you'll forgive me for what might appear to be a flip statement, and I certainly don't mean it to be intended that way, but it's hard to be productive when one is dead. As I stated in the brief, life expectancy is cut short by 30% for diabetics. At that rate—I'm 34 now and have had the disease for 16 years—I'll die when I'm 51. I have a three-month-old child and am a first-time father. I'd kind of like to see her graduate from high school.

At the current state we are funding research, which as I also tried to show in the brief clearly has job implications, growth implications and productivity implications, there are also people implications. While I agree we need to look at the broad spectrum of productivity, I think it's crucial we continue to focus on the fact that people are at the base of productivity.

The Chairman: I think you have to appreciate that I'm advocating this productivity covenant precisely for the reason you stated: to increase the standard of living for people. That also includes the challenges you may face. But if our standard of living goes down, there will be less for everyone. We have to remind ourselves of that.

Mr. Ritz.

Mr. Gerry Ritz: The biggest deterrent we've had in this country to productivity gain is a disincentive or regressive taxation system that really penalizes any type of productivity. So until we get that out of our face, small businesses—the engineers of the economy—cannot begin to turn up that hill.

I'll just shift gears for a second here. Mr. Robinson, in your statement you talked a little bit about health care and said an unplanned cash infusion in any public policy area merely perpetuates the status quo. That could generate a day-long debate in itself.

There was a news article—and I'm just at a loss to remember where and who it was—saying there is enough money in the health care budget now and it's just not being spent properly. The example they used was that fees for services is almost counterproductive to spending efficiently. I wonder if you can comment on that, expand on what you're saying here, and then maybe we can shift over to the doctors to get their views.

Mr. Walter Robinson: In terms of my comments, Mr. Ritz, I would echo that I'm not a medical practitioner, although I do sit on a hospital board locally, and I'm seeing health care from a front-line service delivery perspective. Is there enough money in the system? In certain areas there is but there's no doubt, just as we chronicle in our report, with demographic shifts and the progression of diseases—I was shocked to learn diabetes costs the Canadian economy $3 billion a year and cancer costs $3.5 billion a year to the Canadian economy—we will need to fund those things more just to deal with the advances in technology that will push costs up, and advances in wellness that will make people with diseases live longer, which will also cost us. So we will definitely need to fund them more. The question is, how?

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The article you were referring to is an article written I believe by Andrew Coyne of the Institute for Research on Public Policy. He talked about the debate between fee-for-service billing and the idea of capitation, because medical service in this country is an equation that's driven on the supply side. We, as customers, are not sovereign. We don't have all the answers. We go to the specialist for those answers.

So that's one thing. But that's just one component of the equation. In our brief, we just tried to say that we know we're going to incur $1.2 trillion in medical expenditures and that right now we still could not fund if we were to tax this generation of Canadians for the next 10 years at 100% marginal tax rates. That's clear. So what we need to do is find another way to fund them.

The CPP experience, from our point of view, is sad, because parliamentarians turned away from addressing the really underlying issues on funding. We need to do move away from single-payer systems in which you pay as you go. That's not the wave of the future; that was the wave of the 1950s and 1960s, when populations were projected to grow ad nauseam.

We know that's not happening. There are at least 50 countries across this planet that have already dealt with these things in other, more creative ways. We don't have to mimic the Chilean solution on pensions or the Singapore solution on medical savings accounts. We can, however, find a way to draw the best from what they've done and address the funding issues. I think there are enough people in this room and this institution who could do that when they engage Canadians in that debate.

So far, we have not done that, and that's very unfortunate. Again, I must say that it's an abdication of financial and moral leadership.

Dr. Jacques Lemelin: I think there are several aspects to your question of whether the health care system can be properly funded. There's the clinical part of the care system, and then there's the research part of the care system.

Clearly, research is grossly underfunded. I think the United States spends about eight to nine times the amount spent on research per capita in Canada. So that's certainly a real big problem. If the money's in the States, after we train competent researches, they then go to the States. So we have a double loss there. Certainly more money needs to be put there.

In terms of clinical care, as for fee for service versus capitation, I've worked under both systems, and I'm presently under a capitation system. Personally, I find it much more freeing for me to be able to do specifically what I need to do for my patients. I'm not a prisoner of a fee system that forces me to do X or Y to be able to get paid.

Now, there are varying opinions on that, but I don't think that's the main issue in terms of medical care.

In the U.S. they spend from one and a half to almost one and two-thirds times what we spend on health care. I don't advocate that we necessarily copy their system. Certainly they're looking up at our system in many different ways. One of those ways is in terms of the ratio of family physicians to specialists. They're trying very hard to come to a proportion that's closer to ours, such that about 50% of family physicians in Canada are primary care physicians. They're recruiting very aggressively to get some of our doctors to go down there to work because they think that provides better care.

For care to be of high quality and cost-efficient, you need to have a good match between patient needs and resource allocation. If you have a specialist doing something that a family physician can do, that's inefficient. If you have a physician doing what a nurse can do, that's inefficient. So in addition to extra funding, there needs to be some reorganization of our health care system to make sure that there's a good match between patient needs and resource allocation.

The Chairman: Thank you, Mr. Ritz.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): My first question is quite a simple one. What do you estimate the budget surplus of the federal government will be at the end of the present fiscal year? What is your assessment of the surplus? My question is for the representative of the Conference Board.

Mr. Paul Darby: According to our most recent estimates, it should be about $5.5 billion for this fiscal year. What about you, Mr. Dungan? About the same amount.

So it is quite a significant surplus. This estimate also takes into account some fiscal measures.

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The contribution rate to employment insurance has been reduced by 10 ¢, I believe. The general surtax has also been completely abolished. But even taking into account these fiscal measures, we forecast another surplus for the next fiscal year of approximately $3.5 billion. Thus, even with a tax reduction, we can continue to run a surplus in the future.

Mr. Yvan Loubier: But how do you reach these figures for the fiscal year 1998-99 when in the first six months of this year, we already have an accumulated surplus of $10 billion and the forecasts made by the Conference Board do not foresee a recession or a strong economic slowdown in 1998-99? There was merely a somewhat revised forecast for the GDP, nothing more. How can you expect half of this present surplus of $10 billion to melt away over the next six months?

Mr. Paul Darby: Our experience has been that in the second half of the year, the figures for fiscal performance are not nearly as good as those for the first six months of the year. There's even a possibility of a deficit for the last six months of the year, taking into account the seasonal figures. That would be part of the explanation.

The other reason is that even though we have not forecast a recession, the rate of economic growth in Canada has been going down during the second and third quarters, particularly in 1998. That will certainly have an impact on the fiscal situation of the second and third quarters of 1998.

So there are two reasons to forecast a lower surplus than that which we were expecting; the usual seasonal nature of the figures and the slower growth rate of the Canadian economy during the second quarter. The figures for the fiscal situation during the first half may be promising and those of the second half rather disappointing, as is usually the case.

Mr. Yvan Loubier: Mr. Dungan, do you agree with this analysis?

[English]

Mr. Peter Dungan: Roughly, I do. I'd like to make the point again that the numbers we're both talking about in terms of the 1998-99 surplus already include tax cuts. That is to say, they're not what would have occurred if there had been no changes in taxes. They are after the tax cuts we've put into effect—and each of us have our own particular favourites—so that when we get a surplus of say $5 billion to $6 billion in fiscal year 1998-99, that's after, for example, in our projection, a 20¢ or 30¢ reduction in employment insurance as of January 1, 1999 and a partial reduction in the surtax rate.

You can see that Mr. Darby and I have different....

[Translation]

Mr. Yvan Loubier: It's already contained in your forecast of $3.5 or $5 billion; even before next year's budget was announced, it was your hypothesis that Mr. Martin would be making a decision this fall to reduce the employment insurance premium rates. That is what you are telling us.

[English]

Mr. Peter Dungan: Yes, that's right. In other words, we could do the tax cuts that we have in effect, and that I think is true of both of us, and still have this kind of surplus left over. It's very important as a general point when discussing these things to ask, is it before or after these changes in policy?

[Translation]

Mr. Yvan Loubier: I see. Without taking a reduction in the premium rate into account, what would you forecast as the gross amount for this year? Would it be in the neighbourhood of $10 to $12 billion if we kept things as they are, without reducing the premium rate?

I was disturbed by Mr. Darby's explanations. You rectify matters somewhat by telling us that your forecasts for the period ending this fall provide for substantial reduction in the employment insurance premium rate as well as other fiscal adjustments.

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I'd like to know what your gross forecast was for 1998-99 without these fiscal adjustments and the reduction in the contribution rate.

[English]

Mr. Peter Dungan: I don't have the figures right in front of me.

[Translation]

Mr. Yvan Loubier: No, but just a rough estimate?

[English]

Mr. Peter Dungan: Let's say it's approximately $10 billion to $11 billion. If there were no tax cuts, as we have put in, you would get perhaps $10 billion.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Does that include the $3 million—

Mr. Peter Dungan: It does in our particular case.

[Translation]

Mr. Yvan Loubier: In other words you would forecast a surplus of at least $10 billion, if no measures were taken by Mr. Martin by March 31st of next year? Do we agree on that? We agree? Good.

How can you explain the fact that scarcely a month ago here in the Finance Committee, on informing us of his forecast for this year's surplus, Mr. Martin repeated to us that it would be zero?

Do you see what kind of effect this can have? Listen to what I have to say. You both raise the matter of confidence. Even the Chamber of Commerce and Mr. Robinson mentioned the declining confidence of the population. Don't you think it may be due to the fact that although they have been paying taxes through the nose for the past four years—something Mr. Robinson stressed in his presentation—and making extraordinary sacrifices to put public finances on a sound footing, taxpayers never hear any good news from Mr. Martin? This in spite of the fact that we have achieved results through considerable sacrifice. That is something that may discourage many people.

It is claimed that the confidence level has dropped, not only among individuals, but also in businesses. Is it possible that the claim that there will be no surplus, in spite of all these sacrifices, when the surplus should actually be $10 billion, is having some effect on people's confidence? As far as we are concerned, we would assess the amount of the surplus at $12 to $15 billion, but there are always certain technical aspects in an assessment that may result in some modifications.

Last year it was even worse. Mr. Martin told us that the deficit would amount to $24 billion when in actual fact it was $9 billion. Don't you think that this eventually has some effect on people's level of confidence? Wouldn't it be better to make the actual figures known as soon as possible so that people realize that the sacrifices they have made over the past four years have achieved results and the money can be used for particular purposes? It seems to me this would send out a rather clear signal that would stimulate economic growth.

Do you agree with my position? I would like to have your comments on the subject.

[English]

The Chairman: Mr. Robinson.

[Translation]

Mr. Walter Robinson: Mr. Loubier, allow me to answer you in both languages. We are predicting a surplus of 7 or $8 billion, including the debt contingency reserve, which is at $3 billion, for a total of $10 billion. I agree with Mr. Darby's comments concerning...

[English]

the timing, the revenues into the government, especially on EI. Many Canadians have maxed out at their $1,053. Those things have been remitted to the government for the most part.

[Translation]

As for Mr. Martin's forecasts, I would reply that he is playing with the figures. That's clear.

[English]

For us it's an issue that Minister Martin has been masterful. In some senses he has learned from the mistakes of the previous Tory government in overshooting his expectations. He has managed expectations. He has under-committed and over-delivered. For four years Canadians have said that's good, and they have a sense that as much as they have some issues of how we got to deficit reduction, he's minding the store.

We would agree with you that given the modelling that is out there and knowing what we've seen for the first six months, we have to stop crying wolf. We have to be clear with the village of taxpayers and let them know we're going to run a certain surplus, and you're hearing what we think you should do with that. The finance minister needs to do that, because to continue to play with the numbers or manage expectations really diminishes our credibility.

We see it in British Columbia provincially, even Ontario—I hold up Ontario. To play with the numbers for purely electoral purposes, taxpayers see through that. It really diminishes confidence in the institution of Parliament and the institution of the office of the Minister of Finance. Be clear with Canadians what you think it's going to be and we won't be upset if you're over or under by just a bit.

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But to turn to us and say you're going to run a deficit of $9 billion when it was projected at $17 billion and you're going to balance our budget, but then say that, by the way, you ran a surplus and also loaded $2.5 billion through the back end into the Canada Millennium Scholarship Endowment Fund—that is fundamentally wrong to play with the numbers in that regard.

I would caution the minister through you in your report to make sure that if we're running a surplus, we should not load stuff by the back end again in previous fiscal years. The Auditor General told the finance minister for three consecutive years that the innovation fund, GST, blended harmonization payments to three Atlantic provinces, and the millennium fund were wrong. That erodes confidence in the books of the Government of Canada.

There's a simple premise of taxation in this country: if you collect it in a fiscal year, you spend it in that fiscal year and allot it to those programs. That's taxation with representation. Anything else is the Boston Tea Party revolt.

So I would agree with your line of questioning. Let's be fair and honest in portraying the status of the finances to the nation.

The Chairman: Ms. Hughes Anthony.

[Translation]

Ms. Nancy Hughes Anthony: I agree with you, Mr. Loubier. That is why the Chamber of Commerce presently has three different scenarios and has indicated what the government should do if the surplus exceeds our expectations.

We are constantly disappointed by the fact that we cannot have access to the premises of the Minister of Finance's calculations, and, therefore, we cannot work together. As you know, business people are very practical; they all have their income and expenditure forecasts, etc.

We would like the government to respect what we are doing, so that we can work together and the Canadian public can understand what is going on. In our presentation, we also mentioned that we believe that Mr. Martin has been overly cautious in the revenue estimates presented in his mid-October financial statement. Once again, there is confusion about the government's premises. The point that you have raised is, therefore, very well taken.

Mr. Yvan Loubier: Thank you.

[English]

The Chairman: This is your final question.

[Translation]

Mr. Yvan Loubier: I would like to address my remaining comments to Mr. Darby.

What do you think of the statement that the Minister of Finance's attitude might create negative perceptions in the minds of consumers and businesses and tend to be discouraging? As Ms. Hughes Anthony has just said a moment ago, we don't know what to believe. Democracy is not served by obfuscation. We are only asking for clarity. We merely want the figures in the columns to make sense.

Mr. Paul Darby: I completely agree that if the Minister of Finance were to announce a tax cut in his next budget, it would stimulate confidence in the Canadian economy. That's obvious.

Moreover, it is also important that the Minister make sure there really will be a surplus. As I said in my presentation, it is possible that a recession or even a major slowdown of the Canadian economy could bring it to practically zero.

Therefore, three or four months ago, the minister had to be cautious when he forecast a budget surplus, since there was still a possibility of a recession. At the moment, I agree that there will probably be a surplus. It's almost guaranteed. Clearly a tax cut, for example, reducing personal income tax by some mechanism or by reducing employment insurance premiums would increase Canadians' confidence. That's obvious.

Mr. Yvan Loubier: Thank you. One last question, Mr. Chairman.

According to the present tax legislation, when an unexpected surplus occurs, the government must apply it to debt repayment.

Mr. Paul Darby: Are you referring to an EI surplus or a general surplus?

Mr. Yvan Loubier: No, I'm speaking about a general surplus, that would come from tax revenues. The case of the EI fund is a little different. When tax revenues are higher than forecast, these unexpected surpluses must automatically be applied to repaying the debt.

• 1050

The only way to avoid this requirement would be to table supplementary estimates. In order to ask for a decline in the rate of contributions or in taxation, which could even be announced before next year's budget in order to restore confidence in the economy and stimulate economic growth, Mr. Martin will have to table supplementary estimates.

Would you agree with the tabling of supplementary estimates? There will be a good deal of unexpected surpluses, because in Mr. Martin's budget last March, the surplus was supposed to be zero. Would you agree to that being done?

Mr. Paul Darby: At present, yes. I would agree to Mr. Martin's issuing a financial statement stipulating that now that a tax surplus is indeed certain, we can consider the possibility of reducing taxes or accelerating reimbursement of Canada's debt. Yes, I would agree to something similar being done, because it might raise the confidence level of Canadians. Yes, I would agree with taking this kind of action.

Given the results of the research carried out by the Conference Board of Canada, I would be interested in reducing the rate of contributions to employment insurance. I also agree with Mr. Dungan's assertion that increased employment insurance rates are a silent killer of jobs. The expression was also used concerning the manufacturers sales tax. I feel that an increase in employment insurance rates really is a silent killer of jobs. According to our calculations, the increase probably added at least a half of a percent to Canada's unemployment rate. It increases the cost of job creation, especially for medium-sized businesses. According to us, and also to the Bank of Canada, the natural rate of unemployment may have been increased by the increase in employment insurance rates. If I had to choose one form of tax reduction over another, I would choose the employment insurance rate.

Obviously reducing the personal tax rate would also have a favourable impact on the Canadian economy and on the level of confidence.

[English]

The Chairman: Thank you, Mr. Loubier.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

I have questions for the Canadian Chamber of Commerce and for the Canadian Taxpayers Federation. Maybe what I should do is develop each of those questions, give them to you, and then get the responses.

The chamber is here representing Canadian businesses from right across the country, from coast to coast to coast. I'm having some difficulty here, though, because I recently met a gentleman who is involved with businesses right across the country. He told me that 80% or more of CEOs in Canada are involved with community activism and children's work, etc. Your report strikes me as the report from Oz. It shows three scenarios. If we have these scenarios, then here's exactly what we can give out, and you've shown that you have the brains.

• 1055

If I look down your list, it shows that the highest-income, most privileged Canadians will be the beneficiaries of each and every one of your recommendations—each and every one. Maybe you can tell me which ones on the list don't, but this report shows no heart. It shows no heart, because not once in the entire report, nor in your presentation, did it mention anything about health care, nor did it mention anything about children. Mr. Pielsticker just walked in here. He's going to be here later, and you should talk to him about what Canadian business CEOs think about investing in children. I don't know why they're not here, but maybe you can explain why this report has no heart.

For Mr. Robinson, there's a statement in your report—and you also made it in your presentation—that personal income tax revenues are up 38% since 1993, and that this is an alarming 17% increase. GST receipts are also up by 24%, while corporate collections have taken off a whopping 140%. I assume these adjectives or descriptions mean these are negative things. They imply that somehow personal income taxes have gone up in an alarming way, when income tax revenues have in fact increased because more people are working and more people are paying taxes when they weren't before. What you've described to us as alarming and negative are in fact positives because Canada is getting healthier. So I was confused about why you would present it as a negative, when it is in fact a positive.

I started to reflect on our other encounters, on the time when you came before the finance committee and started to tell us about RESPs being deductible for tax purposes. We pointed out that you were incorrect and that they are not, and we understood that you really didn't know anything about the tax act. Then, when we got together on the technology partnerships, you started complaining about how the Government of Canada hasn't collected all these loans. In fact, the majority of those loans weren't even due and payable, yet you said they were.

I then read in the November 9 Hill Times—and I suspect it was everywhere—an article about MPs going on travels to international destinations. I happen to be the chairman of the Canada-Taiwan Parliamentary Friendship Group, the largest single group of MPs and senators on Parliament Hill, and I know the report that I tabled in the House spoke of the benefits to international trade with Taiwan; of the investment in Canada because of the visitors and the visas and the immigrants to Canada from Taiwan; about developing our relationships, about dealing with improving our trade office there because it is so far out of step with what the U.K., France, the U.S. and Germany have there; and about a whole host of things. The number of benefits that we've been able to deliver include new investments in Canada to the tune of $2 million additional investment in the trade office, along with all of the other wonderful benefits. I know you never read our report, because the subheadline is “Canadian Taxpayers' Federation denounces third-party sponsored trip as `political junkets' and tourism”. That is totally not open to the facts. You didn't inform yourself.

Well, I want to quote you now. The last thing you said to this committee today was “Let's be fair and honest in describing the finances of the nation.” So, Mr. Robinson, I guess my question to you is, why should we do what you say rather than what you do?

The Chairman: Mr. Robinson.

Mr. Walter Robinson: I'll defer to Nancy Hughes Anthony. I'm going to take Mr. Szabo's comments in.

The Chairman: Okay.

Ms. Nancy Hughes Anthony: Thank you, Mr. Szabo.

I'm sure you're familiar with the Canadian Chamber of Commerce, and I'm sure you're familiar with the many people involved in the chamber of commerce movement. As you mentioned, they're from all across this country. They're large businesses, small businesses and medium-sized businesses, and they do have heart. I think what we're here to talk about today, though, is giving some helpful and concrete suggestions to the government on how to get the economy working. That is what we have put in our submission, and we've tried to be as brief as possible.

• 1100

You mentioned that we didn't mention, for example, health care. As I said, the members who live in communities do have families, have children, have parents. They understand that this is a critical problem. They understand Canadians are telling their politicians that this is something that needs to be dealt with. But what they're saying is that they don't have confidence that every single penny of the $108 billion in the government's spending envelope is spent absolutely perfectly, effectively and efficiently. They're saying to please reallocate within that spending envelope, and make some tough choices to meet Canadians' priorities. You do it in your family budget, and you'd do it if you were running a company.

One thing I would very much like to comment on is your suggestion that our proposals are balanced towards a particular size of income group. I'm going to ask Mr. McIver if he would just give you a bit of the logic behind these items. If you hear that, I think you will understand why we feel our approach is more balanced than what you portray with respect to its impact on Canadians.

Mr. Don McIver: Thanks.

Clearly, if you look down the list, I think you will find that you have to be a taxpayer before you're going to benefit from any reduction in taxes. If you make those tax cuts proportional, it is quite obvious that a person who pays more tax is going to get a higher dollar value in terms of tax reduction. But on the criticism that you raise, at least a few of these measures, at any rate, clearly seem to be of immense benefit to low-income individuals—the full indexation of the personal income tax bracket, for example, or the increase in—

Mr. Paul Szabo: Equal for all, equal for all taxpayers—equal benefits.

Mr. Don McIver: Again, as I suggest to you, if you pay more tax than somebody else, yes, the dollar amount will be greater for those who have a higher income when you introduce a program that cuts taxes.

On the suggestion about increasing the basic personal exemption by $400 for all taxpayers, the intent of this is to take people who are at the low-income end of earnings and move them off the tax rolls completely. This will affect, will eliminate some people, but I can't tell you how many.

Rather than continue down the list, of course there are some that will impact higher-income people more and will, in our estimation, improve their productivity. The chairman was talking about or introduced this issue just a short while ago. We are deeply concerned about the loss of certain categories of individuals. We heard from our medical confreres about instances of people being attracted to the United States. This is and should be of substantial concern to Canadians, most especially in the context of whether or not we can achieve and maintain the productivity level that we have.

I'll make one final observation, if I could. One of the things that has bothered me about public debate over the last several years is that there have been automatic assumptions about the tax structure in Canada in terms of whether it is progressive or regressive, and whether it should be more progressive or more regressive. However, there has not been one government study—and I don't believe there has really been anything in the private sector—that identifies the whole rationale for the degree of progressivity in the Canadian tax system. Should it be more progressive? Maybe so. But should not the case be made that it should be the responsibility of, I suspect, the Department of Finance, to mount a comprehensive examination of the consequences of our tax system—and we call for a tax overhaul—to identify those taxes which have various positive or negative consequences, and to try to achieve a tax system which enhances progressivity?

I'll leave it at that.

Mr. Gerry Ritz: Mr. Chairman, can I raise a point of order, please?

The Chairman: Yes, go ahead.

Mr. Gerry Ritz: I really take offence at Mr. Szabo's line of questioning to Mr. Robinson. This is a public forum for debate, not for personal attacks on witnesses. Why would anybody who is treated in a rude or demeaning way bother to come?

The Chairman: They're more than welcome.

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Yes, Mr. Robinson.

Mr. Walter Robinson: I have four points of contention that Mr. Szabo has raised. With sincerity, I thank Mr. Szabo for his questions.

Mr. Ritz, I appreciate your intervention, but I am a big boy and I can take of myself. Mr. Szabo and I have a history of spirited debate at this committee, and I welcome that.

Although I have been accused today of being stupid for not reading the Income Tax Act, I must admit I can't read the entire Income Tax Act, as it is 1,400 pages long, with 700 pages of technical amendments, and it grows on a yearly basis. I just don't have all the time in my life to read that.

With respect to Technology Partnerships Canada, in my testimony on Bill C-36, which Mr. Szabo is referring to, I think if we checked the Hansard it would be shown very clearly that our assertions on government repayment of corporate welfare dealt specifically, for the most part, with the Defence Industry Productivity Program and the 20 or so years that program had been in existence.

The point we made there, Mr. Szabo, is very clear. We have proven, through Consulting and Audit Canada documents and things we have received from the Department of Industry through access to information, that the majority of people who receive money under DIPP—the major program recipients, the big ticket companies, predominantly concentrating in the aerospace industry in this country—if I can quote, are described as being “wilfully negligent, non-compliant, and having blatant disregard for their repayment obligations to the Government of Canada”. Those aren't my words; they are the words of the independent auditors brought in by Consulting and Audit Canada.

We stand by those assertions and fundamentally stand by the fact that under Technology Partnerships Canada many of these same companies continue to receive loans for what we call corporate welfare, fully knowing that on the Technology Partnerships Canada web site, there are eight criteria for receiving assistance. Criterion eight is a demonstrated commitment to repay previous Government of Canada obligations. With some of these, we're now funding third and fourth generation engine technologies when we haven't received a royalty payment from the first generation.

We have challenged the Minister of Industry consistently on three separate occasions publicly and twice in letters. If the Government of Canada is so convinced its corporate welfare programs are working, it should lay out the record for Canadians on what the forecasts were for the last 20 years and what has been repaid—we know the record is abysmal, our access to information shows that—and lay out to Canadians what it believes the repayment obligations will be for the next 10, 15, and 20 years. Let us look at it year by year, case by case, and company by company. The record is empirical and it is abysmal and we stand by those assertions.

Moving to your third point, Mr. Szabo, with respect to the Canada-Taiwan committee you chair, congratulations on chairing that committee. If you look at the context of my remarks and the points I stressed in the Hill Times article, I said at the end of the day it's not for me to decide. It's not for you to decide. It's for your constituents to decide if they believe members of Parliament moving across the world on what I still refer to as junkets is in the interests of their constituents.

Mr. Paul Szabo: Junkets and tourism, you said.

Mr. Walter Robinson: Yes. Let's look at the empirical record of what we dubbed the trip to Italy of 17 members of Parliament and three senators.

Mr. Paul Szabo: The item is about the Taiwan group.

Mr. Walter Robinson: Mr. Chairman, I would like to answer the question please; I implore you.

The Chairman: Yes, you may.

Mr. Walter Robinson: Thank you very much.

With respect to that article, I stand by those comments and I would welcome a copy of your report if you would send it—

Mr. Paul Szabo: It's on record. It was tabled in the House of Commons.

Mr. Walter Robinson: Again, Mr. Szabo, I am one person, and I can't read every report that comes out of every committee in this government—although I try; I really do try.

Finally, with respect to revenues, your point is a valid one. There is no doubt—and we've had this discussion in the past—some of these government revenues are a direct consequence of growth in our economy. But as we've also tried to point out, in four pages of tax facts from groups from the Conference Board, to C.D. Howe, to the IMF, to the World Bank, Canadians continue to languish under one of the highest tax burdens in the world.

We think growth in revenues as a result of tax cuts would be a positive and pre-eminent thing, but we have not seen that to date. The Department of Finance's own internal documents have shown that at least one-third of revenue growth is a direct result of bracket creep, or as the Department of Finance calls it, the interaction between the tax systems and rising incomes. That's a very clever bureaucratic way to say we're taxing and punishing poor Canadians, and that's fundamentally wrong. That's not a record I believe this government should be proud of. So, Mr. Szabo, I stand by my comment.

Mr. Ritz, I appreciate your intervention. I understand that, and respect you for that.

The only thing I'm very happy to say, Mr. Szabo, is you did not accuse me, like you accused the Canadian Chamber of Commerce, of not having a heart. I'm thankful you didn't do that.

• 1110

Mr. Paul Szabo: Mr. Chairman, thank you very much.

I would respectfully like to indicate that parliamentarians who participated, particularly in that Taiwan group, were offended by the comments. The Government of Taiwan, whom we don't have formal diplomatic relationships with because of our one-China policy, but with whom we do an enormous amount of business, were also very offended. They have no other way of communicating with Canadians or interacting with Canadian parliamentarians except through backbenchers.

It takes 14 hours to fly there and 14 hours to fly back. We go when the House is not sitting, so we're using what you call our vacation time. I have often said parliamentarians are on vacation when the House isn't sitting. We do that because we are representing Canada abroad. We have 120,000 visitors from Taiwan every year and have had over 60,000 new immigrants to Canada in the last five years. They bring jobs and capital to Canada. Those things should be important to you and not be belittled as junkets and tourism.

Mr. Walter Robinson: I was never on record, as noted, as saying that when the House is in recess parliamentarians are on vacation. I would challenge Mr. Szabo to find a comment in the last year and a half in which I've been in this position to that effect.

The Chairman: As chair, I accept the diversity of opinions that exist on a number of subjects. Quite frankly, I'm really interested in my productivity covenant, how that's enhanced and how we can improve the quality of life for people.

As for Mr. Szabo, the wonderful thing about democracy is that Mr. Szabo has been re-elected a number of times now, which I think illustrates that the people in his riding, whom you care so deeply about, appreciate the work he's doing.

Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I would like to ask Dr. Lemelin a question, if I may.

Obviously health care is a huge issue right across Canada. One of the presenters yesterday suggested one of the things the government needs to look at redressing is the fact that medical research and development moneys have somehow been separated from patient care, and we need to bring those two separate solitudes together. Really and truly, in looking at how we are going to restructure health care and bring back the kind of confidence Canadians have enjoyed in a medicare system, those two things have to be more in sync with each other. I just wonder if you would comment on that observation.

Dr. Jacques Lemelin: That's a very important point, and very important progress needs to be made. One of the fields of research where that's involved is health services research—how to get that care. We make discoveries in terms of treatments and ways to prevent disease, and the next step is to put that into practice. Research in primary care is very concrete and practical in that aspect.

If you don't do anything there, a gap appears between what we know we should do and what we do. That's health services research. I think more of that needs to get done. The people to do that most effectively are the physicians who are close to the patients who are at an early point in their illnesses or who are not yet ill and are able to prevent illness. That is primary care research, and I agree it's a very important aspect that needs to be dealt with.

Mrs. Karen Redman: In another life as a local politician I sat on our district health council, as well as the local hospital board. We looked at rostering and capitation. We looked at several models, often from the United States, to see if there were any kinds of refinements or improvements. You spoke relatively positively about a capitation model you worked under.

What do we about the HIV and AIDS patients and the people who don't have health cards? How do they fit into that kind of system?

Dr. Jacques Lemelin: The College of Family Physicians of Canada has been quite supportive of the primary care reform efforts that have been going on in Ontario. If you have primary care reform and a capitation system, the patient only needs to be on the list of that physician and the care can take place. Whether or not the system is fee-for-service or capitation, there's no reason these people shouldn't get proper care.

• 1115

Are you referring to their ability to get free medication, or are you referring to their ability to get care?

Mrs. Karen Redman: If part of this whole process is the accountability of health care and how much health care costs, we're looking at individuals who take a lot of resources to be dealt with. If I'm worried about what my financial picture looks like, however it is composed geographically, I might be just as happy if that person went down the street to somebody else's care centre because they're going to make my numbers look bad.

Dr. Jacques Lemelin: If you are saying physicians can choose which patients they take care of and tend to want to take care of the patients they can see quickly to increase their incomes, I certainly think a fee-for-service system would facilitate that. If you're paid a specific fee to see a patient and it takes you three times as long, obviously you can only see one-third the number of patients.

If you have a capitation system, you can have varying capitation amounts for people of varying ages and varying severity of illness, so the seriousness of your patient's illness wouldn't matter, because the pay differential would be there. Theoretically there is no reason why you couldn't do that in a fee-for-service system as well, but it gets very complicated.

Mrs. Karen Redman: Thank you.

The Chairman: Are there any further questions?

On behalf of the committee I'd like to thank you. It's been a very interesting panel. We sincerely appreciate your input to the pre-budget consultation process. It's extremely important to us to hear the various views from across the country from Canadians who really truly care about the future of this country. You've certainly demonstrated that this morning, and we're very grateful.

We're going to suspend for approximately two or three minutes.

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The Chairman: I'd like to call the meeting to order and welcome everyone here this morning. As you know, the finance committee is travelling across the country seeking input from Canadians as to what the priorities should be for the upcoming budget.

I take this opportunity to welcome the representatives from the following organizations: the Canadian Association of Jewellers; the National Research Council of Canada; the Natural Science and Engineering Research Council of Canada; Nuclear Awareness Project; appearing as an individual, Mr. Dale Orr; and the Retirement Income Coalition.

We will begin with the Canadian Association of Jewellers, Mr. Jonathan Birks. Welcome.

Mr. Jonathan Birks (First Vice-President, Canadian Jewellers Association; President, Birkden Management Inc.): Thank you, Mr. Chairman. There is a small correction: It's the Canadian Jewellers Association.

It's nice to see you again, Mr. Chairman. We're beginning to feel as though there's a little bit of a theme of Groundhog Day playing in the background.

My name is Jonathan Birks, and I'm the first vice-president of the Canadian Jewellers Association and the chairman of the government relations committee. I'm accompanied today by Mr. Pierre Akkelian, who's the former president of the Canadian Jewellers Association; and Mr. Michael Birchard, who's president of the Canadian Watch Association and also president of Rolex Canada.

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We very much appreciate the opportunity to appear again, for the fifth consecutive year, before the Standing Committee on Finance during its pre-budget consultations.

[Translation]

Canada's jewellery industry includes about 4,400 companies, most of which are small, privately-owned ones. They are connected with all aspects of the jewellery industry, and employ about 35,000 Canadians full-time. The Canadian Jewellers' Association is the national professional organization representing this sector.

[English]

Mr. Akkelian, Mr. Birchard, and I are here today on behalf of the CJA, as in years past, to urge the elimination of the anachronistic 10% excise tax. This tax is imposed on all jewellery of a value greater than $3 and on watches of a value greater than $50. This so-called luxury tax was first levied in 1918 to fund Canada's efforts in World War I. It is the only remaining tax of its kind. The tax should have been replaced by the GST in 1991; instead, we now have both. For the Canadian jewellery industry, this tax is crippling.

The Ernst & Young study commissioned by the CJA in 1997 stated that “The collected weight of all the evidence and industry knowledge analyzed...makes a strong case for eliminating the tax.” The Ernst & Young study concluded that the tax clearly damages the jewellery industry, and in fact the Canadian economy, in the following ways.

[Translation]

To begin with, it is discriminatory and punitive. Jewellery is not a luxury product. Canadians spend about $130 per year for jewellery, which is less than the cost of subscribing to a newspaper.

[English]

The tax puts Canadian jewellers at a competitive disadvantage to all other retail sectors that do not face this additional 10% manufacturers tax. The tax also increases the cost of financing inventory whereas almost all other inventory taxes were eliminated with the GST in 1991.

Secondly, the tax hurts small business and jobs. The labour-intensive jewellery industry, which operates in centres of all sizes throughout Canada, is a small business sector: 90% of the firms employ less than 20 people, and 65% have fewer than 5 employees.

Thirdly, the tax is difficult to enforce and encourages underground activity. The 1996 Auditor General's report stated:

There are also particular problems in administering the jewellery excise tax. Officials of Revenue Canada directly involved in administering the jewellery excise tax advised us that it is very difficult to apply the tax to all jewellery manufacturers who should pay it.

The amount of illegal tax evasion and legal tax avoidance is estimated at 40% to 60% of recorded sales. This tax has created an underground economy. The customs and excise section of the RCMP Milton division acknowledged that:

Avoidance of these taxes...obviously provides an unfair advantage in the market place to the jewellery smugglers and their customers. I am aware that this ongoing problem has forced other legitimate jewellers to partake in smuggling activities and/or purchase non-duty paid jewellery from the smuggler in order to remain competitive within the market.

Once smuggling is curtailed, we'll stop exporting jobs. It would also relieve the government of the need to allocate resources to enforce a levy that is virtually impossible to enforce.

[Translation]

Fourthly, the tax generates very little net revenue. The excise tax on jewellery generates about $55 million in tax revenue for the federal government. This is insignificant when compared with overall tax revenues—only .04¢ per dollar of revenue taken in. Net losses arising from doing away with the tax would be less than $55 million, because eliminating it would make a large number of transactions legitimate and subject to the GST and corporate taxes. Eliminating the tax would also reduce Revenue Canada's administrative expenses.

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[English]

One may ask, after 80 years, why repeal the tax now? There are two answers to that. First, the jewellery industry should not continue to be penalized for the government's oversight. And secondly, repealing the excise tax will also help the burgeoning diamond industry in northern Canada.

The Ekati and Diavik diamond mines in the Northwest Territories were built at a combined cost of approximately $2 billion. Together they will make Canada the world's fourth largest diamond producer and will represent 10% of the global diamond industry.

Every company involved in the diamond sector—from mining through sorting, cutting, polishing and retailing—is required to obtain an excise tax licence. The tax is paid only once by the retailer at the final point of sale. However, every other player must complete a form claiming a tax exemption on each transaction. A key move to ensure a strong new diamond industry is the elimination of the excise tax on jewellery at the earliest opportunity while this industry is in the very early stages of development.

In the pre-budget report last December, this committee expressed sympathy with the jewellery industry and recommended that, and I quote, “...the Department of Finance assess the appropriateness of an excise tax on jewellery”.

This next quote followed the finance committee's 1996 pre-budget report, and it even more forcefully concluded:

The 10% excise tax is an anachronism. If it is to tax luxuries it should not apply to inexpensive jewellery, but rather should apply to many other items, such as yachts, estates, mink coats, caviar, and champagne. The tax should be abolished.

Along with the committee's recommendations from the last two years, all federal political parties support the CJA in its efforts to repeal the excise tax. And I would note that we have the strong support of the Minister of National Revenue.

This government has committed itself to establishing a fairer tax system. With the successful elimination of the deficit, the government is finally in a position to eradicate tax aberrations in order to begin levelling the taxation playing field.

The Canadian Jewellers' Association has patiently persisted in its efforts to repeal the excise tax over many years. We have done everything that has been asked of us and more. We have completed an objective study of the jewellery industry—Ernst & Young, October 1997—to analyse the policy case. There is no policy case. We have consulted repeatedly with government officials, members of Parliament and the minister. We have enlisted the support of every federal political party. We have the total support of our industry and the emerging diamond industry. The judgments are unanimous. All that remains is for the Minister of Finance to act.

We strongly urge this committee to exercise its fudiciary responsibility and categorically recommend immediate repeal of the jewellery excise tax.

Thank you for your time.

The Chairman: Thank you very much, Mr. Birks.

We'll now hear from the National Research Council of Canada, Dr. Arthur Carty. Welcome.

[Translation]

Mr. Arthur J. Carty (President, National Research Council of Canada): Good day, Mr. Chairman, ladies and gentlemen.

Thank you for the opportunity to speak this morning. Since we do not have much time, I will speak in English, if you don't mind.

[English]

The National Research Council is the federal government's principal research and development agency and we are a major contributor to innovation in Canada. Indeed, I think it's fair to say that the NRC plays a very unique role in our country. We reach into every province and every territory and into many regions and communities right across the country, through our research institutes and our programs, including the industrial research assistance program, which many of your will know as IRAP.

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NRC's vision to 2001, which was articulated two and a half years ago in the context of program review, in 1995-96, is to be a leader in the development of an innovative knowledge-based economy for Canada through science and technology. We are doing this and achieving this vision in a number of ways: first of all, by leading-edge research in our laboratories; by adopting an entrepreneurial approach to the transfer of that knowledge and the technology we develop to Canadian industry; by forging partnerships with large and small companies to enhance commercialization and productivity; and by focusing on innovation at the local and regional level through community innovation initiatives.

NRC also provides essential elements of the national infrastructure, such as wind tunnels for the aerospace industry, pilot plants for biotechnology, and leading-edge astronomy facilities for the university research community.

Mr. Chairman, NRC has made enormous progress towards the achievement of its vision since program review required a major restructuring and refocusing of our activities in 1995-96. And despite significant budget cuts of $76 million in program review one—that was 17% of our funding base—and $13.1 million this year, 1998-99, another 3.5%, NRC has done much more with less and has been successful, I believe, well beyond what could reasonably be expected.

I don't have time today to document all of our successes, but I would simply point out that in your folders you have a colourful insert or poster that describes some of the contributions we are making to foster wealth and job creation, increased productivity, economic growth and societal benefit through innovation.

You might look, for example, at NRC's discovery and development of vaccines against infant meningitis; at our role in the emergence of Saskatoon as one of world's leading agricultural biotech communities; and NRC's continuing impact on the growth of small and medium enterprises in Canada. Yet we've done this in the face of major cutbacks to our A base. Unlike the granting councils, NRC's R and D budget was not restored to 1994-95 levels in the 1998 federal budget, and we are facing major challenges. We've been unable to invest in new emerging strategic R and D opportunities for Canada, and for a research organization that is quite critical. These are opportunities that Canada must take to remain industrially competitive.

Our equipment, facilities, and infrastructure are eroding and we are losing highly qualified personnel and have a reduced ability to provide hands-on training for young researchers.

We are also very limited in entering into new partnerships because of a lack of financial resources, and of course also scientific inflation and the value of the Canadian dollar have severely impacted on our operating budgets.

So we very much need an investment of new funds into our A base to enable us to fulfil what is phase two of our vision to 2001, and also to enhance our ability to be and continue to be a major player in innovation and productivity enhancement in Canada. We are, Mr. Chairman, requesting of our government an A base increase of $25 million a year for the next three years.

In my view, NRC is a Canadian treasure. We believe that Canada has to invest in strategic initiatives such as NRC's national fuel cell initiative; our genome science project; aerospace infrastructure and facilities; an opto-electronics prototyping foundry and the scientific knowledge network. All of these are new NRC-led partnerships that are crucial to Canada in the next century. We need your support to put them in place.

Thank you.

The Chairman: Thank you very much, Dr. Carty.

We'll now hear from the Natural Sciences and Engineering Research Council of Canada, Dr. Thomas Brzustowski. Welcome.

Dr. Thomas A. Brzustowski (President, Natural Sciences and Engineering Research Council of Canada): Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, you probably know us as NSERC, or CRSNG en français. We invest in people, in discovering and in innovation, and we do that by supporting university research in science and engineering.

We have prepared a very short brief, knowing that the committee is facing paper overload. It's four pages.

We would like to begin first and foremost by thanking you, thanking the committee, for hearing our concerns last year, for taking them seriously and for recommending action. I can say that the Canadian university researchers who count on NSERC to support their work are very grateful. They are now able to do more of the things we count on them to do. And they have been expressing that gratitude publicly and in letters to the government that still keep coming more than eight months after the budget.

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[Translation]

In the 1998 budget, the government stipulated that the new funds should serve two purposes: they should increase support for students involved in research, and should encourage a larger number of partnerships between academic researchers and business.

[English]

In the first page of the brief, we simply list for your information how we use the money, and the impact is substantial. Many hundreds of students who could not be supported before will now be supported. We have also done something that I think is very important, recognizing that in asking the private sector to join with universities in preparing applications for partnership we have to guarantee them a reasonable rate of success for their efforts, and we have been able to increase the success rate in university industry programs.

The brief goes on to say, and says it succinctly, that what the budget has done in 1998 has allowed us to deal with some of our most pressing problems. We have indicated for you the remaining five budget pressures on us. I won't take the time now; I've talked about these many times, and Dr. Carty has mentioned some of them. This requires us to set as a target an increase in our budget of $250 million over the next several years. We are hoping that the government will recognize those pressures on us and offer some sign of continuing a move towards that budget.

[Translation]

Mr. Chairman, a sixth budgetary pressure is looming on the horizon, one which will require an increase in the NSERC budget over and above the $250 million just discussed. Over the next five years, the Canadian Foundation for Innovation will be investing nearly $2 billion in research infrastructure, something which is really indispensable. However, the operating costs for this new infrastructure will have to be paid by the researchers who use it and by their home institution.

[English]

That is something of which I think just about everybody in government is aware, that coming over the horizon is the cost of operating that new research infrastructure that the Canada Foundation for Innovation will put in. The CFI walks away from it when the key is turned. Following the patterns that have already been set, I believe about half of the investment of $2 billion will be in the areas of science, engineering and environment, for which NSERC is responsible. Ignoring any write-down, any depreciation allowance, and assuming that NSERC will have to pay only half the cost, we still believe we will need an additional $50 million per year of budget, starting perhaps three or four or five years from now and gradually ramping up as the infrastructure is put into place.

We're already getting notice from the universities that they will come to us because they have nobody else to come to for this money. I'm sure this was all realized when the CFI was designed.

[Translation]

Mr. Chairman, I would now like to address the committee not as chairman of the NSERC, but as chairman of the board of directors for the Networks of Centres of Excellence.

[English]

The president of NSERC has to wear two hats, and if you'll allow me, I will simply switch hats for my concluding remarks.

You may know that in the last few weeks we've had the announcement of three new networks of centres of excellence. These are a superb Canadian innovation-of-research organization that allows us to create a critical mass of intellectual capacity to address large problems and still allows the participating researchers to stay in the regions, teach locally, offer advice locally, and be local resources.

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Consider the three newest networks that were funded. There's a network on arthritis, which carries issues from the research bench right to the bedside and to the treatment of the needs of patient communities. There's a network on mathematics as the language of high technology. There's a network on geomatics, which is an industry in which Canada has a chance to becoming a leader. That's the good news.

The bad news is these networks were three of 72 applications. There was no more budget then for those three. So 11 full applications were invited from the 72 letters of intent, but only three could be ultimately funded.

[Translation]

I think that because of the low success rate of the competitions and the sporadic way in which they are held, Canadian researchers and partners of industry and government are turning away from the Networks of Centres of Excellence program, seeing no value in investing so much effort in preparing proposals for new centres of excellence networks.

[English]

It would be terrible if such a low success rate discouraged the best of the best in this country and their partners in government and industry from applying for funds to create these wonderful networks that deal with important problems so very well.

It's my opinion that the country has both the need and the intellectual capacity to support twice the 14 networks that we have in total. Perhaps there could be 30. I pointed out in my final request that I hoped the government will find it possible to double that program. They could increase it very slowly, with $5 million in the next budget and then three slices of 16, to allow a steady state of 30 of these wonderful Canadian innovations to be in operation.

With that, Mr. Chairman, I thank you for having the opportunity to speak to you today.

[Translation]

I would be happy to answer your questions. Thank you.

[English]

The Chairman: Thank you very much, Dr. Brzustowski.

We'll now hear from the Nuclear Awareness Project, Mr. David Martin. Welcome.

Mr. David H. Martin (Research Director, Nuclear Awareness Project): Thank you very much. Good day, Mr. Chairman and members of the committee.

[Translation]

Thank you, ladies and gentlemen.

[English]

I'm from the Nuclear Awareness Project. It's a small environmental group. We're often called the nuclear watchdog.

You should have before you a paper named “Subsidies to AECL: Time to Pull the Plug”. I don't propose to read it in this limited time, but I would like to touch on some of the highlights. I'm not here to ask you for more money, I'm here to ask you for less. The message is a simple one: it's time to end taxpayer subsidies to Atomic Energy of Canada Limited.

I should say that I will be distributing an updated paper later this week that will touch on many of these topics. But here's a bit of new news. We've recalculated the total subsidies to Atomic Energy of Canada Limited in the last 46 years. The total is now $15.8 billion. There's also a calculation that can be made about opportunity cost in terms of what that subsidy would have been worth if it had been invested in otherwise profitable ventures. That total is now $202 billion. That gives you a sense of how the economy has suffered by continuing to fund the AECL.

I want to touch briefly on where the government's heading. In the budget plan for 1996, following the program review that was initiated in June 1995, the government announced that AECL's subsidy would be $174 million for the 1996-97 year. It would then be reduced to $132 million in 1997-98, then going down to $100 million in 1998-99 and presumably for infinity every year thereafter at that level.

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In fact the government has backtracked seriously on that commitment. In 1997-98 the subsidy was actually over $197 million, not $174 million, as the main estimates stated. This did not include a disguised subsidy of over $21 million from the sale of heavy water, which was turned over to AECL and recorded for the first time in the AECL books for 1996-97. So when we add that up, the subsidy in 1996-97 was actually close to $220 million.

What we see is in that year AECL actually had a funding increase of 13%, or if we include that heavy water figure that I mentioned, an increase of 25%; this at a time when across the board, departments and agencies of federal government were receiving serious cutbacks. For instance, the three-year cutback for Natural Resources Canada, to which AECL reports, was just about the heaviest of all the federal departments, and totalled, I believe, over 40%.

Let me touch on a few specific issues. On Whiteshell Laboratories, I understand there's an announcement coming up in the next few weeks. Despite an incentive package of over $20 million, the government could not even pay the private sector to take over Whiteshell in a comprehensive privatization. Rather than wasting money, it's time the facility be shut down, and the money, if it's going to be spent, should be spent on cleaning up the radioactive waste mess that has been left behind by AECL.

AECL is in the process of building two more reactors right now at its Chalk River labs—$120 million of public support going to, I should note, a private company, MDS Nordion. If the medical isotope business really is profitable, why does the government have to continue to give them handouts?

A new reactor is on the horizon, the Canadian Neutron Facility, the proponents not just AECL, I might add, but the National Research Council as well. The ticket on that one is $400 million. I'd suggest here that there should be some practical benchmark. Who is going to use it? If they are going to use it, how much are they willing to invest? How much are the companies that are supporting this project going to put into this $400 million project? Ontario Hydro is going to be using it for research—how much are they investing in it?

Let me move on to radioactive waste in decommissioning. AECL has long ignored its responsibility to plan and finance radioactive waste management and its facility decommissioning. For the first time, in 1996-97, it estimated its cost at $400 million. The Auditor General doesn't agree with that. He said the cost is $665 million.

For the past six years, the Auditor General has severely condemned AECL for failing to account properly in its books the liability of these decommissioning and waste costs. It's time that AECL was forced to behave responsibly.

Finally, I'll wind up with the question of reactor exports. Coming out of the program review in 1995, it wasn't anything particularly new, but AECL decided it would refocus on its CANDU business, and reactor exports would be the most important part of that focus. Their goal was stated to be ten reactors sold in ten years. It is extremely doubtful that AECL can meet this target, since its best prospects for sales—China, South Korea, Romania, and Turkey—are all very dubious propositions.

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But what if AECL could meet that goal of selling ten reactors in ten years? I suggest to you that even so, it would not begin to recoup the massive investments that taxpayers have made—the $15.8 billion in subsidies and the $200 billion in opportunity cost. AECL is not about to become self-sufficient. It never will be. It's a net loss for Canada, and it's time to cut those losses.

Thank you.

The Chairman: Thank you very much, Mr. Martin.

We'll now hear from Mr. Dale Orr. Welcome.

Mr. Dale Orr (Senior Vice-President, Wharton Econometrics Forecasting Associates Canada Inc.) (Individual Presentation): Thank you, Mr. Chairman.

I'm from WEFA Incorporated, a large international economic consulting company with fifteen offices around the world. I'm responsible for the Canadian services, and also responsible for the two documents that are before you, one of them called “Fiscal Plans”, the other one called “EI Premiums: A Way Out for Mr. Martin”. I'll make a couple of comments on each of those documents, and I'll identify some of the things that you might want to discuss.

First, with respect to “Fiscal Plans”, for this fiscal year, 1998-99, I expect there will be a potential surplus of about $9 billion. That is in addition to the contingency fund, and it's consistent with the recently announced $10-billion surplus for the first six months of this fiscal year. I think government revenues this year will come in about $6 billion above what was forecasted by Mr. Martin in the budget of last February, while gross domestic product will be about $11 billion below what he forecasted in the budget last year. You may have put two and two together: yes, the revenue base will be quite a bit lower, yet government revenues will be quite a bit higher.

One of the things you may want to discuss is the fact that there is yet another amount of prudence that Mr. Martin is putting in the budget—he certainly did it last year—in addition to the contingency fund, in addition to the prudent economics assumptions that we see and we understand. Last year there was a real low-ball estimate of the amount of revenues that the government would collect, given their already prudent forecast of the economy.

With respect to expenditures, as we sit, the government is probably spending part of the fiscal dividend, and will have spent about $4 billion by the time Mr. Martin sits to deliver the 1999 budget in February. I think there will be about $5 billion left, in addition to the $3-billion contingency fund. Since it will be February 1999—virtually the end of this fiscal year—that amount would go to debt reduction.

These calculations, of course, have their complexities, and I'm happy to go into any details that you might have an interest in.

For next fiscal year, 1999-2000, I think it's reasonable to anticipate a fiscal surplus of about $9 billion. In that case, as Mr. Martin comes in front of the country in February 1999 in anticipation of a fiscal dividend of about $9 billion the following year, I think it's reasonable for him to take the approach that he said he would take, and that is to allocate some of it. My recommendation for that allocation would be something in the order of magnitude of at least $2 billion to $3 billion for tax reductions. They would be announced in the February 1999 budget, but for the 1999-2000 year. I would recommend that the other $7 billion of the $9 billion surplus be identified to go to debt reduction, and that there be no net increase in program spending. This would leave an additional $3 billion in the contingency fund to also go to debt reduction.

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The other paper, “EI Premiums: A Way Out for Mr. Martin”, begins by recognizing what I think is a serious dilemma from which there is no easy way out. First, the recommendation that I make avoids the conflict that Mr. Martin now has, in that his actions of the last couple of years and what he apparently intends to do this year are clearly in conflict with the stated policy of EI. Most people, maybe even including Mr. Martin, don't want to change the EI legislation to make what he wants to do consistent with policy. It's very clear that Mr. Martin wants to keep most, if not all of the EI surplus, allocating it to other priorities such as health care, tax reductions, etc. Obviously there's a lot of support for him to do that. The recommendation that I make leaves the way open to do that.

What I'm recommending is that Mr. Martin finally stand up and be counted—three years too late—and identify the excessive EI premiums for exactly what they are: a tax. By identifying the EI premiums as a tax, he would formally reduce them down to their equilibrium level in order to be consistent with the policy, and set them at, say, two dollars. He would then analyse the EI premiums as a tax, immediately say he was imposing a temporary surtax on them, for whatever amount he's willing to stand up and fight for, and be identified with. By doing that, the policy that he's had of having EI premiums in excess of the stated policy would lose its political attractiveness. He would also probably join an awful lot of other people in wanting to get those EI premiums down so that they were consistent with the policy, as soon as he possibly could. By introducing this as a temporary surtax, the mechanism is there to do that.

Thank you, Mr. Chairman.

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

We will now hear from the Retirement Income Coalition, Mr. Malcolm Hamilton and Mr. Charlie Pielsticker. Welcome.

Mr. C.A. (Charlie) Pielsticker (Chair, Retirement Income Coalition; Chair, Conference for Advanced Life Underwriting; President, Pielsticker and Associates): Thank you very much, Mr. Chairman and committee members. It's indeed a pleasure and an honour to be here today. I am here today as chair of the Retirement Income Coalition, as well as chair of the Conference for Advanced Life Underwriting, and president of my own company, Pielsticker and Associates. With me today is Malcolm Hamilton, representing the Retirement Savings Alliance. Malcolm is a principal with the actuarial consulting firm of William M. Mercer Limited, and is also a very noted author, speaker and pension consultant.

The RIC, the Retirement Income Coalition, has fifteen member organizations that represent a broad cross-section of Canadian society—small and large businesses, retired persons, unions, RRSP and pension plan funders, and independent professionals—as seen in our appendix I.

The mandate of the coalition is to work cooperatively with the Canadian government to produce a retirement system for all Canadians that is consistent with the three governing principles cited in the 1982 green paper, Better Pensions for Canadians, as presented by the Honourable Marc Lalonde and the Honourable Monique Bégin. Those were to guarantee a basic income for those without resources of their own; to assure fair opportunity for Canadians to provide for their retirement years; and to enable Canadians to avoid a serious disruption in their standard of living upon retirement.

Malcolm.

Mr. Malcolm P. Hamilton (Member, Retirement Income Coalition; Principal and Benefits Consultant, William M. Mercer Limited; Representative, Retirement Savings Alliance): If you look at the table at the bottom of page 3 of our written brief, you will see the amounts that Canadians must save to retire at age 60, with an income equal to 70% of their pre-retirement employment income. The 70% target underlies the pension plans covering employees of the federal and provincial governments, and has long been recognized as an appropriate retirement planning objective.

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The table demonstrates that Canadians earning less than $25,000 per annum need to save relatively modest amounts because most of what they need will come from public pension plans, such as the Canada Pension Plan and old age security. On the other hand, Canadians earning more than $76,000 per annum will find that even if they save the maximum now permitted, $13,500 per annum, they cannot hit the 70% target. There are currently about 600,000 Canadians in this situation, and this number increases every year.

There was a time when Canadians such as these had viable retirement savings options. In 1976, occupational pension plans covered earnings up to $85,750. This was roughly equivalent to an RRSP contribution of $15,500. Since then, prices have tripled, wages have tripled, public pensions have tripled, but the limit on occupational pensions has not changed.

Our retirement limits are not internationally competitive. The table at the bottom of page 4 of our brief shows our limits to be less than one-third of the corresponding limits in the U.S. and in the U.K. Where their limits are indexed, our limits are frozen. We're not saying that inadequate RRSP limits are driving large numbers of Canadians from the country. They aren't. But we are saying that inadequate retirement savings limits are one of many factors that make our tax system uncompetitive, and these factors are increasingly taken into account by college graduates, by foreign workers who receive offers to work in Canada, and by Canadians who are asked to return home after foreign postings.

We believe the cost of increasing the retirement savings limits is small. Yes, those who contribute more will be at the maximum marginal tax rate, and their extra contributions will reduce taxes at the time that they contribute. But when they retire, they will often be taxed at even higher marginal tax rates, particularly once the old age security clawback is taken into account. This means the tax revenue foregone today will be recovered, with interest, when the money is withdrawn, and it will be recovered at a time when Canada has an older population and is struggling to address the rising cost of public pensions and medicare. For these reasons, we recommend that the RRSP limit be doubled in real terms to $27,000, and that the limit on registered pension plans be increased to $3,000 per annum per year of service. We recommend that these increases be implemented in stages, starting immediately.

Mr. Charlie Pielsticker: I'll now talk about the 20% foreign content limit. Much has been said about the negative effects of that limit. Forcing Canadians to invest 80% of their retirement income savings in 3% of the world's capital markets is unwise and imprudent; increases the risk to which they are exposed; decreases their investment returns, as seen in attachment 4 in our brief; reduces their retirement income; and ultimately reduces the taxes the government will collect from retired Canadians. We are perplexed by the government's inaction on this issue. Neither the U.S., the U.K., nor Australia has any restrictions on foreign investment by pension funds.

In conclusion, we would recommend or urge the government, first of all, to increase the foreign property limits from the current 20% up to 30% of assets over the next five years; second, to increase the contribution limits for RRSPs and RPPs up to $27,000 per year over a period of years beginning immediately; third, to increase the defined benefit pension limit up to $3,000 per year of service. Mr. Chairman, these changes are entirely consistent with the three principles articulated in the 1982 green paper presented by the Honourable Marc Lalonde and the Honourable Monique Bégin.

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We thank you for this opportunity to put forward the views of the coalition, and we look forward to your questions and comments later on.

The Chairman: Thank you very much.

This has been a very interesting round table, and we will now get to the question-and-answer session. We will begin with Mr. Ritz, and it will be a ten-minute round.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you for your presentations here this morning, gentlemen.

Mr. Orr, in your presentation you were talking about a tax on EI. Are you talking about something like a GST on EI contributions? Are you talking about a temporary tax or that type of thing? Is that the mechanism that you would see as useful?

Mr. Dale Orr: That's right. It's a temporary surtax on EI premiums—and I want to be very clear that this is exactly what has been going on. My recommendation is not that the government collect any more money than it otherwise was collecting. If it is made transparent, I wish and I hope the government would be collecting less money than otherwise.

Mr. Gerry Ritz: To the gentlemen from the Retirement Income Coalition, in your brief you're talking about an increase in the foreign content in RRSPs, by 2% a year over the next five years. Is that going far enough and fast enough for most people?

Mr. Malcolm Hamilton: We think so, yes, although there are undoubtedly people who want to go faster. When it went from 10% to 20%, it went in 2% increments, and we don't see any reason why we couldn't equally go in 2% increments in going from 20% to 30%.

Mr. Gerry Ritz: Yes, that's prudent. There's no doubt about it.

To the gentleman from the AECL who said it's time to pull the plug, have you any idea as to the cost to decommission AECL, its subsidiaries, and so on?

Mr. David Martin: I'm definitely not from AECL.

Mr. Gerry Ritz: No, I understand that.

Mr. David Martin: To be clear, I'm talking specifically about the AECL facilities, the ones it is responsible for. Those are at the Chalk River site and the Whiteshell site, and it's also responsible for several reactors at Gentilly, Douglas Point, and Rolphton. In its last annual report, AECL said its costs would be about $400 million for those. The company hasn't put those moneys into a fund. In the past, it has received subsidies from the Canadian government and has paid its costs on a year-by-year basis. It's that to which the Auditor General is objecting. That's not the right way to do it; it's against generally accepted accounting principles.

SO AECL's figure is $400 million. As I said, a couple of years ago the Auditor General looked into it. The total that the AG estimated was much higher, at about $665 million. Independent estimates are much higher again. I've heard it estimated, for instance, that the cost of decommissioning the Chalk River site alone could be over $1 billion.

Mr. Gerry Ritz: So it's one of those situations in which you're damned if you do and damned if you don't.

Mr. David Martin: Well, it's the future generations who are at risk here. By not accounting for it properly, AECL is saying that future taxpayers will look after it, our descendants will look after it. It is very much a question of intergenerational equity.

Mr. Gerry Ritz: Thank you.

Dr. Brzustowski, you were talking about the networks of centres of excellence. You have fourteen of them up and running in Canada now. Whether you agree with the idea or not, we heard some submissions in Atlantic Canada that these are not scattered across the country equitably. How would you reply to that?

Dr. Thomas Brzustowski: Well, what might not be scattered around the country equitably is the administrative centres for these, which entail small offices with two or three people. The centres themselves, however, are networks involving universities from coast to coast. We have about 49 or 50 universities in which there is research in the natural sciences and engineering—and those numbers include all the ones in which there's medical research as well. All of them are involved in one or another network, and many are involved in several. So while the distribution of administrative centres may not be uniformly spread out, certainly the membership and the involvement is. I feel that's one of the strengths of the program.

Mr. Gerry Ritz: Their concern, though, was that the funding was going to the larger centres. Of course, there are more people there to work with and there are more facilities and so on. Their concern, however, was that they would never grow to the extent that they would like with the funding being targeted to those large centres on an ongoing basis.

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Dr. Thomas Brzustowski: The funding isn't targeted, it's given in response to the application. People create a network from where the expertise resides. They bring in partners, and they're not always industrial partners. They may be government agencies in the provinces, non-government organizations and so on. It's in response to that kind of a network created from the ground up that the funding is either given or not given. There's very tight competition.

There isn't really a regional allocation from the top or anything like that.

Mr. Gerry Ritz: Thank you.

The Chairman: Thank you, Mr. Ritz.

[Translation]

Mr. Cardin, Mr. Loubier, do you have any questions?

Mr. Serge Cardin (Sherbrooke, BQ): Thank you for your presentation, Gentlemen. Welcome to the Finance Committee.

My first comments are for Mr. Birks. As you know, this is not the first time that the Bloc Québécois has supported your claims. Equity between taxpayers and for the various industries is an important item. It is clear that the excise tax is detrimental to the jewellery industry, is hurting sales of jewellery and is encouraging black market activity.

I might have missed a part of your message a while ago, but I would like to get some more details from you concerning the black market, its revenue and the potential losses in terms of GST and provincial sales tax.

Mr. Jonathan Birks: Mr. Cardin, it is always difficult to set a precise figure, but black market activities are estimated at some $1.5 million Canadian. Thus it is a substantial and continuously growing market.

Mr. Serge Cardin: We believe that with our present budget surplus, we have an excellent opportunity to bring equity to the fore. We are aware of the inequitable conditions that are so common in our system and that often hurt some businesses and taxpayers. I feel that the time has come to restore equity among industries and taxpayers. It is very important.

Mr. Martin, you suggested that we systematically do away with the nuclear program in its current form. However, we must not lose sight of the fact that nuclear energy is an important source of energy for consumers. How would you suggest investing the amounts saved by no longer subsidizing the nuclear sector? How could we channel them into other ways of obtaining energy in a productive way?

[English]

Mr. David Martin: While I'm suggesting subsidies should be eliminated for AECL, it's clear there are parts of the nuclear industry that can function on their own without support, and that is a different matter. If AECL thinks it can survive and export reactors without taxpayer subsidies, that's another issue. We have other problems and concerns—environmental, safety and ethical—about those, but it's important to maintain that distinction.

In terms of alternatives, there are very real alternatives—efficiency, conservation, and renewable energy. We're proposing that the playing field be levelled here. There is close to a 50-year history of subsidy to the nuclear industry. The same is not true for the renewable energy sector. We need to first of all create a level playing field, and then we can start to implement a truly sustainable energy path for Canada.

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[Translation]

Mr. Serge Cardin: Thank you. I will close with a comment that should reassure the representatives of the National Research Council. The Bloc Québécois is quite prepared to support an increase in your budget, since its members feel that research is very important at all levels, including your field. You can count on our support.

The Chairman: Thank you, Mr. Cardin.

[English]

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman.

I want to pursue a couple of items with the Retirement Income Coalition. Maybe I'll start with Mr. Pielsticker. Thank you for the report. This is fascinating, and I think it's going to be helpful.

Since I did mention your name in the previous panel, I thought I'd at least give you an opportunity to make a comment about business executives, their sensitivity to the social realities in Canada, as you know it, and some of the things they're doing. I'd like to give you an opportunity to make a brief statement.

Mr. Charlie Pielsticker: Thank you, Mr. Szabo.

Mr. Szabo was referring to some information I had presented here with the former chair, Mr. Peterson, on the Retirement Income Coalition.

The Retirement Income Coalition, which is in the greater Toronto area, represents the largest partnership between business and education currently in North America. It is larger than those in New York, Chicago, Los Angeles or any other city. It is really a partnership between senior business and small business, together with education, focusing on the future of the 950,000 students in the greater Toronto area. From that has come involvement in activities all across Canada, where businesses have been involved with education and young people.

The most visible activity occurred just last week, and was certainly here in Ottawa, which was take our kids to work day. That activity involved probably 1.5 million Canadians, of which 450,000 were grade nine students. The rest were all businesses which, as volunteers, together with teachers and parents, took grade nine students out of the class to build an awareness of what the workday is like. It is really a bridging opportunity for young people.

Thank you.

Mr. Paul Szabo: Thank you. I thought it was important to make sure we understood that all CEOs in Canada are not just suits who make lots of money. There's an awful lot that comes back into the community to our children, and I want to thank you for raising that.

Mr. Hamilton, on page 3 of your report you address the issue with regard to the retirement requirements. You referred to your chart, and I just want to be absolutely sure I understand what is here. As a principle, you're suggesting that as a benchmark or a starting point Canadians should provide approximately 70% of their pre-retirement income for retirement purposes. Your chart deals with how much you have to contribute to an RRSP at certain income levels, when taken with the Canada Pension Plan and any other entitlements, to get to the 70%.

Your chart seems to show that if you have a pre-retirement income of $75,000, the current level of RRSP contributions of $13,500 would adequately, taken together with all other things, provide for 70% of the retirement income; i.e., approximately $50,000 a year of retirement income for this person.

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You're recommending doubling the current contribution limit, which says to me that these income earners, at levels higher than $75,000, have the cash and have had to earn that cash, which they can't contribute to RRSPs, at levels that are sufficient to be able to double the amount of contributions.

That cash isn't just thrown down the sewer. I assume this excess cash, capital or savings that can't be invested in RRSPs is invested in other assets, and presumably they are income-producing assets. So whatever you have on your chart here basically assumes there is no other source of income available to those retirees.

Am I correct in my assumptions? If I am, would someone making $100,00 or $200,000 actually have a deficiency in retirement income if you included the imputed return on non-RRSP sheltered investment income?

Mr. Malcolm Hamilton: Let me try to do justice to that. First, this table isn't looking at what Canadians actually save. This table is looking at what Canadians need to contribute to RRSPs to hit the 70% target. There is nothing in here that is saying this is what the average Canadian at these income levels is saving today.

Let's take the Canadian making $100,000. We say to retire at 60 that Canadian would need to save about 19.3% of their income if their savings could go to RRSPs, and that would be equivalent to $19,000 a year. That's if they could put it all in RRSPs, which today they can't.

I believe the question you're asking isn't answered by the table. You're asking, if they try to get to the 70% target by saving outside of RRSPs, what percent of their income do they need to save? It's substantially higher than 19% in the case of the individual earning $100,000, and substantially higher than 21% in the case of the individual earning $200,000.

In other words, it is true that by saving very large amounts, like maybe 30% of income, these people can compensate for the very heavy taxes they will have to pay on investment income. But it becomes extremely expensive, and in fact they just don't do it. They pay down mortgages and buy bigger houses and fancier cars because there is just very little point in them trying to save outside an RRSP where all their money is taxed away.

Mr. Paul Szabo: So you don't get the tax deferral, but you still have to pay it. In fact, in your submission you made the statement that very often they will pay higher tax rates on crystallizing or receiving the RRSP-sheltered income when it converts into a RRIF and starts flowing into income than they would have paid when they got the deduction.

So if I make a lot of money and I contribute the maximum and I have a spouse who manages the family home, cares for my children and doesn't have the same level of income, if I purchase the maximum and purchase a spousal RRSP rather than an RRSP for myself, if that were the only retirement income my spouse had, wouldn't the money, on which I got a deduction at the highest marginal tax rate, based on how you structure your RRIF, come out at the lowest marginal tax rate under our current tax system? In other words, you pay one-half of the taxes you got back when you made the contribution compared to how much taxes you pay when you go out. You get a capital gain on the rate, a 50% rate reduction on the tax rate. Isn't that also the case, and isn't it an important strategy for Canadians investing in RRSPs to split income and get the capital gain on the rate side if they can?

Mr. Malcolm Hamilton: If all Canadians had spouses who never worked, that would be an attractive strategy for all Canadians.

Mr. Paul Szabo: If they had the same level of pension income—just for levelling.

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Mr. Malcolm Hamilton: For levelling, you're saying come out at the lowest marginal rate. If you earn $75,000 and your spouse earns $50,000 and you both save for retirement, spousal RRSPs are never going to come out at the lowest marginal rate for either spouse.

Mr. Paul Szabo: Sure they are.

Mr. Malcolm Hamilton: It's going to be pretty hard.

Mr. Paul Szabo: The middle rate goes right up to $60,000.

Mr. Malcolm Hamilton: No. If you have two individuals, one making $75,000 and one making $50,000—

Mr. Paul Szabo: But a spouse making $50,000 is going to pay a lower marginal rate than somebody making $75,000.

Mr. Malcolm Hamilton: Yes, but my point is it might come out at 40% instead of 50%, but we're not having money going—

Mr. Paul Szabo: There's still a rate saving, though.

Mr. Malcolm Hamilton: It's still a saving, there's no denying it. But I guess the question is, what's wrong in that circumstance? Basically you have two people who are trying to save for retirement. The law allows them to use spousal RRSPs and they do, and they end up paying slightly less tax after retirement than they otherwise would.

If the objection is to spousal RRSPs, fix spousal RRSPs. The limits are constraining a lot of people who don't use spousal RRSPs.

Mr. Paul Szabo: I think the point is that only about 3% of Canadians make more than $75,000 a year today, and more than half of those are in registered plans already. So we're only talking about 1.5% of Canadians, and you're saying for those 1.5% of Canadians let's double the amount of tax expenditure we make so they can have a better retirement income.

Mr. Malcolm Hamilton: We're not asking you to double your tax expenditure. We're saying if you properly calculated your tax expenditures—and we don't believe the government properly calculates the tax expenditure—you'd find there was very little cost to doing this.

Also, by our reckoning it involves much more than 1.5% of the taxpaying population, and we don't see this as having a large cost. The issue is simply should people earning more than $75,000 be able to have a decent retirement income by saving amounts that are greater than what other people save?

Mr. Paul Szabo: I understand.

The Chairman: Thank you, Mr. Szabo.

Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chairman.

Sometimes if we can paint a picture it helps set priorities. I wonder if Dr. Brzustowski would give us a little commercial for MITICS, or how these partnerships actually work so the government can understand why it's a good idea to spend money there. Either the math one or the arthritis one would be fine.

Dr. Thomas Brzustowski: This is a question from a member of Parliament who was involved in both announcements. Thank you very much.

One of the things to recognize is that these networks aren't created in a vacuum out of nothing. They are created as a superstructure on top of the funding that's been invested in individual researchers for 10 to 30 years. They're called networks of centres of excellence, and first comes the excellence: the investment from councils like NSERC, the Medical Research Council, or the Social Sciences and Humanities Research Council over many years, and individual researchers and their students around the country.

These people get together because of common interests, and when the numbers get large enough they form a centre. They tend to be geographically very close. As that continues, at some stage in the game they realize some of the issues in modern society they have to deal with require much more intellectual resources than a small group of people, and if they create a network and bring together into that network industrial partners, NGOs and government agencies, they can develop a strategy together that achieves far more for the whole than the sum of their individual efforts. Then they put together an application that takes the better part of a year and apply into a competition.

The point I've been making is that the last competition was brutal. The success rate was based on 27% of the 11 final applications—3 out of 11—but was measured against the letters of intent. These weren't 2-, 3-, 10- or 20-page letters; they were briefs like that. The success rate was only 4%.

• 1240

If you take arthritis, what does this allow people to do? It allows people to integrate basic research on cell science that deals with, for example, what the characteristics of their immune systems are and what problems arise in the immune system with aging, right through to such things as orthopedic surgery; what people can do to relieve the symptoms—replace hip joints, whatever. It goes all the way through to dealing with the needs of patients in the community, people who are impaired in their mobility, their functioning ability, because of arthritis. All of that is integrated, in that particular case, over several dozen of our country's leading researchers and their students. There's a relatively small amount of funding on top of what they're already getting, but it can lever the tremendous additional productivity of research results.

I hope that's a good enough commercial.

Ms. Carolyn Bennett: That's great. The corporate partners, particularly in MITICS—could you just...?

Dr. Thomas Brzustowski: On mathematics, I hope members of Parliament who were in office when this was created will remain proud of that Canadian achievement for many years, because what we're seeing right now in 1998 is a change in the way mathematics is taught, practised, and used across the country. Mathematics is the language of high technology; it always has been. But that's been a well-kept secret among mathematicians. MITICS involves industry in all sectors. It involves the financial industry because people are learning how to manage risk. Although some Nobel Prize winners haven't done all that well recently, the techniques are there.

An example is the scheduling of transit systems. There's a company in Montreal, Ad Opt, that sells scheduling software for transit systems and national railways all around the world. That is the result of basic research in mathematics that was funded 30 years ago by us. These applications are there and the network brings them all together. It's across the country. It's across all sectors of industry and government, and it really gives mathematics the prominence it needs to have in the millennium.

Ms. Carolyn Bennett: I'm sorry our Reform colleagues aren't here to hear that the things that look perhaps on the surface like a line entry on a budget may actually solve a problem, such as encryption, and some of the risk management in terms of derivatives and some of the things we've heard a lot about in MacKay....

I guess the other issue that was raised by the member opposite was on the misunderstanding about bricks and mortar in these things and understanding that this actually a virtual network that really serves the whole country.

Dr. Thomas Brzustowski: That's absolutely right. Perhaps the best chance people from remote, small institutions have to play in the big leagues in these fields is by networking with all the players in the rest of the country.

The Chairman: Thank you, Ms. Bennett.

I agree with the substance of the question. However, we don't draw attention to the presence or lack of presence of members.

Ms. Carolyn Bennett: He raised the question and I'm sorry he wasn't here for the answer.

The Chairman: Okay.

On behalf of the committee I'd like to thank you very much. It was a very interesting panel. You raised very important issues that will serve us well as we reflect upon the priorities for the upcoming budget. You not only raise issues that are important for this budget, but you have certainly signalled to us some very important issues that speak to the future, and for that we're very grateful. Thank you.

We're going to take a five-minute break and we'll be right back.

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• 1301

The Chairman: I would like to call the meeting to order and take this opportunity to welcome representatives from the Canadian Federation of Independent Business. They are Ms. Catherine Swift, the president and CEO; Monsieur Pierre Cleroux, vice-president from Quebec; and Garth Whyte, vice-president, national affairs.

Welcome. You may begin.

Ms. Catherine Swift (President and Chief Executive Officer, Canadian Federation of Independent Business): Thank you, Mr. Chairman. Once again, it's always our pleasure to appear before this committee.

Our current membership in Canada is actually greater than noted in our brief. We're actually over 91,000 members now, in small and medium-sized businesses located across Canada.

We've addressed our comments today specifically to your committee's request to focus on four different questions: priorities for the fiscal dividend; appropriate changes to the tax system to help to achieve those priorities; how Canadians can be helped to take advantage of new fiscal priorities; and finally, what's the best way government can help ensure a wide range of job opportunities in the new economy.

I might note that we have a series of slides, which we're going to have up on the monitor. We're just presenting them on the monitor in English, but we have a hard copy in French, so both are certainly available. It is just logistically difficult to do both on the screen.

The data we're going to be presenting in the charts and in our brief today are based on a number of different surveys we've conducted over the last year or so. Cumulatively these represent tens of thousands of responses from our small-business membership.

Right after the last budget earlier this year, in March, we circulated a fairly detailed survey to our members on fiscal priorities and tax and spending policy.

Generally speaking, we found that right after the budget, just under two-thirds of our members were fairly satisfied with the government's overall fiscal approach.

At that time we asked how the government's fiscal strategy should be improved now that the deficit was eliminated. Just under half said that there should be more of a focus on debt repayment. That was the number-one priority.

Just over a quarter said, focus on tax cuts. Twenty-four percent said that they felt the government's 50-50 approach they've been ostensibly pursuing was about right. Less than 1% felt the focus should be on spending increases.

Now, we surveyed our members about six months later, fairly recently. This showed that through that period our members' priorities have shifted to putting more emphasis on reducing the total burden of taxation. Just over 80% have identified that as the number-one priority.

Employment insurance and government debt, both identified by roughly equal numbers of respondents, were pretty much tied for the second priority.

Now, there's no question that our members have become more concerned over the last.... Your tax is always—and always will be—an issue, of course. But we have seen increasing concern, and this can be explained by a number of factors over the last year or so.

They have the sense, which is pretty well justified, that federal spending appears to be back on an upward growth trend, after a number of years of relative flat performance.

Of course, they also see employers'—and employees', for that matter—overall tax burden increasing. This is because of the substantial increases we're foreseeing in CPP, QPP premiums over the next few years, coupled with EI premiums that are much higher than they have to be.

• 1305

I might also note that there are some signs, although not really that alarming as yet, of a slowing in the economy. And as with any cost component, taxes are more bearable when the economy is more robust.

As we see a slowing economy, you can expect more attention on the need for tax reductions. Of course, the timing really couldn't be better for tax reductions, given that we're all interested in trying to prolong a period of economic growth, and not go into a downturn.

In terms of government spending performance, the latest estimates we've seen coming out of the Department of Finance show that program spending for the 1997-98 fiscal year was $108.8 billion. This is considerably above the $106 billion that we saw estimated in the February budget.

What we see as particularly worrisome...we shouldn't have to see higher spending in a time of reasonable economic growth. We've recently seen, just in the last couple of days, that the surplus is much higher than estimated.

But what has been particularly worrisome is some of the sleight of hand that's being played with some of these numbers and its likely impact on confidence in the finance minister's projections in the medium to longer term.

For example, we've seen things like the millennium scholarship fund. It was ostensibly allocated into one year, even though we're not going to see any real spending until the year 2000 in that particular area. And we've seen other examples of this, as well.

You'd expect to see lesser expenditures in the years they were supposedly made, because we've already allocated these. But we're not seeing that. We're actually seeing current spending running higher than it did last year.

We're particularly concerned about seemingly concealing the true extent of the surplus. We saw the previous government conceal the extent of deficits, which was of particular concern.

Although one could argue that this is the flip side of the coin, it is also very much of concern. This is because of the impact it will have, and is already having, on confidence in the government's fiscal plan.

I'd like to ask Garth to deal with the employment insurance premium issue and payroll taxes.

Mr. Garth Whyte (Vice-President, National Affairs, Canadian Federation of Independent Business): This brings us to the employment insurance surplus.

The EI premium rate for employees is almost 90¢ above the break-even rate. This means the rate needed to pay for the program's cost. That's what we mean when we say the break-even rate, and for employers it's almost $1.20 above the break-even rate.

Figure 3 in your text shows the employment insurance surplus. It shows that the surplus will reach $19.6 billion by the end of this year. If the premiums stay the same at the current level, and assuming the unemployment rate remains the same—which we think it will—or decreases, the surplus will grow to $32.7 billion by the year 2000.

Now, the finance minister has stated that he would like to lower EI premiums, but the surplus money is needed to achieve other important priorities, such as reducing the debt, decreasing personal income taxes, and increasing health care spending.

Even if one accepted the argument that EI funds should be used for other spending and tax priorities, a policy position with which CFIB disagrees, there's still room to lower EI premiums immediately because of the creative spending accounting practice by the government.

I will now move to figure 4. We surveyed our members and asked them whether the employment insurance fund should be separate. As you can see, this is based on over 12,000 responses.

Of these 74% said yes, 14% said no, 11% were undecided, and less than 1% had no interest in the issue. So based on this survey result, CFIB recommends that the employment insurance fund be recognized as a separate account dedicated to employment insurance programs.

Now, our concern is that the government wants to use the EI surplus year after year. Three years ago we were told that the EI surplus must be built up for a rainy day fund.

Last year we were told that the EI premiums could not be significantly reduced, because a surplus is needed to eliminate the deficit. Now that the deficit is gone we're told that this year we should not expect lower EI premiums, because we need to deal with the world crisis. What will be the reason not to lower EI premiums next year or the year after?

• 1310

We are concerned that the government is creating a crisis by spending the EI surplus. That means it will either have to raise EI premiums, or borrow debt to pay for the EI program when it will be needed the most during an economic downturn.

So the CFIB strongly recommends that the federal government publicly state and deliver a three-year plan to bring the EI premium into balance with the cost of running the EI program. There is no reason the government should not establish a plan to break its annual dependency on spending the EI surplus.

The CFIB's members' opinion survey found that our members believe that cutting payroll taxes and personal income taxes would help their business the most.

Now, payroll taxes tend to place a disproportionate burden on small firms, which are more labour-intensive than large firms. There are numerous research studies that show that increasing payroll taxes damages job creation. Some of those studies were done by this government.

Some in this government have argued that Canada has the lowest payroll taxes among the G-7 countries. Figure 5 is based on the OECD job study and OECD numbers. It is kind of a difficult graph, but we had to get it for this explanation. The figure shows payroll taxes on employers, not total aggregate payroll taxes on employers and employees. This is what it is on employers, what the employers pay.

One side of the graph deals with the percentage change in employment from 1994 to 1998, and another section refers to employer payroll taxes. As you can see when looking at the employers' obligations, Canada in fact does not have the lowest payroll taxes in the G-7.

Indeed, with respect to these payroll taxes, the percentages of the GDP are higher than in the U.S.A. or Britain, two of Canada's trading partners.

However, we did not provide this graph to refute some of the comments by other people. What we want to show is the link between dependency on payroll taxes and the job-creation track record of those countries that tend to want to use job payroll taxes as their major means of collecting taxes.

As you see, France and Italy have a much higher dependency on payroll taxes. If you look at Italy, Germany and France, you can see that their job creation track record over the last four years is well behind what it is for Canada, the United States and Britain.

We know there are other reasons that affect employment. But in this case we do see that those countries with higher payroll taxes tend to have much lower employment growth and higher unemployment rates.

What is more disconcerting is that Canada's tax regime is shifting the emphasis away from profit-insensitive taxes.

Figure 6 is from the Mintz report which was commissioned by the government, and it was brought from tax experts across the country. Jack Mintz was the Clifford Clark visiting economist at the Department of Finance at the time. Robert Brown, another member of that committee, is currently the Clifford Clark economist at the Department of Finance.

What they found is on the graph. One segment shows total business taxes. Another section of the graph shows the increase in profit-insensitive taxes, and elsewhere a decrease in profit-insensitive taxes is shown.

This shows that governments—not just the federal government, but provincial and municipal governments—are more dependent these days on profit-insensitive business taxes, such as payroll taxes and municipal business taxes, than they are on profit-insensitive taxes. We have examples where members, many members, make zero profits in a given year, and they still have to pay these taxes.

Now, why do we spend time talking about this shift? We do it because our surveys on small business expectations for 1999, which we'll be releasing later this year, found that 45.5% of our members identified lower payroll taxes as a necessary condition to hire more employees than they currently expect to do in 1999.

Figure 7 shows that unfortunately at the federal level aggregate federal payroll taxes are increasing because CPP, QPP premiums are increasing dramatically over the next five years.

Again, this graph talks about employer-paid federal payroll taxes, and there is a section on the Canada Pension Plan and QPP increases. When you put Employment Insurance premiums at the top, you can see in aggregate that total federal payroll taxes are increasing dramatically.

• 1315

This is why we are recommending that 1999 EI premiums be reduced by at least 20¢ to 30¢ to offset CPP, QPP increases. Since small firms are recognized as creating most of the new jobs, we also recommend that the government renew the New Hires program for small business for 1999 and 2000.

We can't emphasize this enough, Mr. Chairperson. We can't do so, because we're concerned that the government will not do this. Instead, we're concerned that the government is going to abandon small business job creation. They're going to follow the recommendations of big business and big unions, and have no decreases in EI premiums. We see that as a departure from this government's past record and public statements that they support small business and job creation.

I will now pass to Pierre Cleroux, our vice-president for Quebec.

[Translation]

Mr. Pierre Cléroux (Quebec Chairman, Canadian Federation of Independent Business): I would like to present six other recommendations of importance to SMEs, which of course stipulate that the government should give priority to reducing employment insurance contributions and not use the surpluses from the fund to subsidize other tax reductions. With these considerations in mind, I will submit six different options.

Catherine has already spoken about the first option earlier, when she said that debt reduction was a priority for our members. They're quite right, because in 1998, the government has to spend 27¢ of every dollar it collects in revenue on debt servicing. It is very clear that until we reduce the debt, we will not be able to reduce the tax burden of Canadians and Canadian businesses in a permanent, long-term way.

How should we go about this? Figure 8 shows the proposal most supported by our members: passage of legislation that would force the government to repay at least $3 billion of the debt every year. We know that in his last budget, Mr. Martin announced that he intended to do that, but we would feel much more confident if there were legislation requiring that Mr. Martin and his successors always reduce the debt so that future governments will have a little more latitude.

Figure 9 is about reducing personal income taxes. Our members very much favour the reduction of taxes for consumers and suggest a general reproduction in tax rates. They favour a comprehensive approach, a reduction that would affect all Canadian taxpayers, rather than specific reductions limited to certain groups of Canadians.

We did a recent survey whose results do not appear in figure 10. We found that there is definite support for eliminating the individual surtaxes introduced by the government to help deal with the deficit. We found that over 76% of SME owners think that individual surtaxes should be eliminated.

Figure 11 talks about reducing corporate income taxes. It is important to note that SME owners think the priority should be reducing employment insurance premiums. Their second priority is to reduce individual income taxes, and their third priority is to reduce corporate income taxes.

In the area of corporate income taxes, our members support decreasing the small business rate, followed by increasing the $200,000 small business deduction threshold, which has not been increased for eight years. If we take inflation into account, the $200,000 threshold set eight years ago would now be over $300,000. This threshold for small businesses has therefore lost a significant part of its impact since it was introduced.

The fifth proposal made by the owners of SMEs appears in figure 12. We are strongly opposed to eliminating the $500,000 lifetime capital gains exemption. Eighty-one per cent of businesses think this would have a negative impact on their business. We will see later why this is so important for small business owners.

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Figure 13 shows how business owners go about providing for their retirement. Government employees and people who work in business have pension plans, but that is not true of small business owners, who count on RRSPs, the capital gains exemption and the market value of their business to provide for them in their retirement. We found that RRSPs and all the other features relating to owning a business would allow small business owners to have some retirement income. We recommend that the maximum RRSP contributions be increased from $13,500 to $14,500 in 1999, and to $15,500 in the year 2000.

Finally, my final suggestion appears in figure 14 which shows a very important aspect of the financing of companies, that is the sources of business equity. We know that this often causes problems, particularly for the smallest companies. This figure sets out the three sources used by business to obtain equity: first, their personal savings, the capital that comes from the business people themselves; second, reduced taxes, which come from the revenue generated by the business; and third, other sources that have to do with their network and their borrowing capacity, including their friends and contacts in business.

We think it is increasingly important to make RRSPs more flexible so that people can invest part of their RRSP in SMEs. Thank you.

Ms. Catherine Swift: Thank you, Pierre.

[English]

I have a couple of comments on health and education issues before concluding.

Although our members generally do support overall expenditure restraint, particularly over the last year or two, when we've had relatively good economic growth and revenues increasing even more than forecast in budgets, it's important also to note our members do support increasing transfers to the provinces in health and education. And this is illustrated in the next chart. It doesn't necessarily mean added dollars; it could well mean a reallocation of spending priorities.

We should also comment on the fact that our members are not supportive of massive new public programs. As represented in the last slide, you can see almost three-quarters of our members oppose there being a publicly funded national pharmacare system. There's a lot of good reasons for this. Government should not exclude the possibility that the private sector can contribute a great deal in terms of a number of programs and it doesn't always have to be dependent on the public sector.

In the area of health benefits covered, for example, we were very pleased to see in the last budget the provisions to permit the self-employed and unincorporated business owners to deduct their health benefit plan costs for themselves, their family, and their employees. We had promoted this for a number of years, and we were very pleased to see it in the last budget.

We are currently working with the Canadian Life and Health Insurance Association, the Canadian Dental Association, and some other groups to increase awareness and expand coverage in the health and dental area to small businesses across Canada.

We're also developing our own health and dental benefits program within CFIB so that we can expand coverage not only to those of our members who are not currently covered but also to any other small businesses. This involves improving the type of product offered right down to the one-person firm. Of course we've seen a huge growth in the self-employed in our economy after the last few years, so that proportion is increasing as well as having a more moderate cost. Cost is an impediment to a lot of small firms in terms of achieving coverage for themselves, their employees, and their families in the health and dental area.

In conclusion, the results we've presented to you today are based collectively on a number of surveys of tens of thousands of small and medium-sized businesses across Canada, that segment of the economy that we know to be the most robust job creators. It is certainly a very representative group within the Canadian economy overall. We believe that the government should be extremely careful over the next little while not to undermine the credibility it has built up by manipulating some of the expenditure projections, by misusing the EI surplus and otherwise fudging the numbers. Credibility, as we know, takes years and years to build up, and barely any time at all to destroy.

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The best way all Canadians can benefit from our improving fiscal situation is to ensure that Canada's economy continues to grow and that there are more job opportunities for Canadians generally. The best possible way to ensure this is to alleviate the tax burden on small firms as well as on other Canadians. On the small-business side, we know it will pay off in terms of job creation and that it won't only boost local economies but it will also boost Canada's overall economy.

As Garth mentioned, this government has prioritized small-business issues over the last few years. We're very concerned that we are moving away from the small-business agenda—not exclusively small business, but certainly as one of the priorities—towards a large corporation and large union agenda, which doesn't tend to foster job creation and growth.

Before inviting your questions, I'd like to thank Mike very much for changing our slides for us today.

I'd be happy to try to answer any questions you have now.

The Chairman: Thank you for a very comprehensive presentation.

We will now start with the question and answer session. Mr. Ritz, it's going to be a ten-minute round.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you for your presentation here today, folks.

You mentioned toward the end of your intervention that you've seen a huge growth in the self-employed sector, and it leads me to a question. Having been self-employed myself, you're paying a disproportionate amount every time you make contributions to EI and so on; you are paying both the employer and the employee. Is there a more equitable split that may take away some of this?

Ms. Catherine Swift: A lot of the self-employed would not pay EI premiums simply because they are not eligible for EI benefits, so there is a proportion there. CPP is a good example, because you pay the employer and employee, so you do get a double whammy on CPP. We've recommended for quite some time now that the overall split on EI, which is now 1.4:1, as you know, could certainly be reduced on a gradual basis to a 1:1 split. We think there are a lot of very good equity-based reasons to do that.

The CPP issue should be addressed, because, as you say, our economy is shifting. We don't see any reversal of that trend over the next little while. We believe we are going to continue to see that self-employed proportion grow in our economy, and not asking them to take a double hit would be certainly something we should look at.

Mr. Garth Whyte: We could have a policy discussion on each of our recommendations, but let's talk about the self-employed for a minute.

When they were looking at the collective reflections of the changing economy in the analysis that was put forward, one of the reasons people were shifting to self-employed, and we certainly hear it from our own members, was because of the payroll tax burden, because of before-profit taxes. What we are doing indirectly.... And when I say “we”, I mean all levels of government; it's not just the federal government that has that dependency on profit-insensitive tax increases. People are saying, “I'm not hiring people. It's not worth it. I'm going out on my own.”

That is one of the dangers we have to watch, and then we get into the underground economy. We have to be very careful of a lot of other places where we lose tax revenues. If you don't believe it, there is a threshold where, once you get up to a certain tax level, you lose money. We saw that with liquor taxes and tobacco taxes. So everyone has to be very careful.

Mr. Gerry Ritz: Have you done any studies that give you any idea on the depth of the underground economy? What kinds of tax dollars could be recouped if we went away from regressive taxation?

Ms. Catherine Swift: We've done some studies, not terribly recently. It was during the worst of the recession that we seem to have had our worst underground economy problem. We also had a much higher dollar then. There were all kinds of issues in the early 1990s—cross-border shopping, the introduction of the GST and so on. They are a little dated at the moment. And of course trying to nail down the size of the underground economy is always like nailing jello to the wall.

It is a good idea to re-examine the issues now, because most people do believe that we are going to be seeing an abatement in economic growth. As I say, we're not pessimistic. We think we have at least another couple of years of decent growth, but it will be slowing, which is typical in any business cycle. Given that we still have a very high level of taxation in this country on the personal income tax side, on the sales tax side, and in a number of other areas, seeing that underground economy perk up again is not out of the realm of possibility.

Mr. Gerry Ritz: You're recommending cuts of 20¢ to 30¢ on the 1999 EI premiums. Is that enough? The actuary is saying it can go to $1.90 and still be actuarially sound.

Mr. Garth Whyte: We're trying to play ball with everyone. We're trying to say yes, it should go down, and it could go down almost $1, and you still would have a $20 billion surplus.

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We listened to the minister's economic statement. We think we're being more than reasonable. We think zero premium reduction is unreasonable. We think five cents is unreasonable. We think we've come and gone halfway.

Part of the key to this is.... We're concerned that if you take it out all at once, you could really hurt the fiscal plan on deficit reduction and everything else. So we want to see a phase-in over time. We're even willing to try to sell it to our membership, that this is what should happen so we can work on this type of strategy. But we have to start turning off the tap. If we don't turn off the tap, there will be dependency on this revenue source, which will dry up. Then we'll find ourselves with deficit-financing again, or raising taxes.

Ms. Catherine Swift: The other key reason to look at 20¢ to 30¢ is that about 25¢ offsets CPP. At a minimum, that seems eminently defensible.

At least don't make it worse. At least don't make this cumulative burden worse than it is now.

Mr. Gerry Ritz: So you have set this 20¢ to 30¢ arbitrarily? It wasn't from a survey? You were saying that you have to sell this to your members. It's not from your membership up?

Mr. Garth Whyte: Well, I should say that we did survey our members.

Mr. Gerry Ritz: Okay.

Mr. Garth Whyte: We surveyed our members and asked them, should the money be used to eliminate the deficit or other purposes? I think that five percent said yes. We're talking about opinion leaders across the country, and people who are joiners and represent small-business owners. Five percent of them said yes. Another major segment gave the 20¢ to 30¢ range. Another major segment said bring it down immediately. So we had kind of a split on that area.

On the other hand, as we've shown, there are other priorities. So we can't just say do this, and then all these other things all at once. So we're trying to come up with a strategy to phase it in over time.

Mr. Gerry Ritz: Great, thank you.

The Chairman: Thank you, Mr. Ritz.

Madam Lalonde.

[Translation]

Ms. Francine Lalonde (Mercier, BQ): I would like to start by thanking you for your presentation, which was just as interesting as the preceding ones and based on these surveys that we of course would like to study. Before asking my question, I would like to point out what seems to be a mistake in the French version of your paper. The correction should be made in the minutes of today's meeting. You refer to the "réduction des impôts sur la masse salariale" whereas the correct expression is "réduction des taxes sur la masse salariale". This would be clearer.

Mr. Pierre Cléroux: You are right; we will make that change.

Ms. Francine Lalonde: Thank you. The Bloc Québécois not only agrees with much of what is contained in your brief, but has actually suggested these measures at various stages. For example, it asked that the Employment Insurance Fund be recognized as a distinct account and that employment insurance premiums be reduced significantly.

What do your members think of our recommendation to reduce employment insurance premiums by half of the overall reduction? This would allow us to manage the fund in accordance with our needs, while the other part of the reduction would be used to improve the program. The improvement would apply to the people who work for you, particularly in SMEs, and who are experiencing all sorts of upheavals closely linked to the economic situation. We also suggest that the eligibility criteria for young people and women be made more flexible so that they can have access to benefits more easily and receive benefits for a longer period of time. However, we are not recommending that the program go back to the way it was in the past. I would like to hear what you think.

Mr. Pierre Cléroux: The priority for our members is really to reduce premiums. We support the last reform of the system, which changed the benefits paid somewhat. We're suggesting mainly two things: on the one hand, that there be a separate fund, and on the other, as Garth was suggesting, that rates be reduced for three years in order to allow the fund to become balanced.

We don't think it would be desirable for the time being to increase benefits, for a number of reasons, the most important of which is the following: we acknowledge that we are currently experiencing a period of high growth which results in too high an employment insurance fund. However, we also acknowledge that as soon as our economy slows down somewhat, the surpluses will be lower. If we were to increase benefits at this time, it is clear that the ability to reduce employment insurance benefits for both workers and employers would be greatly reduced in the future. We therefore see reducing premiums as the top priority.

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Ms. Francine Lalonde: We are going to continue to try to convince you and your members about the second part of our proposal, the one on which we are not agreeing.

I have a supplementary question for you. You say you are asking the government to share the surpluses in three phases, over three years. That does leave an extremely high increase. The $19.6 billion in the current surplus could totally eliminate premiums for everyone for one year and would allow us to continue paying out benefits. We could also waive premiums for everyone for the following year. The surplus is so large that it would be quite ridiculous to allow it to grow even larger for the next three years. I don't think you are demanding enough.

Mr. Pierre Cléroux: As Mr. Whyte said earlier, we are trying to adopt a balanced position. I would agree with you, but we must remember that the 19-billion-dollar surplus no longer exists. It has already been used up by the government. Getting it back would be very difficult.

We want to ensure that what is being done at present—transferring the EI surplus into the Consolidated Revenue Fund—ceases. By maintaining a separate fund, and applying a strategy whereby premiums would be reduced over three years until a balance is reached, the government could still achieve its goals.

There would be a cushion to protect against an economic slowdown, and the government could still ensure that workers and companies would no longer be penalized by transferring EI funds into the Consolidated Revenue Fund.

You say that our strategy is less aggressive than you believe it should be. That's because we are well aware there could be an economic slowdown, and we would not want the government to be in an overly vulnerable position. Nonetheless, we would like to see a balance within three years.

Ms. Francine Lalonde: Mr. Chairman, I would like to take this a little further. Somewhere in your brief, you said—and I quite agreed—that employment insurance premiums penalize SMEs, as they are labour-intensive rather than capital-intensive. And on the whole, major corporations are generally capital-intensive, even though some SMEs are as well.

SMEs are disadvantaged for two reasons: they are the ones paying salaries under $39,000. Let's just say that higher salaries are very infrequent among SMEs. So they pay 100% of the tax. Capital-intensive companies have proportionately less personnel, and are therefore subject to a lower taxation rate since salaries are higher. In major corporations, employees can quite often earn up to $60,000 by doing some overtime. So the premium is much less.

Don't you think that penalizing SMEs through this kind of taxation is in fact an anti-economic measure, particularly since they are such an important engine of job creation and economic development? Sometimes, I feel as I am the only person who believes this. I have been making this point and asking the question for years now. I find it absurd that SMEs should be so heavily taxed.

Mr. Pierre Cléroux: You are absolutely right. We have pointed out twice that we believe the government, which gives the impression of wanting to support SMEs, was planning to move away from that approach and implement the approach advocated by major corporations.

As you know, major corporations have declared that reducing EI premiums would not be a very significant move. But our entire presentation today supports the notion that we must reduce EI premiums before reducing income taxes or corporate taxes. Our members themselves believe that priority should be given to reducing EI premiums.

Moreover, you are quite right in saying that EI premiums—that is, payroll taxes in general—penalize SMEs more heavily. We do believe this is a fact, and so our proposals have always taken it into account. We have made progress in some provinces, where payroll taxes have been eliminated or reduced. The Quebec government took measures along those lines in its last budget.

This is why we would like Mr. Martin and the government in power to understand that this is a priority for us. We have to bring down EI premiums. As Mr. Whyte said earlier, a 5¢ reduction would not be acceptable. The government would have to go further, particularly since there is a huge surplus at present. Premiums will have to come down by at least 20 or 30¢ to take some of the load off SMEs.

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Ms. Francine Lalonde: I have been looking at Figure 6 very carefully. It illustrates the discussion we have been having very clearly. It shows which taxes are profit-insensitive... or perhaps we should say which income taxes are profit-insensitive. We can make a distinction between taxes on profits and payroll taxes, because payroll taxes have a tendency to be equal, while income taxes are proportional. Here, we see that the taxation rate decreases as profits increase. This confirms what we just said, that taxes tend to be higher for SMEs than for major corporations.

This is definitely going to be a factor in our reasoning, or at least in mine. I know that major corporations engage in research and development, and that they are granted funding in the form of investment—not subsidies—under relevant programs, like Technology Partnerships Canada. However, in this case I think we are subsidizing them through the taxation rate. I will say this again and again, and continue to support you.

I would like to ask you many other questions, but the chairman is indicating that I'm out of time. I would have to beg your indulgence in any case, because I have to go to the House for Question Period. Thank you again.

Mr. Pierre Cléroux: You are quite right... This is a very important point. It clearly shows that the government is protecting itself against fluctuations in the economy. When you have a profit- insensitive taxation system, ie, a capital-based system geared to payroll taxes, government revenue tends to remain about the same, even during a recession. This means that companies are increasingly bearing the burden of economic cycles, since the taxes they have to pay do not drop in an economic downturn, as they would if they were profit-sensitive.

Ms. Francine Lalonde: I see. Thank you.

[English]

The Chairman: Thank you, Madame Lalonde.

Mr. Szabo.

[Translation]

Mr. Nick Discepola:

[Editor's Note: Inaudible]

[English]

Ms. Catherine Swift: Short term or long term?

[Translation]

That's the difference. In the short term, this may be good for the government, but in the long term, it is extremely damaging to SMEs and to the economy. It is a major problem.

[English]

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman.

And thank you for your presentation.

Mr. Whyte, part of the presentation with regard to EI indicated the fund would show a projected surplus of some $20 billion. If the Government of Canada used the total $20 billion to reduce debt, invest in health care, and promote job creation, how much would be left in the EI fund?

Mr. Garth Whyte: Don't call it employment insurance premium. Let's call it the health tax or let's call it the debt—

Mr. Paul Szabo: No, no—

Mr. Garth Whyte: Excuse me, sorry. But last year we tried to bring this forward before this very committee and we heard “no, no, no it's being used for employment insurance”. And now what is happening—

Mr. Paul Szabo: Could you answer the question? If the $20 billion were spent on a whole bunch of things, how much would be left in the EI fund?

Mr. Garth Whyte: Right now I think the answer—

Ms. Catherine Swift: It's already been spent.

Mr. Garth Whyte: It's already been spent, hasn't it? The surplus is gone.

Mr. Paul Szabo: How much is in the EI fund today?

Ms. Catherine Swift: In real terms?

Mr. Paul Szabo: As projected. You're projecting the EI fund will be....

Mr. Garth Whyte: No, it's not our projection. To answer the question—

Ms. Catherine Swift: It's the actuary.

Mr. Garth Whyte: No, we talked to the employment—

Mr. Paul Szabo: Wait a minute.

Mr. Garth Whyte: These are not our numbers, these are Human Resource Development's and the actuary's numbers. They said based on—

Mr. Paul Szabo: You've got the numbers in front of you. As of the most accurate historic time available for the information that you have, how much is in the EI fund?

Mr. Garth Whyte: There should be $19.6 billion.

Mr. Paul Szabo: When?

Mr. Garth Whyte: At the end of this year.

Mr. Paul Szabo: But you just said the money was spent?

Ms. Catherine Swift: We know it's spent. We know it is effectively spent.

Mr. Paul Szabo: But how much is in the fund?

Mr. Garth Whyte: There should be—

Mr. Catherine Swift: Zero, in real terms.

Mr. Garth Whyte: —$19.6 billion.

Mr. Paul Szabo: No. And the reason I raise this is that it's kind of like a mug's game. The EI fund is an analysis. It's not a bank account. We know that.

Ms. Catherine Swift: We know that. Certainly we know that. But let's be transparent.

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Mr. Paul Szabo: And even though the accumulated surplus from that analysis has been applied to deficit and debt reduction, health spending, and other things, there still is an EI fund and analysis, and there still is legislation guiding that. And I think you probably are aware the finance minister indicated the law will be respected with regard to the EI fund. He's made that commitment.

Ms. Catherine Swift: Well, I guess we'll see. Things aren't terribly black and white.

Mr. Paul Szabo: So he hasn't broken the law yet, right?

Ms. Catherine Swift: No.

Mr. Paul Szabo: Okay. No. We needed that on the record.

Mr. Garth Whyte: No. But we never said he broke it.

Mr. Paul Szabo: No, we haven't broken the law yet. Let's move on quickly, because time is running out.

Ms. Catherine Swift: Nor have we said that.

Mr. Garth Whyte: The government is treating it as a real fund because they're paying interest on it right now. If they thought it was a fund for something else.... They're paying interest on this notional fund, so they have identified it as a fund. I think what we're laying on the table now is that the government won't change the rules in the future, once it gets to $37 billion. In other words, I guess it would be nice to have the committee's commitment that they will not legislate that this comes over to general revenue, and that this will still be a fund in the future.

Mr. Paul Szabo: It is in general revenue though. It always has been since 1986.

Mr. Garth Whyte: This is the problem. There is a lot of confusion about it, even in exchanges like this. There shouldn't be any debate here. The facts are clear. There is no separate bank account; the fund is a paper analysis—

Ms. Catherine Swift: We know that.

Mr. Paul Szabo: And the cashflow reflecting that analysis has been used for deficit reduction and all other purposes, okay. And the law has not been broken.

Mr. Pierre Cléroux: Let's have a separate fund.

Mr. Paul Szabo: Okay I'll get to that; that's my last question. But I do want to understand something here. If I turn to chart 8, I see all the bars add up to 100 on your preferences, but in all the other charts they don't. It's not really clear. But it tells me, for instance, on chart 9 that—I don't know how I interpret this—52.2% of something want to reduce general tax rates across the board. Could you tell me what that 52.2% represents?

Mr. Garth Whyte: We asked our members to circle two, to identify their top two priorities. We worked with the Department of Finance to build the survey. That was their recommendation.

Mr. Paul Szabo: So these should then add up to 200.

Mr. Garth Whyte: Well, I don't think so, but—

Mr. Paul Szabo: No, 200%, to get two choices—

Ms. Catherine Swift: You'll get some respondents on any survey who will only circle one, for example, even though you asked them to circle two.

Mr. Paul Szabo: Okay.

Ms. Catherine Swift: But it depends how the question was asked. That's why you get—

Mr. Paul Szabo: So I should have ignored the caption—percentage of response.

Ms. Catherine Swift: It's a frequency table.

Mr. Paul Szabo: You asked about priority. So only half the people you surveyed thought reducing taxes was a good idea.

Ms. Catherine Swift: No, we're asking here how they want to do it.

Mr. Garth Whyte: This is just for personal income tax.

Ms. Catherine Swift: Which part are we looking at, still nine?

Mr. Garth Whyte: We're still looking at nine.

Ms. Catherine Swift: When asked how they felt personal income taxes should be reduced, 52.2% believed the best way to do it was to reduce taxes across the board, as opposed to any particular segment within the income spectrum or whatever.

Mr. Garth Whyte: And figure 2 asked them to identify—circle as many as apply—the priorities they saw as the top priorities. So tax burden at 80% was number one, employment insurance is number two, at 61%, and government debt and deficit was 60%.

Mr. Paul Szabo: Okay. Even though the captions on all these charts are identical, we don't have the explanation as to the form of the question and what options they had in terms of answers.

Mr. Garth Whyte: We'll send you the survey. Actually, the captions are different—

Mr. Paul Szabo: All right, I'm going to try not to draw any conclusions from these charts right now until I get the assumptions behind them.

Ms. Catherine Swift: Sure.

Mr. Paul Szabo: Okay.

Ms. Catherine Swift: The only difference will be—

Mr. Paul Szabo: The last question has to do with the point that was raised here about a separate fund for EI. That would be a very significant change in the policy, and it probably is going to open up some really interesting debates. I guess the question I would ask is whether you would ask the question of your members, those who feel there should be a separate EI fund, whether they would support an opt-out by businesses and industries who would prefer to self-insure.

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Ms. Catherine Swift: We've done that on workers' compensation, just as a provincial area, as a matter of interest, and a significant portion of the membership supports that.

Mr. Paul Szabo: Of course you appreciate that the reason why it would be such a.... Well, you'd never get there.

Ms. Catherine Swift: No.

Mr. Paul Szabo: The reason is that we have some major segments of business and industry who in fact are net drawers rather than givers.

Ms. Catherine Swift: Sure. There are different experiences with the different sectoral groups, regional groups, and what not. Of course the way we designed our system has often exacerbated that over the years as well. But sure, the system does equalize experience across the board. It would be a very difficult transition to make. It's very difficult to have experience rating—this is what you're talking about—built into EI.

Mr. Paul Szabo: Yes.

Ms. Catherine Swift: Ultimately, though, we do feel that accountability and transparency is always a good thing in any tax system. That's the main reason behind the separate fund concept.

Mr. Paul Szabo: I've raised that self-insuring aspect because I think that businesses don't want to pay any more taxes than they have to. And those that don't abuse the system are those that don't keep standby labour forces. Those that don't work the system can in fact be more profitable because they have a stable, qualified labour force. It's all good news for business people. I think this is so for small businesses particularly because you're dealing with a more integrated pool of people who have a common bond of association in a smaller business environment as opposed to the informal environment of the major corporation.

I'd really like to see some question asked at some point about the need to seriously look at establishing a separate fund and whether or not we can abandon those who, for whatever reason, are unable to sustain a continuity of employment. In fact, many turn out to be net drawers.

Ms. Catherine Swift: The same arguments apply on the employee side.

Mr. Paul Szabo: Absolutely. Thank you.

The Chairman: Thank you, Mr. Szabo.

I have a question. I've been listening to Canadians from coast to coast to coast on a number of issues. Of course everybody brings their own perspective to the table. I often wonder what the general framework of that contribution is. In other words, you come here to talk to me about the needs of small business. Other people might come here and talk to me about the issue of health care, research and development, and so on.

I was just wondering about this. I've been advocating a thing called the productivity covenant whereby government would make decisions in light of the issue of productivity.

I'll tell you why I'm really concerned about it. I'm concerned about it because productivity remains the major issue when you're looking at raising your standard of living. It's extremely important. Things are not going to change in this country unless there is a focused approach. We can make many people happy and give then $200 million here and $100 million there and kind of do that type of approach, but I think the time has come in the history of the country where we have to be a little bit more focused. Even pre-budget consultations like this have to begin to take a long-term view of things.

Quite frankly, we're going to have to leave this country to future generations. This present generation, of course, has paid for some of the decisions that were made in the past. I personally don't want my children, quite frankly, to think that we designed the wrong road for them. So I think there has to be a focus.

I know your points of view on a number of issues. I think you've made that quite clear. But I want to use your expertise when asking you whether the time has come for our country to start looking at the long-term issue of productivity as it relates to our standard of living.

Ms. Catherine Swift: I think that's an excellent idea. We've seen the deterioration of our currency for more than 20 years now, which is just a measure—although certain groups within our membership would say this was okay, such as tourism, big exporters, or whatever—that essentially connotes a deterioration in our standard of living. That's the best measure we have.

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I think it has become pretty alarming. It's a conundrum. We believe from our vantage point that many of the things we have recommended that are more short term, like you say or whatever, are oriented toward a less regulated, more efficient economy that ultimately should translate into productivity increases.

We have a lot of challenges in Canada, in that the foreign-owned portion of our business community is high, notably in large, multinational corporations. We know that impacts on our decisions, for example, which impacts on productivity. It's not a simple question, as I'm sure you well know. We speak from a small-business standpoint. We represent Canadian-owned domestic enterprises that currently find fighting the regulatory brick wall very debilitating for productivity.

I think it's an extremely good idea to go ahead with this. The big challenge would be that all governments would have to collaborate on this. It wouldn't be just a federal government initiative. Otherwise, I would suggest it would be a failure. I think the challenge for governments is whether you guys get along for long enough to collaborate on an important thrust like that from a policy standpoint. I couldn't say enough positive things about pursuing something like that in the medium term to the long term.

The Chairman: We do that with all sorts of issues. Governments have this federal-provincial filter through which everything has to go to find out whether or not it's going to work.

Yet when you really think about it, our focus ought to be on productivity. Is there another issue that's as important as that? The state of our economy today is very much linked to our productivity, yet it's a word people shy away from. It's the fear of the unknown. If you look at history, productivity innovation has been what has given us the standard of living we enjoy today.

I'm just concerned, particularly as we compare our productivity rates with those in the United States. There are some people, of course, who say to me that it's really unfair, because they're ten times our size. Well, the reality is that we share markets. They're our competitors. This is who we do business with. I think we need to start paying more attention to that particular issue.

Ms. Catherine Swift: Productivity isn't size-dependent. In the business community, there have been studies showing that smaller firms, on balance, invest more in R and D. I'm talking about scaling it down appropriately.

So in the productivity context, there's no question that I think that's a very worthy objective. I think small business would be an essential component to any such study. In fact, given the fact that we have a national orientation, that would be an important thing as well, because by and large, our small businesses are Canadian.

The Chairman: Mr. Whyte.

Mr. Garth Whyte: We have done several studies and initiatives that could enhance productivity, but we were just not able to do that. An example is internal trade negotiations and how we could work across borders. We can't even get our act together there. So we have done many studies on productivity and job creation, and I guess we're leaning to the job creation side of it. When government gets too involved, all you can do is set the stage to allow those new firms—these are the ones you don't even know exist today—to come forward as well.

We've done studies like Breaking Through Barriers for the Minister of Finance and Industry Canada. It's sitting right there. A lot of those things could be looked at now from a small-business perspective to help small-business productivity.

The Chairman: We need to champion the cause. It's a cause worth fighting for. Quite frankly, as for the fact that we haven't been able to move on internal trade barriers and other issues, we're really denying ourselves a better standard of living as a result of this inertia that has occurred in some sectors. Anyway, that's the issue of the day.

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On behalf of the committee, as always, the Canadian Federation of Independent Business works very hard at making sure the government understands the concerns of small businesses, which are, by the way, as you know, the number one job creators. You do excellent work on behalf of your membership. We're very grateful for that. Thank you.

The meeting is adjourned.