FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 17, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I want to call the meeting to order, as everyone is here this afternoon.

As everyone knows, the finance committee has been travelling across the country, from coast to coast to coast, seeking input from Canadians as to what the priorities for the upcoming federal budget should be.

Before you begin your presentations, I want to thank the panellists on behalf of the committee for what I am sure will be yet another very insightful panel that will provide us with valuable information.

May I also add that this is the last day for pre-budget consultation for the members of the finance committee, and we begin writing our report in the coming days.

On behalf of the committee, I'd like to welcome the Canadian Parents for French; the Canadian Restaurant and Foodservices Association; Carpenters and Allied Workers Local 27; the Don't Tax Reading Coalition; Ducks Unlimited Canada; the Economic Community Starting Centre: Job Creation Inc.; and the Nature Conservancy of Canada.

We will begin with the witnesses from Canadian Parents for French, with the president, Carole Barton, and the vice-president, Joan Netten. Welcome.

Ms. Carole Barton (President, Canadian Parents for French): Thank you.

Canadian Parents for French is a national network of volunteers that values French as an integral part of Canada. It is dedicated to the promotion and creation of French second language learning opportunities for all Canadians. Canadian Parents for French also believes that every child should have the right to learn both official languages through the Canadian school system. Currently, no child in Canada has this right, and only a few have the privilege. A large majority of these students can do so because of the hard work of dedicated CPF volunteers. Canadian Parents for French firmly believes that the learning of both official languages is an important component of a well-rounded and complete Canadian education and is essential to Canada's future.

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Canadian Parents for French has been instrumental in the implementation of French first language programs in several provinces in Canada and French second language programs in all provinces of Canada. We have over 12,000 members across Canada in all the provinces and territories, and we operate in about 150 local chapters in communities from St. John's, Newfoundland, to Campbell River, B.C.

Canadian Parents for French strives to raise public awareness of the value of French in Canadian society. In 1991, 23% of Canadian teenagers, aged 15 to 19, were bilingual, representing the largest group of bilingual Canadians in history. Now, nearly 25% of young Canadians aged 18 to 29 are bilingual.

Ms. Joan Netten (Vice-President, Canadian Parents for French): This is why we wish to speak to you today about the official languages in education program. The number of bilingual Canadians, bilingual in French and English, the two official languages, is not continuing to increase because of the decrease in funding to the official languages in education program. The official languages in education program is a series of agreements between the federal government and the provincial governments wherein money is given to provincial departments of education for programs in schools that teach the other official language, French first language and French second language outside of Quebec as well as French second language and English second language programs in Quebec.

The funding is provided on a per capita basis according to a formula based on full-time equivalent pupils in a program. The actual amount varies from province to province. These moneys have been reduced by 42% since 1992-93; 30% in the first year and 12% in the past year. This reduction has created an impression in Canada that the learning of the official languages is no longer valued by the federal government. The learning of both official languages has actually decreased dramatically since 1992. This result was not anticipated, and it needs to be addressed by the finance committee. This decline could create a major problem for Canada in the future. The larger percentage of bilinguals in Canada tends to be francophone, and, in addition, the lack of a bilingual population will affect in a negative manner the maintenance of French minority language rights in Canada as well as the question of Canada's future.

In reply to the first question submitted to us by the chair, Mr. Bevilacqua, the message we wish to send to the government is that funding to programs such as official languages in education be restored, if not increased, because the official languages in education program is critical to Canada's future and to Canada's youth. Government should be aware of the message it is sending to all Canadians about the value of French in Canada through reductions in these programs.

With respect to question two, we are not in a position to comment on new strategic investments and changes to the tax system because tax reform is not within our area of expertise.

In reply to question three, the best way to take advantage of the opportunities offered by this new era is to ensure that all Canadians have the opportunity, perhaps even the right, to learn both official languages. Second language learning is an extremely important job skill that we should be providing to all young Canadians. It's also an important skill in the international business community.

Other benefits included in second language learning are an increase in problem solving and critical thinking, as much of an increase as occurs with the study of math and science on which the school system is tending to put more emphasis because of the message it's receiving from the federal government with the reductions to the program, as well as an increase in the ability to learn a third or fourth language, which is now very important in the international business community.

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In addition—and this is very important to Canada's future—second language learning promotes the cultural understanding and sensitivity that is needed when trying to bridge Canada's two official linguistic communities.

In answer to question four, to enable access to as many job opportunities as possible, governments should ensure that Canadian youth have competence in both official languages. Without competence in both official languages, youth are at a disadvantage in the job market, both in Canada and worldwide.

Ms. Carole Barton: Canadian Parents for French works with many partners to promote second language learning opportunities in Canada. As an example, the most recent correspondence we received from the Canadian Chamber of Commerce states: “Business dealings to date have moved beyond our backyards and into the global arena.” French and English communicating and working side by side—that is our reality and our destiny as a country.

We are here to request increased funding for the official languages in education program as well as an increase in funding to volunteer organizations such as ours that promote the learning of both official languages.

These measures are crucial to Canada's future.

Thank you.

The Chairman: Thank you.

We will now hear from the Canadian Restaurant and Foodservices Association, Ms. Joyce Reynolds, senior director, government affairs, and Jill Holroyd, director of research and communications.

Welcome.

Ms. Joyce Reynolds (Senior Director, Government Affairs, Canadian Restaurant and Foodservices Association): My name is Joyce Reynolds and I represent the interests of the $32 billion food service industry, which employs 867,000 Canadians.

The Canadian Restaurant and Foodservices Association welcomes a debate on tax relief. After thirty years of tax increases and ballooning government debt, it is a welcome and refreshing change. Very little discussion has been focused on the adverse effects of taxation.

For the majority of Canadians, the issue isn't whether or not taxes are to be lowered; the issue is what taxes and by how much. But as in the debate about tax increases over the past three decades, I believe we are missing an important issue, and that is, where would tax decreases have the most positive effect on the economy?

Government must do the right thing for the country and not what is simply convenient and will generate votes. Economists agree that payroll taxes have a perverse and destructive impact on jobs and economic activity, and yet government is pushing ahead with a plan to keep EI premiums unnecessarily high, contrary to legislation, in order to divert EI funds for other unrelated purposes, including income tax reductions.

Because the issue of unnecessarily high payroll taxes is so critical to the restaurant industry, my entire presentation today will be focused on them. Additional comments on the GST are included in our submission.

The Canadian Restaurant and Foodservices Association recommends that the government restore EI to a truly stand-alone account and make reductions of employment insurance premiums a first priority. EI premium reductions provide government with a golden opportunity to accomplish several public policy objectives at the same time. A sizeable cut in EI premiums is superior to a cut in income taxes because it benefits both companies and workers as opposed to income tax cuts that are targeted only to individuals. It stimulates spending by individuals and companies. It reduces a regressive tax where workers who earn $39,000 pay the same amount of premiums as those earning $200,000. It reduces a tax on jobs. It offsets the negative economic impact of scheduled increases in CPP contributions. It also puts more money into the provincial coffers to be redirected to health care. Finally, it restores the integrity of the EI system.

Commissioning the Mintz report to assess the taxes paid by business was a start in a needed strategic review of the tax system. This report identified the substantial growth in profit-insensitive taxes such as payroll taxes, which discriminate against employment-intensive industries like food service.

The Mintz report confirmed what restaurant operators have known for some time: the industry has been suffering as a result of heavy and punitive taxation. The Mintz report is particularly relevant to the food service industry when it examines taxation and unemployment. Mr. Mintz noted that unemployment from the 1960s to the 1990s increased substantially. He concluded that escalating payroll taxes have contributed to rising unemployment.

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Government has placed increasing reliance on payroll taxes. In 1965, payroll taxes represented 8% of total taxes paid by corporations. In 1965, corporations paid $1.4 billion in payroll taxes. By 1995, payroll taxes had ballooned to 36% of the total taxes paid by corporations, or $23.9 billion. Government's insatiable appetite for tax revenue has swung from income taxes to payroll taxes, and this is where Ottawa should start swinging the tax axe.

Finance Minister Martin once said that payroll taxes such as EI were a cancer on the economy, and he's right. It is estimated that between 100,000 and 316,000 jobs were lost between 1990 and 1993, mainly due to increasing employment-unemployment insurance premiums. This is why unemployment among young Canadians is running at 14.7% when the economy is enjoying its best year of the 1990s. This is why we have a deficit in youth jobs and a surplus in squeegee kids, and this is why we must use this opportunity to reform the tax system to produce jobs and economic growth as opposed to votes.

What is really astounding is that the basis for the collection of employment insurance premiums, when applied to the collection of tax revenues, which Minister Martin is doing, is one of the most regressive forms of taxation. Those at the lowest end of the payroll scale pay the highest proportionately. Bay Street executives pay substantially less, proportionately, in EI premiums than our waitresses and dishwashers. That repayment has been placed on the backs of the lowest-paid Canadians.

In addition, EI is a tax on employment. In October 1994 the Minister of Finance said to this committee:

We believe there is nothing more ludicrous than a tax on hiring. But that's what high payroll taxes are. They have grown dramatically over time. They affect lower wage earners much more than those at the high end.

Food service employers have faced a steady increase in federal payroll taxes since those statements were made, with the exception of this year when they decreased marginally. Employee-intensive industries like ours, where $3 out of every $10 that comes into the restaurant goes to payroll, are paying a disproportionate amount in payroll taxes.

Our industry is composed of small businesses that employ 867,000 Canadians. Almost half of those workers are under the age of 25. These are the people who will benefit from a cut in the EI rates, benefiting from an increase in take-home pay and an increase in job opportunities. A sizeable reduction in EI premiums will offset the negative economic impact of CPP increases—which is scheduled to go up 30¢ on January 1, 1999. Economist Peter Dungan estimates the accelerated CPP premiums scheduled will result in GDP losses of $13 billion and job losses of almost 20,000.

It's also no secret that there is tension between the federal government and the provinces over cuts in transfer payments for health care. A 90¢ reduction in EI premiums over three years would return between $800 million and $1 billion to the provinces, which could be redirected to health care, a priority that has been identified by both the provinces and the federal government.

Finally, a sizeable cut in EI premiums would restore the integrity of the EI program. Right now, a sacred trust is being broken. Employers and employees contribute to the EI program in good faith. Expropriating money from EI stakeholders for purposes unrelated to EI is a breach of faith. It is grossly unfair to buspersons, dishwashers, waiters, and waitresses to find out that they are subsidizing personal income tax cuts to the self-employed, pensioners, the prime minister, members of Parliament, and other Canadians who derive their income from investments rather than employment.

In conclusion, restoring the EI fund to a truly separate account and significantly reducing premiums will serve a multitude of objectives: it will reduce a regressive, job-killing tax; it will stimulate spending by individuals and companies; it will offset a scheduled 30¢ increase in CPP premiums; it will put more money in the hands of the provinces to use for health care; and it will restore the integrity of the EI program.

Thank you.

The Chairman: Thank you very much, Ms. Reynolds.

We will now hear from the Carpenters and Allied Workers Local 27, Mr. Richard Mahoney.

Mr. Richard Mahoney (Partner, Fraser Milner, Barristers and Solicitors; Carpenters and Allied Workers Local 27): Thank you, Mr. Chairman.

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We prepared a brief this afternoon, which, I must apologize in advance, is only available in English as of today. We will have translated copies available by tomorrow.

We're here on behalf of the Carpenters and Allied Workers Local 27, which is an Ontario union. We've answered the four questions you've put to us, Mr. Chairman, in a way that we believe is national in scope and addresses the national issues on behalf of the United Brotherhood of Carpenters and Joiners of America across Canada.

With me today is Mr. Eddie Thornton, who is executive director of the Carpenters and Allied Workers Local 27, and Mr. Dan McCarthy. Dan is the Canadian director of research and special programs for the United Brotherhood of Carpenters and Joiners of America. Our brief is focused on what the appropriate federal role is in the context of the 1999 budget for labour market and apprenticeship training in Canada in the world post-labour market development agreements that have been signed with every province except Ontario.

I'm now going to turn it over to Mr. McCarthy to take you through the four questions.

Mr. Dan McCarthy (Canadian Director of Research and Special Programs, United Brotherhood of Carpenters and Joiners of America; Carpenters and Allied Workers Local 27): Just to follow up on who we are, we represent approximately 50,000 tradespeople in Canada, including carpenters, millwrights, pile drivers, floor laying installers, drywallers, and even an MP.

The reason we are here before the committee is that we not only represent the 50,000 tradespeople, we also represent the employer associations. We have what we refer to as training trust funds from coast to coast. These are labour-management organizations that have a budget based on money deducted at source from the workers and negotiated into a collective agreement so that we can train our people—not just apprentices, but upgrading the skills of our people—to meet the current demand. Let me tell you, when you sit around the table with employers, they will let you know what the current demand is. We're also here on behalf of current and future apprentices. They are the future of the industry.

When people come before this finance committee and look at investment, it seems to me we have to make it clear that apprenticeship is underappreciated in terms of leveraged funds. Between the contractors' contributions in terms of salary and lost productivity to have a mentor for their apprentices, and the deductions I've already mentioned, we cover about 85% of the cost of training an apprentice to become a skilled journeyperson. So for every dollar that is invested, you're looking at five times that amount in the field.

I would also like to turn to the purpose of our submission, which is to make sure the budget maintains an allocation for a direct investment. I underline the term “direct” because the federal government has to prepare young Canadians for job opportunities—I'm not saying job creation, but job opportunities—which are available today in construction and are going unfilled.

We need a skilled workforce to build an infrastructure, because to capitalize on the global economy, you have to have the communication and transportation networks in place. If we can no longer build those rapidly and have them when we need them, the entire economy suffers.

In the construction sector we face a challenge to recruit new apprentices. We are also faced with a real problem in terms of the demographics. There are national studies that show the average for most tradespeople is the mid to late 40s. We also know the exit rate, when people begin to retire from the trade, accelerates between the ages of 50 and 55. We're dealing with a shrinking pool of workers.

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At the same time, employment insurance reform has created disincentives and obstacles to our recruitment. I'd like to have Eddie Thornton give you a couple of examples of some of the problems we're encountering in the greater Toronto area in terms of trying to fill positions we know are going empty.

Mr. Eddie Thornton (Executive Director, Carpenters and Allied Workers Local 27): We had an article in the Homes section of the Toronto Star on August 15 this past year. That article highlighted the major skill shortage we're confronted with in the construction industry, specifically the opportunities that are available to youth. Now is a good time to get into the industry. We had 1,600 calls to our office within three days. Out of the 1,600 calls, we interviewed 450 people. Of those 450 people who were interested, 39 of them qualified for UI.

We applied to HRDC for funding for a training program for concrete forming. It took four months to get a response. When we did receive a response, out of the 39 people who qualified for UI, only 6 of them then qualified, because they had to take a menial job in the meantime. They were penalized from entering into an opportunity that would have brought them into the construction industry and provided us with the skills we require.

We are presently experiencing a major skills shortage of carpenters in the Toronto region. With many major projects predicted to start in the new year, we— Right now we are taking people out of retirement who are in their 70s—73, 74 years of age—to supervise projects, because we cannot get youth into the programs because there are no definitions.

We can go to one HRDC office in Scarborough outside of Toronto, Mississauga, and several in Toronto, and every one of them has different definitions of how an individual qualifies to enter into a training program so they can qualify to take a course and enter into the construction workforce. Somehow, this has to be dealt with, and we would like that to be considered in your upcoming budget.

Mr. Dan McCarthy: Furthermore, we just gave an example in the greater Toronto area, which is obviously one of the largest construction markets in Canada, but this similar thing is happening in the oil patch in Alberta. With the billions of dollars that are being invested by Suncor and several other companies, and the upgraders in Westminster in Saskatchewan, the same cry is going out. We cannot provide a millwright.

I was out in Newfoundland two months ago and at our hiring hall there was a list of people in Newfoundland signing up to go to either Alberta or Ontario, and we're still not filling it. It's not just a case of the mobility not being there. I think we've got close to 100 drywallers working in downtown Toronto from New Brunswick. There's an argument in which some people say well, yes, but there's high unemployment in other areas. We can't get enough people, and we're encouraging. We're phoning. We're trying to get them in.

The other reason I would like to highlight this is that it's not just a problem with EI. Yes, there are disincentives, and yes, there are definitional problems, but it seems to me what we need to do is ask where we have a direct lever on the economy in which the federal government has the opportunity to intervene. I would suggest to you the training trust funds I described to you, the labour-management trust funds—these are people who are actually contractors and actually working in hiring halls and trying to fill these positions—are very much like some of the sector councils in aerospace and auto, in auto repair and supplies to the auto— Not only are they labour and management, but very often they are liaison people from both the federal and provincial governments, whether they be based in Ontario, Quebec, or elsewhere. These are a conduit for this government to have a line item in the budget to say where these come up— And depending on what study you look at, I think construction is the second or third largest industry. We need levers the federal government can use to make sure— when there's demand.

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Mr. Richard Mahoney: Dan, I wonder if you could expand a bit, for the benefit of members of Parliament, as to how sectoral councils and other industries have played a role, and maybe how training trust funds might play a similar role in the construction industry.

Mr. Dan McCarthy: To me, the most important thing when I look at sector councils—and I'm thinking, for example, of aerospace, with the success of Bombardier, and short-term, De Havilland, and now, Regional Jet. When they get orders, they can predict very clearly that they need to have an influx of skilled machinists, and quickly. In construction, we have a very similar instrument, and that's the training trust fund.

To give you an example of how construction is always different and misunderstood, I was recently before an HRDC board. They told me what we should do is go out and get the employers to give us a letter on how many people they'll hire. In construction, since everybody might not know this, you bid for work. You may get it; you may not. Any employer in his or her right mind is not going to sign a letter saying they're going to hire these 50 people. We know, because, for example, on the training trust fund we've sat with PCL, Eastern, Ellis-Don—they take all the biggest projects across North America—and they have said they can't bid unless we get them—

They can't predict who's going to win the work, but they can predict very clearly what the demand is by the industry. But to get any one of them to sign a letter saying they're going to hire x number of form workers, x number of millwrights, and so on, they're not going to do that. But they can say with definite assurance, because they know what their costs are, that if the project is $7 million or $8 million, it translates into x number of workers for so many weeks or so many hours.

It's a real problem to try to work through a bureaucracy that is set up for a manufacturing or an office template in mind, that kind of paradigm, which doesn't work in construction. I am suggesting to the government that not only do you need a direct lever for the major components of the economy, construction being one of them, but you need a conduit like the training trust funds for the actual people who know what the demand is in the areas and can predict it.

So I would strongly suggest that what we're looking for here is not only a line item in the budget that says we need direct intervention, but recognition that there are conduits out there that can deliver the kind of economic clout that is needed.

Mr. Eddie Thornton: I'd like to make a comment that I missed out on a couple of moments ago, to follow up on what Dan is saying.

We have an area in the Toronto region, York region, which is the fastest growing community in the surrounding district. When I made contact with the local HRDC offices there, they simply told me to put an add in the paper, charge every kid a thousand dollars each, and pay for it yourself. We have people employed in HRDC offices across the Toronto region who do not understand our industry, and when we confront them with applications for government funding, we're simply turned away from the door—take it or leave it.

Mr. Dan McCarthy: As I say, it's not just that we're asking for direct investment; it's the multiplier effect. When you help a young person get into an apprenticeship, the other 85% of their course is being picked up by the private sector and by themselves. We like to refer to it as tuition for life.

When you become a journeyperson after your fourth or fifth year, you continue to pay that deduction on your collective agreement for the rest of your life, for the rest of your career as a carpenter, millwright, or floor layer. So it's tuition for life. When you come back for upgrading because of the changing technology, there are courses being developed that are specific to the needs, and they're almost entirely paid for by deductions over the years. So I have to re-emphasize that.

I'm wandering a bit here, but on the last question, in terms of job opportunities for not just new Canadians but young Canadians, we've mentioned some of the dysfunctional aspects of the EI rules. But I also want to say that we need a carefully tailored sector specific—we've alluded to this in the fact that construction is different, and you need to deal directly with people who are in the construction industry and make that kind of investment.

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I know we've taken a fair amount of your time and I haven't covered all the points in this brief, but I think you have the message clear and succinct. There's an enormous demand right now. We're losing our workforce. Young people need to get in. They need to get in the front door. The present dysfunctional rules of EI are keeping them out. The government needs to have a strategic lever into the construction industry, like the training trust fund. We need to have a line item in the budget, and we need to get these young people into careers that will make not only them productive but make Canada productive, and to have the infrastructure to challenge the global economy.

The Chairman: Thank you very much, Mr. McCarthy, Mr. Mahoney, and Mr. Thornton. We'll probably get back to you during the question and answer session. You can expand on a point that you might not have been able to speak to us about in this round.

We will hear now from the Don't Tax Reading Coalition, Ms. Jacqueline Hushion, chairperson. Welcome.

Ms. Jacqueline Hushion (Chairperson, Don't Tax Reading Coalition): Thank you, Mr. Bevilacqua. We're here talking about what everyone else here is talking about today. We're talking about education, about apprenticeships, about training, about retraining. We're talking about skills. What is the basis for all of those skills? The bottom line, the lowest common denominator, is literacy.

The Don't Tax Reading Coalition represents one million employees in Canada. The coalition now has over 25 full members.

Your four questions dealt with employment, with the message that should be sent to the government about the priorities for the fiscal debit dividend, how we can take advantage of opportunities offered by the new era, and what we might do to change the tax system, if necessary, to make sure those things actually happen.

It's time to take the tax the rest of the way off reading. Congratulations to Minister Martin who has taken some gigantic steps already. He has eliminated tax on materials purchased by educational institutions and by libraries, and the tax on books at least at the provincial component level in harmonization in the Atlantic provinces. But we still have a very long way to go. We've left the students out. Students in post-secondary institutions buy their own books. The institutions don't buy them for them. They pay tax at the cash register when they buy their books, their manuals, what is required for their education by their various professors.

The consumer was left out. Ordinary Canadians—as a leader of a party in this country called them—were left out. As a grandparent or a friend or a babysitter, I can go to the cash register and buy a book for a child and be guaranteed that I'm going to pay tax on it. That book I pay tax on at the cash register is just as educational and serves just as important a purpose as any book or magazine or newspaper subscription purchased by any educational institution.

Literacy begins at home. The Prime Minister of this country, on August 24, 1992, wrote the coalition a letter to say that if he was elected he would in fact remove the tax on reading in this country in his first term of office. It's still on.

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The time is now. Over two million Canadian taxpayers have communicated individually to this government to say that the time is now. They've communicated in telephone calls, faxes, postcards, and letters. They've signed thousands and thousands of petitions. We just happen to have a batch of petitions with us today. It represents the batch that has come in this month.

Canadians have not forgotten; they have not accepted the fact that there is GST on reading. It offends them. It offends them greatly that there is a tax on that, which forms the basis for literacy and therefore every single function we perform as Canadians, from childhood, through lifelong learning, to the elder years, if we are lucky enough to get there.

It is time to take the tax the rest of the way off reading.

Mr. David Hunt (National Coordinator, Don't Tax Reading Coalition): Thank you, Jackie.

A tax on reading material is in fact, as we've pointed out since it was first contemplated, a very unusual thing in an international context. Canada is one of the few developed countries that taxes reading material, and they all have value-added taxes now. Canada's tax on reading, 7% federally and 15% within the harmonized zone, is among the highest tax rates on reading material within the OECD and the highest within the G-8 countries.

Many nations that don't have the luxury of a fiscal dividend are moving in the direction of zero-rating reading material. Just this month, Finland and Indonesia joined the very long list of countries that zero-rate reading material only. If Indonesia can afford to zero-rate reading, given their current fiscal restraints, I think possibly Canada can as well. Within the past year, Russia has also removed their value-added tax from books. They already had a rate of zero for magazines and newspapers, and they have steadfastly refused to apply tax to those materials.

Statistics show this tax continues to depress the sale of magazines, books, and newspapers, both single-copy sales and subscriptions. We've been over those statistics repeatedly; we can supply them again on request. But the one statistic we want to point to again is that according to Statistics Canada, lower-income Canadians continue to spend a higher percentage of their income on reading materials, and therefore a value-added tax on those materials is regressive. It hits hardest the lowest-income Canadians and Canadians who are most in need of upgrading their reading skills and bringing reading to their children.

We would also point out that the statistics also show that the single greatest determinant of literacy skills and high employability is whether reading material was present in the home for a child and how much reading material was present in the home. In fact, the only statistic we've been able to find that can predict income and level of productivity as an adult is how much reading material was present in the home while the person was growing up.

We've calculated the amount of GST being collected on reading material, and given the recent reductions in GST on materials purchased by educational institutions, we've come up with a total figure of $182 million per year net. That's on books, magazines, and newspapers. We've also calculated the offsetting tax increases that would occur if this tax was removed.

We know that employment in the printing and publishing industries—which is the third largest industrial employer in Canada, we would point out—is very sensitive to sales, and we know sales are very sensitive to price. We know that employment will go up in those industries when this tax is removed, as has been repeatedly promised. And we calculate the offsetting tax increases that would result from that increase in employment at $64 million and nearly 1,000 new jobs.

It's been suggested that removing reading material from the GST base now would result in a lineup of other commodities— We dismiss that argument. Books, magazines, and newspapers—it is the only commodity subject to a specific election promise by this government in 1993, and repeated in 1997, to remove it from the tax base. It's the only commodity that all five parties in Parliament have said should be removed from the GST base.

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The GST base has been opened several times in the past to remove items such as yogurt and pudding, Remembrance Day poppies, and bull semen. There was no lineup at that time, and I'm sure, as you can see here, there's no tremendous lineup today. We're back, and we will be back repeatedly, because we have the specific written promise and the specific written commitment.

Canadians know that reading material is different. Books and some periodicals were the only items that were specifically removed from the harmonized sales tax base at the very last minute, as a specific condition of getting tax harmonization. The provinces said “No, you must at least keep your promise not to put books into the harmonized tax base”.

Canadians are waiting for the rest of the promise to be carried out, but they do understand it was a very specific promise and very much limited to reading materials.

So in answer to the chairperson's first question on what the priority for the fiscal dividend should be, one of the priorities has to be keeping your original promises. There was a promise made that as soon as this government could afford widespread tax cuts, it would keep the 1993 red book promise and remove reading material from the GST base.

If you're not going to keep your previous written campaign commitments on what to do with the fiscal dividend, it throws into question the validity of any other commitment you make in your report or at a later date.

Ms. Jacqueline Hushion: Finally, there is currently a bill before the Senate, Bill S-10. It was introduced by Senator Consiglio Di Nino. As David said, this is a non-partisan issue. The language of Bill S-10 currently before the Senate is word for word the same language of the previous bill introduced in the House by a Liberal member of Parliament. It is also the same language used by the eminent Jacques Hébert when he made his speech in the Senate at the eleventh hour before the GST was implemented. He told the government of the day: “Don't tax reading. It's never happened in the history of our country. Don't do it.”

Whether your recommendation to the government is to take the tax off fully or whether the House receives a bill that originated in the Senate and in its wisdom, and in the wisdom of the finance minister, allows that bill to go through is academic. The bottom line is that the tax has to come off reading because the Prime Minister said it would and because it's the right thing to do. It sends the right signal to Canadians.

Thank you.

The Chairman: Thank you very much, Ms. Hushion and Mr. Hunt.

We'll now hear from Ducks Unlimited Canada, Mr. Don Young, executive vice-president. Welcome.

Mr. Don Young (Executive Vice-President, Ducks Unlimited Canada): Thank you, Mr. Chairman.

Ducks Unlimited is a private, not-for-profit charitable organization whose mission is to conserve wetland habitats for the benefit of healthy environments for wildlife and people. With over 100,000 members in Canada and an annual budget of $70 million, over our 60-year history we have now conserved over 18 million acres of Canadian wildlife habitat and have expended $800 million in that conservation and in environmental education pursuits.

We recognize that the beneficiaries of this 18 million acres of habitat are clearly wildlife, but the beneficiaries are also society in general, inasmuch as these wetland areas provide significant benefits in terms of flood protection, filtration of pollutants from surface waters and ground water recharge, and enormous recreational opportunities for Canadians.

I'm here today to request tax relief for Canadians who are prepared to generously donate lands for the ecological protection of those areas in perpetuity. Canada is endowed with approximately 25% of the entire world's wetlands. However, since the turn of the century, fully 80% of Canada's wetlands have been degraded, drained, or completely lost. Furthermore, the annual attrition rate on the remaining wetlands in some areas of the country represents about 2% per year. At that rate of attrition it's quite conceivable that within a 25- to 30-year period, much of southern Canada, where most of Canada's population resides, and the agricultural areas of Canada will be completely devoid of these important wetland areas.

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A high proportion of these wetlands occurs on private lands, and unless opportunities are presented to those private landowners to encourage them to conserve these areas, it's unlikely we will be able to retain them. Eight out of ten of Canada's provinces have conservation easement legislation, which provides a very tangible indication of the provinces' commitment toward conserving these areas through a mechanism whereby landowners can protect important ecological areas on their lands and still retain title for these lands.

Both conservation and agricultural agencies are very much interested in encouraging private landowners to sustain these conserved areas, and they are also interested in helping achieve Canada's biodiversity objectives.

Our own organization has many different approaches to providing conservation. They include purchasing land, obtaining free easements, and looking for other opportunities that are sometimes prohibited by economic factors and local municipal governments that are often opposed to large-scale purchase of lands.

We believe that as a co-signature to the North American Waterfowl Management Plan between the Government of Canada and the Government of the United States, we have long-term objectives for the conservation of Canada's wildlife habitats. This mechanism of providing tax incentives to private landowners will help us to achieve those goals.

Precedents exist for this tax relief in the form of exemptions provided to cultural property donations and reduced capital gains for marketable securities. Secondly, our neighbour to the south provides for complete exemption on capital gains for donations of ecologically valuable land.

I mentioned earlier that much of the ecologically valuable land in Canada is in the hands of private landowners. These landowners are very desirous of finding opportunities to conserve these areas to the benefit of their own operations, but also for future generations of Canadians.

A recent study that involved examining the motivations of landowners for considering donations of these kinds of properties indicated that the most important consideration was to ensure that conservation and productive value of the lands were maintained. The most important factor after that was ensuring capital gains reductions were in place so they were not penalized for making these generous donations of land.

There is broad-based endorsement for tax relief for these Canadians who are prepared to donate these lands, and these come obviously from the wildlife conservation sectors, but also from agriculture, forestry, and others.

Our organization is committed to non-confrontational cooperative work with the finance department, the revenue department, as well as other provincial and federal government departments to help support this initiative. Environment Canada at the federal level is in the middle of proposing new endangered species legislation that will be highly dependent upon stewardship with private landowners. We believe tax relief through this kind of program will help engender support from private landowners for conservation easements, as well as endangered species protection.

I would hasten to note that other agricultural support groups, such as the Canadian Federation of Agriculture, are very supportive of this particular initiative. As I mentioned earlier, all of the provinces in Canada are very supportive of this.

To conclude, I want to reiterate that Canada is endowed with a high proportion of all the world's wetlands. People often speak of the forests of the world as being the lungs in terms of purifying the air, but clearly the wetlands of Canada provide important functions as the kidneys of the planet, in terms of water protection and water control capabilities.

Canada is clearly behind the concept of wetland protection by being a co-signator of an international convention called the Ramsar Convention. Furthermore, less than six weeks ago the Prime Minister of Canada, just down the hallway of this building, announced the Canadian Millennium Partnership Program, whereby our organization is a partner in protecting Canada's environment in the future. Fundamental to our ability to deliver on that promise is our ability to develop conservation easements that are embraced by Canada's private landowners.

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Protection of these vital areas can be afforded by conservation easements that allow private landowners to retain title on these lands yet afford environmental protection, without being penalized for making that donation.

In the view of our organization, we can meet Canada's conservation initiatives, which can also be facilitated by exempting capital gains from conservation easement donations.

Thank you very much.

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

We'll now hear from representatives from the Economic Community Starting Centre: Job Creation Inc., and Dr. Bokya-Lokumo.

Welcome.

Ms. Monique Bokya-Lokumo (Ph.D., Teacher, Community Organizer and Industry Adviser, Economic Community Starting Centre: Job Creation Inc.): We would like to thank you. I would like to present the members of my organization who are present here today.

We have Marie Mboyo, secretary; Laurent Mboyo, communications officer; and Maurice Leblanc, community member.

[Translation]

The Economic Community Starting Centre: Job Creation Inc., thanks you for this invitation to appear on this November 17, 1998. We would like to present our request for federal financial aid with a view to pursuing the community economic activities we already have planned.

I'm promoting this centre, registered in Ontario as a non-profit organization. I am a teacher, community organizer and industry advisor. With all that expertise, I think I'll be able to contribute to the success of this centre set up to create jobs.

Our centre would like to build a community economic force based on the economic equilibrium between supply and demand. That means that we'd like all members of the community to have their own place on the job market. It's a totally new undertaking and I believe that Canada is the first country to be considering it.

The population wouldn't be a spectator; it won't act in the way that has been described and won't want to take everything for granted. We are mature enough to engage in undertakings that will ensure our country's future.

Our centre would like to build a community economic force based on the economic balance of supply and demand on the job market. Employment is a market. We must market things the proper way. The market is already based on the strength and balance between supply and demand and will continue to evolve in this way in the future.

I will start by clarifying a few definitions. The community today is not limited to Africans, Haitians or whatever other people. It is defined based on the people who wind up in the same place and live together in a given place where the economic equilibrium that is going to play out is taken into account.

Our organization is based on that very concept. I could read you a few paragraphs pertaining to the objectives pursued by our organization or the body corporate that was set up. Our centre's goal is to develop, design and create jobs in a given community environment as well as managing the jobs so created through a personalized job bank.

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I gained experience and worked in the area of employment for 15 years. I trained with a Canada employment centre and I know how that works. It seems to be impossible to create jobs; you take care of the client and you train the client but, at the end of the day, what has the client really gained? We need to find a new method with a view to creating employment and, in my opinion, that must be done within the community.

We must establish a community job network accessible to all within a given community, location or environment and encourage the creation of cooperatives. These cooperatives will gather all the individuals of a given community where an economic equilibrium will prevail and where the question will be whether everyone in the community is working.

I'm from Scarborough and more specifically from Malvern Town Centre. I wondered about this economic equilibrium and I tried to find out how many people living in Malvern Town Centre were not working. No one had ever asked that question. We didn't want to limit ourselves to looking for the answer for that single question. We also wanted to develop community economic activities and we did that. The activities were planned and we are now ready to proceed with their implementation. We are ready to take on this community economic work where economic equilibrium will prevail on the job market.

Each and every member of the community must play a role in these job markets. Attaining balance between supply and demand of jobs translates into community economic equilibrium. Unemployment is considerably decreased and we finally get an end to monetary dependency and stagnation of the labour force.

We've put all our expertise into this project. I brought in my experience as a teacher, community organizer and industry advisor. There is a way to eliminate unemployment in Canada. We have everything we need to develop our economy dynamically as long as people don't sit around waiting while others look at what's going on. We want to promote economic activity and encourage the whole community to invest and find its own place in tomorrow's economy.

The centre has planned the implementation of community economic activities that will allow the unemployed to find their own place on a job market that they know and are building together. It also provides employers with the tools needed to gain the maximum development of short, medium and long-term job offers. You'll find more information concerning activity planning in the files we've compiled. I would invite you to consult these and I will be distributing them to you shortly.

We then must energize the job market by creating economic co- operatives.

These are the new things we must do if we want to face the future. We really have to promote each and everyone's economic effort so that everyone can benefit from our economic life.

I would also insist on the planning program and the tools for employers. I am a businesswoman and I have my own little business. In their staffing plans, employers should

[English]

determine how much time he has to add people on this staffing plan in the short, medium, and long term.

This is to be planned out. It is not a case of listen, today I will take two people. No, we have to go through the staffing plan. How many people do I need to hire in the first quarter, second quarter, third quarter, fourth quarter? How many people do I need to give jobs to?

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Our organization, the Economic Community Starting Centre, is going to work with the employer to provide a good plan that shows, for example, that in this year you have to add five people. We have all this information and we put it to the community where it takes form. And everybody knows what happens on the job market.

[Translation]

We're counting on your co-operation and financial support to ensure community economic success.

[English]

I hope you are going to help us realize our goals. Thank you very much.

The Chairman: Thank you very much, Professor Bokya-Lokumo. I certainly appreciate your words on empowering communities.

The next speaker will be Mr. John Lounds from Nature Conservancy Canada.

Welcome.

Mr. John Lounds (Executive Director, Nature Conservancy Canada): Thank you, Mr. Chairman.

[Translation]

As I'm not at ease expressing myself in French, I'll make my presentation in English. I am sorry.

[English]

We'd like to speak to Canada's conservation challenge on privately held lands. I'd like to echo some of the comments made by the representative from Ducks Unlimited today. I'd like to talk particularly about the need to exempt donations of ecological gifts from capital gains in order to encourage Canadians to assist in achieving Canada's conservation goals.

As Mr. Young mentioned, ecological gifts are either donations of land in fees simple that are ecologically significant or else they're donations of conservation easements on property where you're trying to protect the conservation values of that particular land.

The Nature Conservancy of Canada is a national charity dedicated to preserving ecologically significant natural areas, places of special beauty and educational interest. We do that through outright purchase, donations, and these conservation agreements. We work with individuals, communities, businesses, and governments. We have 10,000 members across the country. And since 1962, when we started, we've protected over 750 properties across Canada.

Canada as a nation has made a number of commitments to achieving conservation goals, and I'd like to speak about three of them today.

The first is that Canada has signed the Convention on Biodiversity Conservation, committing it to protect rare, threatened, and endangered species in this country.

Secondly, Canada has also committed itself to complete its national parks plan and protect areas across the country. Currently only about 5.9% of Canada is found in these particular areas. The national standards are usually 12%, so we have a long way to go yet.

Thirdly, Canada passed ecological gifts legislation in 1995 as part of the income tax changes. This legislation was enacted to promote the donation of ecologically significant lands, covenants, easements, and servitudes for conservation purposes.

Environment Canada has developed detailed criteria defining eligible lands, and it is responsible for certifying land and the recipient charities. At that time, legislation removed the barrier of the 20% limit on deductions against annual income. That helped deal with the big problem at the time, which was that you would actually have to pay capital gains tax on a deemed disposition prior to receiving your tax benefit, which was spread out over five years.

This was an important step in supporting private philanthropy, but it does not address the key problem of deemed capital gains on the donation of ecological gifts. Over 50% of Canada's imperilled species are found in the 10% of Canada that is private land. Without the help and contribution of private landowners, Canada's conservation goals will not be met.

There are three reasons why we believe the time is right to remove capital gains from ecological gifts.

First, it's cheaper than buying the land directly through the A-base. We could go about this, and it can be met at a lower cost and in a way that encourages Canadians to participate in that accomplishment. As well, when the government doesn't have to set up the necessary management infrastructure to manage the lands, groups like Ducks Unlimited and Nature Conservancy Canada pay for the costs of land management. We pay for the insurance. We pay for the stewardship. We pay for the monitoring of these lands by raising private funds to bring toward conservation. A key point here is encouraging philanthropy by owners of key natural lands in the country.

The second reason is that tax treatment would be fairer compared to other types of gifts that incur deemed capital gains. Cultural gifts are exempt from capital gains tax. Marketable securities are taxed at 37.5% of the capital gain. Ecological gifts, important lands that we're trying to protect, are taxed at 75% of the capital gain. Our tax treatment of ecological gifts is far less supportive than what you would find in the United States, where donations of capital assets held for more than one year are exempt from capital gains.

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The third reason is that it encourages stewardship by Canadians. The majority of gifts we have received so far have been donated by people over the age of 60, with limited incomes, who have owned the land for more than 20 years. Such donors may face loss of fixed-income provisions when they have to incur a deemed capital gain in their income in a particular year. Those donors will also find that, from a tax perspective, they're better off selling the land and donating the proceeds after paying their capital gains tax than if they actually just donated the land.

Now, this may seem bizarre, but it's true. If you donate a piece of land worth $100,000, with an adjusted cost base of $20,000, you have a capital gain of $80,000. With the deemed disposition, the capital gains tax payable would be $30,000. The $100,000 tax credit you get for donating the land is worth $50,000 to the donor, resulting in a net credit of $20,000 after you've paid the $30,000 in capital gains tax. If you sell that same property, you have the $100,000 you get from the property, and you pay the $30,000 in capital gains tax. This leaves you with $70,000. If you donate that to a charity, you get a $35,000 net tax credit.

It's better for you to sell the land than it is for you to donate it. I think we're not setting up the system in a way that makes sense for people who are out there in the field wanting to donate property.

Since 1995, when the ecological gifts legislation was put in place, there have been 75 donations of ecological gifts, covering 9,000 hectares of land. This is about 3,000 hectares a year. We believe we have a goal in front of us of having to preserve somewhere in the order of a million hectares of land over the next 30 to 50 years. We think this will take us about 16,000 hectares a year to actually make happen. Without changes to these systems, we're not going to achieve these goals.

We actually think there will be capital gains tax foregone. It will be about $11 million a year. We think this is a high estimate we've made. We'd be happy to talk further with Finance officials. If there's a worry this might open flood gates, we'd support a time limit, the same way it was done for marketable securities. There could be a five-year review, or something like that.

To conclude, resolving this issue will encourage Canadians to help with the conservation of important habitat on private lands; recognize the significant contribution of those owners who have been long-term stewards of Canada's remaining ecologically private lands; make a donor's decision to donate at least as favourable as making a decision to donate cultural gifts or marketable securities; provide the Government of Canada with a non-confrontational way to achieve biodiversity conservation goals; and place the conservation of ecological gifts on a similar footing with U.S. tax policy.

We recommend donations of ecological gifts receive an exemption from capital gains in order to encourage Canadians to assist in achieving Canada's conservation goals. If the Government of Canada cannot achieve this, we would certainly be looking for something that was at least comparable to donations of marketable securities.

Thank you.

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

This is actually the final presentation of this year's pre-budget consultation. We will now go into the question and answer session. We'll begin with Mr. Epp.

Mr. Epp, it's going to be a 10-minute round.

Mr. Ken Epp (Elk Island, Ref.): Thank you, Mr. Chairman.

Thank you all for your presentations. We've had a gamut of interests expressed, not only today, but throughout our hearings in the last five or six weeks or even longer that we've been working on this. There are many different people with different priorities when it comes to budget planning.

I want to ask a question, first of all, of the Canadian Parents for French.

Education is a provincial jurisdiction. Is it not true that instead of sending money to Ottawa and then hoping to get some of it back, we might be better to keep the money a little closer to our chest and do that through our provincial governments, who are ultimately responsible for education? Basically, you are asking for reinstatement of the federal level of funding as it was some years ago. All this means is that the Canadian government is going to tax us more in order to get this money, so they can give some of it back after they've let it spin around here in the whirlwind of bureaucracy.

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Ms. Joan Netten: Education is a provincial responsibility, but bilingualism in Canada is a federal value. Therefore, if the federal government really accepts the importance of bilingualism in Canada, it's the federal government that needs to somehow give a message to the provincial governments about the importance of young Canadians learning both official languages. The message given by this official languages in education program is the most important part of this. It's not just a question of transfer of moneys.

Mr. Ken Epp: But it doesn't work. I was talking to a person in Quebec the other day who is French-speaking. His wife is French-speaking. They have a French heritage. But in order to be bilingual they wanted to have their children learn English, the other official language. The government of the province wouldn't permit them to register their children in an English school. So he had to actually register them across the boundary so he could get them into an English school. They learn French very well in their home and in their community. He wanted them to learn English in their school.

So it doesn't work. The federal government cannot impose on the province something the province isn't willing to do.

Ms. Joan Netten: The federal government cannot impose on a province. But the example you are using is a very particular one that applies to the province of Quebec. For a minute I'd like to talk to you about the anglophone provinces or primarily anglophone provinces in Canada.

There is a very great difference between the learning of English in Quebec and the learning of French in the anglophone provinces in Canada. Basically speaking, the point of view with regard to the learning of English for francophones is that English does not really have to be taught. In fact, in some French milieu what francophones say is that English is contagious. It's caught. It's so strong in the community, and on the North American continent, that people who are French-speaking are almost automatically going to learn English because of the English milieu.

This is not the case at all for the learning of French in the anglophone provinces. In other provinces, there is not the same need for anglophones to learn French. There is certainly not the same pressure from the French milieu for English people to learn French. As a result, in Canada at the present time 80% of bilingual people are francophone. This means there is quite a difference between your anglophone community and your francophone community because there is a very small percentage of anglophones who are becoming bilingual.

We had quoted a statistic that has been quoted by Statistics Canada. The generation of young Canadians we have now is developing into the most bilingual generation in Canada. But this is not true. This was true up until 1992-93 when the cuts started coming to the official languages and education program. Since that time, the number of anglophones taking French through to the end of high school in order to become bilingual has decreased dramatically. This was not an expected result. This is presenting a serious problem for the future of Canada. If most of your bilinguals are going to be francophone, there is going to be a problem from the point of view of the anglophones in Canada.

Mr. Ken Epp: I'd like to discuss this with you for a couple of hours, but I want to move on to some of the other topics. In conclusion, I think I shall just simply make a note that you believe it's a proper role of the federal government to fund education in the official languages in the provinces. It's a point of view I certainly respect, if that's what you want us to know.

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Now I want to talk to these restaurant people. I have a son who has a degree in philosophy and English who works in a restaurant, that being the best job he can get in this country at this time. I shouldn't say that. That sounds demeaning to the food industry, but I guess we need philosophers serving tables, don't we?

I'd like to ask you a couple of things. You mentioned the oppressiveness of payroll taxes, and you've given a pretty strong presentation in that regard, but you barely just touched on the GST. Is that because you ran out of time? Did you want to say a little more about it now?

What really is your objection to the GST? Everybody tells me it's a wonderful tax to replace the manufacturers sales tax and that Canadians love it.

Ms. Joyce Reynolds: Our objection to the GST is that our restaurant operators are forced to collect GST, but our closest competitors, grocery stores, aren't, so there's an uneven playing field. You can buy the exact same product in a convenience store and not pay tax; when you buy it in a restaurant, you do pay tax. So that's our objection to the GST.

The focus on employment insurance today was because this is so topical. We're expecting to hear within the next couple of weeks what the reduction will be, and we clearly feel very strongly about what the priority of the government should be. That's why I focused on it exclusively today in the presentation.

Mr. Ken Epp: Yes. It was a very good presentation, one that I won't question you on since you've already totally convinced me, at least. I could even go so far as to say I was convinced before your presentation. There are many statistics that show payroll taxes— in fact anything you tax you will reduce. That's just human nature. If you tax jobs in employment, then you will probably have fewer jobs and less employment. So it was very good.

Speeding right along, do you have anything else you want to say?

Ms. Joyce Reynolds: I was going to say, in reference to your son, an interesting statistic is that one-third of the population gets its start in the restaurant business, so it's not unusual for us to have marine biologists and philosophy students. We run the whole gamut in terms of people who get their start in our sector.

Mr. Ken Epp: I told him that if he stays there much longer I want him to soon start planning on when he's going to own his first restaurant. It'll happen, I'm sure.

Ms. Joyce Reynolds: It's a tough business to make a living in.

Mr. Ken Epp: Moving along to the Carpenters and Allied Workers Union, you said something that I think is contradictory, at least in my mind. I want you to clarify this. On the one hand, you said the cost of apprenticeship training comes from the union people themselves through lifelong dues, so you called it lifelong tuition. I understand that, because part of the money the unions collect goes for training. But then you turn around and say the message you want us to hear in our recommendation to the finance minister for the next budget is that there should be a direct investment by the federal government in these training programs. I want you to clarify that. If you're funding 85% of it, are you really saying the government will fund the other 15%—or wherever it comes from? I know some of it comes from employers and from businesses too in terms of the trades training, because I've worked in that area.

Are you saying the federal government should pay more so that you can pay less, or are you simply saying keep on paying it? What exactly do you mean by this particular percentage, the 85%?

Mr. Dan McCarthy: The reality is that when they made the changes to the Employment Insurance Act and the corresponding devolution of training to the provinces, the responsibility for training was clearly given to the provinces, but some of the money was held back.

I can give you a number of instances. For example, the average age of apprentices in Canada, according to the national apprenticeship survey, is between 26 and 28, depending on the province. It used to be that when you were sent back to class—you know how apprenticeship works. You do so many hours in class and then you spend virtually the rest of the year out in the field working. Then you come back and take a little more in-class training. When you come back for your in-class training, if you leave the job, they used to pay the first two weeks, the traditional waiting period. That's been taken away. So you're asking a 26- or 28-year-old with family responsibilities or whatever to leave a job that's paying them to go back to class.

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Mr. Ken Epp: Many of them can't afford it.

Mr. Dan McCarthy: That's right. So what happens is we have people who are staying as second-year apprentices at 60% or 65% of their salaries for years simply due to economic necessity. This is one thing that's been drawn back. The total package of money that is going to apprenticeship training has dropped dramatically, because it wasn't just that one particular program.

The other thing, and it's an interesting tax spin on this too, is that when EI was introduced they did away with the National Training Act. The National Training Act said that money spent on tuition, child care, travel, and books—those kinds of expenses—were tax-exempt. Now there's a ruling by Revenue Canada that those are taxed not at source, but you're nailed when you pay your taxes in April. That's not a very good incentive to find a child care space so you can go back to school or get your books or travel to an institution. It's not just that there's been a devolution and changes to the EI act, but the amount of money made available to let these people who qualify get started has been reduced, and the hurdles and some of the dysfunctional aspects of the EI changes have made it impossible for people to get their start.

We're still willing to pay the same 85%; the cost is the same. It's just that the upfront money to get them moving is gone or has been reduced.

The Chairman: Thank you, Mr. McCarthy. Thank you, Mr. Epp.

Mr. Martin.

Mr. Pat Martin (Winnipeg Centre, NDP): Thank you, Mr. Chairman. I think it was very useful to learn a little bit about an industry that I don't think is very well understood. I think it's very helpful for some of the MPs to get that sort of insight from you, given that it's such a unique industry. Even though I think you said it's the second or third highest employer in the country, it's an industry with no fixed workplace and a transient workforce. So the human resources strategy has to be unique and cultivated in that way. It was interesting to have you share that here.

One of the things that I'm glad Mr. Epp actually raised was funding the EI money. In terms of the two-week waiting period, you mentioned that used to be paid to apprentices in their first two weeks of school. Maybe you can correct this, but I understand the total cost of that one aspect was $10 million per year. So the total saving to the government when they eliminated it—this is from an EI fund with a surplus of $600 million per month.

I'd ask you to elaborate more on the impact of eliminating that two-week waiting period on the number of apprentices you may find even dropping out and not just putting off their training period.

The other thing I'd put in is that any money paid into the apprenticeship system from the UI system is already paid for by industry, because the only people who pay into the EI fund are employers and employees. The federal government stopped paying into the EI fund in 1989. I'd ask you to elaborate a little bit more on the communication of craft trade skills through apprenticeship and the uniqueness of our industry—I still slip into that a bit—the construction industry, and the importance of it being truly industry-driven with the joint labour-management initiative that is your joint training trust fund.

Mr. Richard Mahoney: Out of respect for members of Parliament, I'll let Dan and Eddie answer that. I figure you want to hear less from lawyers and more from the people who actually do it.

I think one of our biggest problems, and Dan and Eddie will agree, is that we're not only losing skilled people, but some of our most skilled people are becoming members of Parliament. So we face that problem too.

Mr. Eddie Thornton: With respect to the question that was previously asked by Ken, about whether we are willing to continue to pay our fair share, in a recent study completed by Dr. Rick Loreto across the construction trades of the Toronto region, the findings proved that the private training providers like ourselves receive 9.6% support from the federal government and 5.4% from the provincial government for apprenticeship training.

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As private training providers, as labour and industry, we do not receive the capital loans and grants that community colleges and universities receive. Yet we're forced to compete with the per diem of the community colleges. We cannot exceed what they can charge on a per diem basis. So we're forced to fund our own training programs; otherwise we close down.

It has been proven time after time that the community colleges cannot provide the hands-on training required to provide the workforce in the construction industry. So we're willing to continue to pay, but we would like to get a fair share similar to what the universities and colleges get.

Mr. Dan McCarthy: The other thing, Pat, is that the $10-million saving you spoke of is clearly a drop in the bucket. The figures speak for themselves.

But this is what I find very interesting. I went to an apprenticeship graduation. I've been to two of them this year in two different provinces. People are taking approximately six years now to do a four-year apprenticeship because they're staying in the field longer. They try to wait for when an in-class session is being offered and a natural lay-off is coinciding.

As the cyclical nature of construction kicks in, such as when the oil patch and southern Ontario get hot, the whole country starts to move. Construction workers are moving.

We're also finding we've got a shortage—this was alluded to—of supervisors and foremen for companies. Putting somebody out there who hasn't completed all facets of the trade so that they're a fully skilled journeyperson with a really good sense of skills means they don't move up to become a foreman.

Say a company gets a big contract. They've got a very small pool of foremen that they want to expand very rapidly. Some of the best and the brightest don't have all the requisite skills because they're languishing because of these hurdles, such as familial responsibilities, etc.

So it's not just that there's a shortage. The shortage is at every level. When you look at some of these statistics, they show a bit of a bulge where you have people in their twenties trying to get in. These are the apprentices. We actually see a drop with people in their thirties, but then it goes up with people in their forties. I'm really concerned that as that wave moves through, we're going to be in dire straits.

We know what the Canadian solution is historically. We opened the doors of immigration and brought in the skilled tradespeople. That's not there. That's simply not going to happen. We can no longer pass off costs onto other countries because Canada is a land of opportunity. That solution is not there.

This is what we're really saying. I want to re-emphasize the need. The jobs are available; this government needs a lever.

You discussed labour-management— We were talking with Paul Richer of Ellis-Don the other day. He said if we can't get some action here, they're going to start trying to train their own people without us. He's that desperate. He wants to bid on work. Ellis-Don is not small potatoes in this country or in the United States. They're saying that if we get them the people, they'll bid on more work.

That's the message that needs to go out. He's been co-chair of our training trust fund in Toronto for years. Those are the kinds of people who are there.

For us, it's terrific, because quite frankly, we can sometimes deceive ourselves as to what we need. But consider going to a meeting with somebody who just screams at you that he needs 25 form setters tomorrow. He says you had better get them there, so you're on the phone all night trying to find them.

To me, that's the kind of lever the federal government wants to have. I think you've got that in some of the sector councils. What I'm really saying is that I think the TTF is the vehicle.

I'm sorry to take up all of your question time.

Mr. Pat Martin: No, that's fine.

I still have one more, Mr. Chairman.

From a more practical point of view, this is just to narrow down what you would like to see happening. You mentioned a line item in the budget that recognized the need for this kind of direct intervention and training in that industry. Where would you see that coming? Do you see the funding flowing through the EI system again, or do you anticipate a line item addressing your concern in the general revenue budget?

• 1705

Mr. Dan McCarthy: It's a bit interesting, because, as I understand it, listening to Minister Martin before this very committee, there's a pretty blurry line between what is an EI surplus and what is general revenue.

Quite frankly, it's probably faster to consider reinvesting the premiums of workers where there are job opportunities available, and I don't think the distinction between CRF and EI is necessarily that useful. The money is there. It has come from these workers; it has come from those employers. There's a desperate need, and it's going to supply the jobs that are there. I think that's the biggest difference right now.

Mr. Pat Martin: One of the uses, then, of the EI money should and could be apprenticeship. Even though they've devolved the labour market training to the provinces, you're calling for a role of the federal government to at least oversee apprenticeship at some level.

Mr. Dan McCarthy: Absolutely, and especially because of the disincentives that could take HRDC years to work out.

You have somebody who's working part-time at McDonald's and part-time somewhere else, who comes to the training centre and says they want to be a carpenter. The second they give up their part-time job to go to school, they're ineligible. There's a problem.

Mr. Richard Mahoney: We're trying to answer your question, which is, what should be done with the dividend, as well as the question, what is the role, if any, for the federal government in training after these labour market development agreements are reached with the provinces. We believe there is a role for the feds to invest directly in training, and the way to do that is through these sectoral councils. We have precedents for that in a couple of sectors already, like the automotive and aerospace sectors.

The Chairman: The issue of sectoral councils has been coming up quite a bit, and I personally remember that with cars, the automotive sector, it has worked quite well.

One question I want to ask you is in reference to recruitment of workers. I'm fully aware of the challenges we face. I am from York region, the region you're referring to.

I once analysed the difference between the German and the Canadian apprenticeship models, and what I discovered was that in Germany, the average age at which they get into apprenticeship is much younger. It makes perfect sense, because it's also cheaper to train a person who starts when they're 16 or 17 years old.

Our average apprentice is how old, 26 or 27? When you're 26 or 27 years old, you have a different set of responsibilities and you have different challenges in your life. You're in a different phase of your life. I don't understand why we as a country have not accepted a model—by the way, the dual system, the German system—where these apprentices graduate. Of all professional engineers in Germany, 66% actually came up through the dual system. So it's not a “vocational” sort of—

Vocational training in Canada is not accepted as something that— If you can't do anything else, you become a— They have a different view in Europe of the type of apprenticeship programs I'm talking about.

So what has been the problem? Why do we have to wait for the apprentices to be 26 or 27 years old? Why hasn't the dual system of apprenticeship been accepted?

Mr. Dan McCarthy: I think you've put your finger on it. There has been an idea— certainly I know growing up in the 1950s and 1960s, if you didn't have it academically, and that included if you were a discipline problem, you got on one stream versus the other stream. I was a discipline problem. I eventually made it.

That is a terrible thing to overcome, but I would also like to say it is something we are working on.

The other thing is, with the perception that you didn't need math skills and whatnot, we are finding now that— As a matter of fact, we would prefer not to have an apprentice who hasn't a high school diploma. In most provinces it's still grade 10. With computers and CAD and global positioning— they have Caterpillars now that work on global positioning to level a highway; you don't need to bang pegs into the road any more. We are moving in that direction.

• 1710

Actually, I'll ask Eddie to speak to two projects we're signing on to with school boards in Toronto to address that very issue.

Mr. Eddie Thornton: Just recently we've entered into negotiations with the Toronto Catholic District School Board and the Toronto District School Board to enter into an agreement with them that we will be responsible for the placement of grade 11 and 12 co-op students in construction workplaces from February until June that would give them four credits toward their graduation.

It's taken us about 12 years for that to come about. There was a certain reluctance on the part of guidance counsellors to enter into these arrangements with us, but with the recent cutbacks in education in the province of Ontario, there are a lot of people coming to the table who didn't come before. They're being forced to because of the IAS program. The school boards now can apply for IAS funding. That's the only reason they're coming to us. Prior to that there was no interest expressed. But within the past two months there's a tremendous interest being expressed by the school boards to enter into this arrangement. We welcome it with open arms, because with this type of mechanism we will get people into the industry at a much earlier age.

The Chairman: And it is an issue we need to overcome. I remember during the talks when we were giving up labour market training to the provinces how we retained internship instead of apprenticeship programs, and how we have been able through legislation and programming to still offer young people these opportunities.

But the public perception issue is a real challenge you face. I think industry, quite frankly, needs to beef up its marketing campaign in attracting young people, and saying that being whatever— If people would only find out how much these people make, I'll tell you it would inspire most Canadians to enter that field.

Mr. Dan McCarthy: We're actually working on a video that is geared to high school students. We've given up trying to train academics who are counsellors. We will give them a video, so if somebody asks something they can have the video. We're trying to stay out of the video. It's going to be first- and second-year apprentices who are young, including the host, and it's actually being produced in conjunction with a high school. So we're going to try to do that. It's an enormous expense, but we have to do it, and we're quite willing to undertake that.

The Chairman: Well, good luck, because with an aging society, the challenges are many. It's quite serious. If you look at the demographic transition that's occurring in our country, you're going to be faced with shortages that are going to be very hard to fill.

Mr. Szabo.

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

I wanted to thank the Canadian Restaurant and Foodservices Association for the work they did on the— I thought it was very good. There are some very good charts in here, particularly appendix I, which shows historically where we've been. I'm looking back here and I see that in 1991, EI rates went from $2.25 to $2.80 in the year—a 55¢ increase—simply because the notional fund started to have a deficit, and I think it was, what, $4.2 billion in that year alone? The trend is good, though since 1993 it's been going down steadily and we're down to $2.70.

But I thought it was kind of interesting, and I want to ask, just for clarification, about your final conclusion, in which you made the statement “Restoring the EI fund to a truly separate account and significantly reducing premiums—”. Are you suggesting that there in fact be a segregated bank account that has premiums in and benefits out of that separate operating bank account?

Ms. Joyce Reynolds: I'm suggesting it should be entirely separated from consolidated revenue, similar to the Canada Pension Plan. That's right.

Mr. Paul Szabo: So it would be a funded program, which CPP is. Premiums have to fund the benefits.

Ms. Joyce Reynolds: Right, but it would be separate from consolidated revenue. We're getting messages from members of Parliament and from the Minister of Finance saying that really, since 1986, when the Auditor General said EI had to be consolidated with the overall financial statements, there really hasn't been a separate account.

• 1715

We take issue with that, because at that time the country's overall budget was in deficit and the EI deficit had affected our borrowing requirements. During that recession, as you noted, premiums went up very dramatically but temporarily, and unfortunately they haven't come down. They've gone down in very small increments, but it's our position they should have returned to the $2.25 rate they were prior to that recession.

The other thing that concerns us is that the Minister of Finance has said that general taxpayers fund the program and there really isn't a separate account because of the interest payments on that account. But if you look at that same chart, you can see that consolidated revenue pays interest to the EI account when it's in surplus, and the EI stakeholders—employers and employees—pay interest back to consolidated revenue when it's in deficit. So general taxpayers have never paid for the EI program. It has always been employees and employers only.

Mr. Paul Szabo: Between 1990 and 1991 the fund went from a $2 billion surplus to a $2 billion deficit in one fiscal period. There was a $4 billion swing because of the downturn. We had a significant increase in the EI premiums because all of a sudden it was under-funded.

If you establish a separate fund, who will be responsible for funding a recession, when all of a sudden the number of unemployed increases dramatically and there is no cash left in that bank account to pay for the EI benefits people were hoping they were insured for?

Ms. Joyce Reynolds: We believe the way the system was initially set up is the way it should be funded. You need to have a cushion in the account to ensure there is stability in premium rates when there is an economic downturn. In fact, in the last couple of years when we were here we said we supported the Minister of Finance's objective to have a bit of a cushion in the account. The problem is we're $5 billion to $10 billion higher than what the actuary has indicated is prudent. That's what the real issue is.

I guess the other concern is now that it's part of the overall financial statements, if there is an economic downturn we will have to either borrow money or rates will have to increase again, because there isn't actually a fund; it's just an account within the overall financial—

Mr. Paul Szabo: The fund is really an analysis of the ins and outs. It doesn't really represent the cash. The cash has been used to reduce debt—

Ms. Joyce Reynolds: That's exactly the issue. We may have to borrow money.

Mr. Paul Szabo: But the fund still shows how much is owing, or how much has to be accounted for in the operation of the EI program. Even though the cash has been utilized, there is still an obligation under the EI Act to operate under the fund and reduce premiums.

I'm looking at your chart and I see that from 1995 the fund was basically balanced. That's not very long ago. In 1995 there was a very small surplus there. All of a sudden, even though the government reduced rates during each of those years, three years in a row the surplus started to build. I'm not sure if your group has ever looked at it, but if you look at when Canada has hit recessions, it's always happened at the end of a decade—1950, 1960, 1970, 1980, 1990—and we just happen to be on the precipice at the end of another decade.

If we reduce the premiums too much now and concurrently hit a recession—which I hope we don't, but we're not the masters of our fate if the automobile sector in the U.S. goes down, and that's the sign—prudence would suggest, and maybe I'm asking you, that we should continue to be cautious about providing too much of a reduction in an EI premium—and I think that is committed to; it's just a matter of how much—until we find out where the economic cycle is.

• 1720

Ms. Joyce Reynolds: But if you look at appendix 3 and the projected surplus in the EI account, even with substantial reductions in premiums we're still looking at a huge surplus in the EI account. As we just discussed, this surplus doesn't really exist.

Mr. Paul Szabo: That's assuming no change in the current rate.

Ms. Joyce Reynolds: No, this is with rates going down from $2.70 to $1.70 on three different scenarios.

Mr. Paul Szabo: Yes, but a $1 reduction is worth about $12 billion for each and every year. If you did run deficits until the surplus was utilized, you would then have to quickly ratchet it back up again. I'm not sure whether or not that's a good idea—

Ms. Joyce Reynolds: We're calling for a 30¢ premium reduction this year and matching that over the next two years.

Mr. Paul Szabo: Just for interest's sake, if you support going to a segregated EI fund where the cash is segregated from the main government revenues and the general reserve, have any of your members ever considered whether or not there should be opt-out provisions for those segments of the Canadian economy that want to self-insure?

Ms. Joyce Reynolds: That's a really interesting question. During the whole EI reform debate our industry was very proactive in promoting the idea of a student exemption. There are a lot of students who pay into the EI program who never have an opportunity to collect.

Mr. Paul Szabo: There are eight industry segments, such as construction, forestry, fisheries, etc., that historically have been net drawers. They take out more than they put into the plan.

Ms. Joyce Reynolds: In terms of an experience-rated system, we would support that if it could be done on a company-by-company basis rather than on an industry basis.

Mr. Paul Szabo: It makes sense.

Ms. Joyce Reynolds: Within all industries you have some that are bigger users than others.

Mr. Paul Szabo: Again, essentially, I think you did an excellent job. The Canadian Restaurant and Foodservices Association members have been regular participants in our budget consultations ever since I've been around in 1993, and they've done an excellent job. I'd just like to commend them for it.

The Chairman: If you are interested, they have a restaurant caucus, so perhaps you can talk to Mrs. Reynolds after.

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I'd like to ask something of Mr. Young. I think Ducks Unlimited is terrific and does great work. I was present at the University of Waterloo when we had a huge world wetlands day and the leadership role we've provided in the Ramsar Convention was acknowledged.

In your brief you talk about eight out of ten provinces having conservation easement legislation. I would just like to know, for clarification, which two provinces don't have that kind of legislation.

Mr. Don Young: It's currently Quebec and Newfoundland. Quebec is contemplating it, and preparation for conservation is even in legislation right now.

Mrs. Karen Redman: I have some sympathy for your proposals on people who would like to bequeath land and give easements in the spirit of conserving wetlands. Is there a problem if we look at provinces that don't have that kind of legislation intact?

Mr. Don Young: I would think not because the legislation you've spoken to relates only to conservation easements. It could be an actual donation of the title of land, for example, as opposed to just a component of the landscape. So we have no reservations whatsoever.

Mrs. Karen Redman: Okay, thank you.

The Chairman: Thank you. That more or less concludes this panel.

• 1725

Go ahead, Mr. Epp.

Mr. Ken Epp: I'm curious. Again, to the Carpenters and Allied Workers, one of your statements was that recruitment is more difficult. We're told that there's a boom going on, you can't fill positions, and yet it's difficult to recruit people, presumably young people. What's the reason for that?

Mr. Dan McCarthy: I think early in our presentation we gave statistics— we had an article in the paper. Out of 1,600 phone calls, 450 expressed interest and 39 were eligible.

One of the biggest things we're encountering is it's not that young people aren't working; it's that they're working in part-time jobs or a string of part-time jobs. To get into the first part of your education program, you virtually have to be EI-eligible. If you quit your part-time job, you're not EI-eligible, so you can't make a transition.

Mr. Ken Epp: Would you favour, then, delinking accessibility to the apprenticeship programs from the whole EI program?

Mr. Dan McCarthy: I hadn't thought of the term “delinking”, but I would say we need a complementary thrust. In other words, if we get a number of people coming through the regular EI door, that's fine, but for new entrants, and particularly for young people who are underemployed or in low-paying jobs who want to make the transition, yes. Whether we do that by expanding the definition of who's eligible to qualify for EI support or whether we do it as a direct— and I would think the latter is an important complement because it's more sensitive to industry demands, particularly in major areas where you're having a cyclical economic impact.

Mr. Ken Epp: Good.

That answered my question, Mr. Chairman, but I want to make one little ten-second statement.

Even though you dear people with the reading tax didn't get asked any questions, you stated your case so eloquently that I for one, at least, am 110% on your side. I'm sure many of the others here would say the same. Thank you so much.

The Chairman: Thank you, Mr. Epp.

As I said earlier, this is the last panel for our prebudget consultation this year. I must say to you that as we travel across the country, we really are energized by the experiences we have. We have many Canadians who truly believe in the great potential this land has.

Whether you're talking about tax cuts, or investment in communities or health care, or any other issue that is really close to the heart of many, many Canadians, one thing of which you can rest assured is the fact that if we continue in the same direction in which we're going now, if we really commit ourselves to building the great nation that this nation already is, if we focus on the type of future that I think we all envision, we have a great deal to do and much work to accomplish in this land, but we have great human resources.

I was fascinated by the input given to us from Vancouver to Newfoundland. There is one common theme that has emerged from these hearings. Every single participant is dedicated to one ultimate goal, and that is to improve the quality of life for the people of Canada.

I can tell you that in these particular sessions I've determined that the time has come in the history of this country where we ought to be looking at the establishment of a productivity covenant. If we truly believe in raising the standard of living for the people of Canada, then we also have to do it within a framework. As chair of the committee, I want to tell you that I'm going to give a lot of attention to this particular issue, because it's an issue that concerns me, particularly as we look at the type of gap that exists between the United States and our country. We need to focus on that. But everything you have said, of course, speaks to increasing productivity and the standard of living for the people of Canada.

• 1730

On behalf of the committee, I want to thank everyone for their participation in yet another excellent panel. Thank you very much.

The meeting is adjourned.

• 1731

• 1831

The Chairman: I'd like to call the meeting to order and welcome everyone here this evening.

It's a pleasure to have with us the Governor of the Bank of Canada, Mr. Gordon Thiessen, and Mr. Tim Noël.

We look forward to your comments as always.

Governor.

Mr. Gordon Thiessen (Governor, Bank of Canada): Thank you, Mr. Chairman.

My colleagues and I welcome these appearances before your committee following each edition of our Monetary Policy Report. As you probably know, we published this report yesterday. It touches on a wide range of economic and monetary issues and it provides us with an opportunity to account for our policy actions and the results of those actions.

It's important to keep in mind that the objective of monetary policy is to help create and maintain a Canadian monetary climate favourable for improved economic performance over the long haul. The best way that monetary policy can contribute to this is to preserve low and stable inflation.

As set out in the jointly agreed inflation control target of the bank and the government, our objective is to keep inflation within a range of 1% to 3%.

In our previous report in May we highlighted the global economic uncertainties that shrouded the economic outlook, and since that time economic uncertainties have intensified further. While some stability returned to Asia, instability spread to other regions during the summer, following further evidence of Japan's inability to deal with its problems and Russia's decision to declare a debt moratorium.

Many emerging market countries were faced with large capital outflows and widening interest rate spreads above the rate on U.S. treasury bonds as investors looked for safe havens. More broadly, interest rate spreads between private sector and government bonds also increased and market liquidity fell.

Throughout this period the conduct of monetary policy in Canada has been influenced by these international factors. Problems in Asia and Russia have contributed to a sharp decline in the prices of the commodities we export. The difficulties this has caused in our primary industries were the source of an ongoing downward pressure on the Canadian dollar during the summer. In August, financial markets became extremely nervous and uncertain. The Canadian dollar came under intense downward pressure and our medium- and longer-term interest rates began to rise sharply.

To forestall a potential loss of confidence in our currency, the Bank of Canada raised its bank rate by one percentage point. Subsequently, the Canadian dollar stabilized and medium- and longer-term rates came back down.

In response to the difficult and illiquid financial markets between August and October and some signs of a possible credit crunch, the U.S. Federal Reserve lowered its interest rates twice by a total of 50 basis points, and it lowered them again by another 25 basis points today.

Because of the importance of the U.S. economy to Canada and given our ongoing low inflation rate, the Bank of Canada followed these first two moves with similar reductions in our bank rate. Since then international financial markets have been less volatile.

• 1835

[Translation]

Looking forward, the economic and financial upheavals in the international area have resulted in downward revisions to the estimates for global economic growth in 1998 and 1999. Nevertheless, economic activity in the major industrial countries, particularly in North America and Europe, is expected to be reasonably well-sustained through to the end of 1999.

The Canadian economy is expected to continue expanding over the next year on the basis of the projected sustained domestic demand in the United States and accommodative monetary conditions in Canada. However, the turbulent international developments have created greater than the usual uncertainty around the economic outlook.

Financial stability is particularly important to household and business confidence. Thus, the extent to which growth in Canada's economy will take up the slack over the next year will depend on how quickly international and domestic financial markets stabilize. Preserving confidence among investors in Canadian financial markets will therefore be an important consideration for the bank over the near term. And I welcome the greater stability we have seen in financial markets in recent weeks.

Let me reaffirm that the fundamental focus of monetary policy over the medium term continues to be on keeping inflation within the target range. Inflation is expected to remain in the lower half of the range of 1 to 3 p. cent over the next year.

[English]

Mr. Chairman, I'll conclude by underlining once again that the global situation continues to be uncertain and this will have an effect on Canada. However, we are coping with these international difficulties on this occasion better than before. I believe this is because of the progress we have made in recent years in getting our fiscal house in order, in achieving a low and stable rate of inflation, and in restructuring our private sector to make it more productive and internationally competitive.

Thank you, Mr. Chairman. We're open to your questions.

The Chairman: Thank you, Governor. We'll begin the questions with Mr. Epp.

Mr. Ken Epp: Thank you, Mr. Chairman.

Thank you, Mr. Governor, for gracing our committee with your presence today.

I'm new to this business of watching the economy of the country as it goes through its various convolutions as it has in the last year. I should begin by commending you for what I believe is a very difficult job. I hope you hang in there for the long run so that this country will remain stable.

What is the relationship between interest rates in Canada and interest rates in the United States? I don't only want the numbers. From some economic theory or whatever basis you have, how do you decide where to set Canadian interest rates?

Mr. Gordon Thiessen: We decide this based on the outlook for the economy, what that means for growth, and what that growth means for inflation over a longer period of time.

We always look at interest rates in conjunction with the value of the Canadian dollar. You have to look at the two of them together. You have to put them together and say, what is the combined effect of these interest rates and this level of the Canadian dollar on the Canadian economy? Both of them are going to have effects on people's willingness to spend and invest.

• 1840

We make a projection into the future and we say, what is the Canadian economy going to look like one to two years down the track and where is that economy going to be relative to the full capacity of this economy, relative to its ability to produce? On that basis, we make a decision. If it looks like the growth is going to press hard against capacity, potentially causing inflation, then we will raise interest rates and look to a higher dollar. If the economy is the reverse, then we will tend to ease monetary conditions.

On the relationship between interest rates in Canada and the United States, there is really no such thing in this world as independent interest rates. Everyone's interest rates are affected by what goes on in the rest of the world, of course, in our case particularly by what goes on in the United States. It's such a big country; it has such big financial markets.

So whatever happens in the U.S. is bound to have an influence on Canada as well, and we have to take that into account. There is still room, quite evidently, for Canadian interest rates to diverge from American interest rates. Sometimes they'll be lower and sometimes they'll be higher, depending on our situation.

Mr. Ken Epp: When you set Canada's interest rates lower than the American interest rates, which has happened, does that not cause capital to run out of this country?

Mr. Gordon Thiessen: Not necessarily. When you do that, as we did, it was when our economy was relatively weak and we had a very low inflation rate relative to the American inflation rate. In those circumstances interest rates lower than the U.S. would be what you might expect.

You can only have interest rates lower than those in the U.S. if there's an expectation that the Canadian dollar is going to go up. People will not happily accept lower interest rates in one country than in another unless they think they're going to be compensated for that by an appreciation in the exchange rate. So for some period of time we had an expectation that the Canadian dollar was going to rise because of our lower inflation rate. That's why we had lower interest rates than they did for a while.

Mr. Ken Epp: Okay. In layman's terms, how would you describe or explain the fact that while our dollar was falling the American dollar was going up? Our interest rates basically track the American rates, and usually they lag behind by a week or so or whatever. So why was that?

Canada is a very fine country. We have lots of resources. Certainly, we have assets as a country that far exceed our national debt, even now. Otherwise, why should people keep a willingness to lend to us? So it's a mystery why the Canadian dollar took such a plummet during last summer.

Mr. Gordon Thiessen: It was basically because the value of some of those assets was going down during the summer. The assets I'm referring to were assets in in the primary resource industries.

Over the course of the last 12 months, primary products that we export have fallen in price in international markets by 15%. It's a big deal. That's a lot. Because of that those industries were weakening and this was putting downward pressure on our dollar.

At the same time, while the Americans produce some of these products, they are much less important to them than they are to us, and they had a booming manufacturing sector. The U.S. economy was pressing the limits of its capacity. In those circumstances you expected their currency to rise, while ours was falling.

In addition to that, there was the Asian financial crisis, and then the crisis in Russia. It frightened a lot of international investors. So there was a rush for security, a rush for a safe haven. The U.S., with the biggest, strongest economy, with the best capital markets in the world, attracted a good deal of that flow. That was another reason why the U.S. dollar was strong. It was strong against all currencies at that time.

• 1845

Mr. Ken Epp: You say when you increase the interest rate, it strengthens the Canadian dollar. Why?

Mr. Gordon Thiessen: If our interest rates are higher than they were before, it means there is some attraction for people to hold funds in Canada. They can earn a higher rate of return. This will tend to strengthen the dollar until the difference—and I'm sorry I'm getting a little technical on you here—

Mr. Ken Epp: No, I want to know this.

Mr. Gordon Thiessen: It will strengthen the dollar until the difference between the two sets of interest rates is offset by the expectation of what's going to happen to our currency.

So if we raise interest rates, it will tend to raise the Canadian dollar up to the point where the expected change in the Canadian dollar is equal to the change in interest rates.

If, for example, we have interest rates that end up being 50 basis points or half a percentage point higher, it by and large means that in the markets people will expect the Canadian dollar to depreciate by about half a percent over the following year. Once this happens, everybody is sort of in an equilibrium. They say, yes, I get a higher return in Canada, but I think on balance the Canadian dollar would be a little weaker and I'm content.

Mr. Ken Epp: Do you expect our dollar to go back up to 75¢?

Mr. Gordon Thiessen: I don't know exactly where it's going to go. I think that's very difficult to say. But I must tell you that I think commodity prices are too low. I think there is too much pessimism in the world economy, and that's making commodity prices lower than they otherwise would be. There is an exaggerated sense of the importance of commodities to Canada. They are still very important, but I think that importance is exaggerated. If commodity prices do recover, as I think they will, and if there's a better appreciation of how they fit into the Canadian economy, I think that would lead you to believe that over time—I stress the term “over time” because I'm not making any short-run forecasts—the Canadian dollar would be stronger.

Mr. Ken Epp: Speaking of commodity prices, this affects the Canadian economy. But I believe around 80% of our exports are headed for the United States. Generally, I would think that when the American economy is strong, the demand for products there would be strong, including those imported from Canada, which would strengthen our dollar. Yet this didn't seem to happen. Why not?

Mr. Gordon Thiessen: Even those primary commodities that we sold to the United States went down in price. So even if our sales to the United States were reasonably well maintained, they were at prices that were substantially lower than before. So the returns we get to those exports have been reduced. The profits in those industries go down and the outlook for those industries is not as good as it was before. This is what was weighing on our currency.

Those commodity markets are very international, whether you're talking wheat, aluminium, copper, nickel, or whatever.

Mr. Ken Epp: Okay. My last question is undoubtedly the most difficult. At least I think everyone who hears it will think so. I have a constituent whom I have talked to a number of times. He is knowledgeable about banking and finances and things. He says it would be very wise for us to pool our resources with those of the United States. We live right next door to each other. Our boundaries are really quite open. We would do best if we were to peg our dollar to the American dollar instead of allowing it to float independently. He gave me an outline of how that could be done over a period. I think he suggested something like moving it arbitrarily 1% per month until they're basically equal.

What's wrong with this theory, if anything? Maybe my friend, Mr. Barlott, is right.

Mr. Gordon Thiessen: I think it's very interesting that Canada was the first country of any size to float its exchange rate after the Second World War. We did that in 1950. We did it because commodity prices were rising rapidly after World War II in the run-up to the Korean War. There was an inflow of funds and a demand for our products that was enormous.

• 1850

It was putting a lot of pressure on our pegged exchange rate. There was pressure to the point at which we weren't sure we could maintain that peg. If we were going to appreciate it, no one really knew what the right value was. So we floated.

We pegged the exchange rate again in 1962. Then along came the commodity price boom in the early 1970s. Once again, exactly the same thing happened to us, and we were confronted yet again with this incredible inflow of funds and pressure on our currency.

In those circumstances, once again, we decided to float. A floating exchange rate acts as a kind of shock absorber when you're hit with these kinds of major changes, whether they're rises in commodity prices or falls in commodity prices. It can be other sorts of shock, but those tend to be the big ones for us.

The other thing I would point out is that the problems in Asia, in virtually every case, came with a pegged exchange rate that could no longer be sustained. They got hit hard by some shocks. They couldn't sustain it. They tried, and then they got knocked off it. Then there was a crisis, as opposed to having your currency move up and down. I think there's a strong case, as long as we continue to be a major exporter of primary commodities, to have a flexible exchange rate.

Mr. Ken Epp: In other words, you're very strongly in favour of keeping the status quo and not going back again to a dollar that's pegged either to a gold standard or to the American currency?

Mr. Gordon Thiessen: Yes, I'm a strong supporter of a flexible exchange rate.

Mr. Ken Epp: Okay, that ends my intervention. Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Epp.

Governor, I have a question. In the past two years, there's no doubt in my mind that as a nation we've made great progress. We've eliminated the deficit. We're paying down the debt. We've seen strong economic growth. On the surface, it looks like things are really improving for our country.

However, I do have a concern on the issue of productivity. As we all know, our standard of living is very much tied to the productivity of our country. But in the past 20 years we have seen our productivity levels decline. Obviously we can't let that continue for very long.

I was just wondering whether you, being the Governor of the Bank of Canada, think the time has come in the history of our country to come up with a productivity covenant. By that I mean that all the decisions made by the Government of Canada and governments and the private sector throughout our country must take into consideration the impact those decisions have on productivity, if we really want to look after the long-term growth of our country and indeed sustain a standard of living that past and present generations have grown accustomed to.

Mr. Gordon Thiessen: I certainly agree, Mr. Chairman, that productivity is the source of rising living standards. There's just no question that during the 1960s, when we had substantial increases in productivity on an ongoing basis, it provided the basis for rising private sector incomes and also rising public sector revenues that governments could use to deal with social issues.

I must say that I don't think we typically put enough emphasis on productivity. I'm certainly attracted to the notion that when people propose new programs, there should be an onus on them to explain how it's going to contribute to better productivity. The only long-term basis for rising standards of living is growth and productivity.

The Chairman: Thank you, Governor.

Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you, Mr. Chairman. That was a good question.

Thank you, Governor. Again, like my colleagues, I welcome you to the committee. I'm pleased to have a chance to listen to your statement and ask a few questions.

I know you're a really sharp person, and I don't think you make many mistakes, Governor, but I think you have made a mistake. You said the United States had increased their interest rates three times. But I think you said that you had only matched them twice. Is that a slip, or are you going to match them again or—

• 1855

Mr. Gordon Thiessen: Well, they raised their interest rates, or lowered their interest rates rather, the last time—

Mr. Nelson Riis: Did I say raise? I meant lowered.

Mr. Gordon Thiessen: And I promptly followed you, yes. They lowered their interest rates for the last time just a few hours ago, and I really can't say more than that.

Mr. Nelson Riis: I thought maybe you'd slipped up there.

Mr. Gordon Thiessen: No.

Mr. Nelson Riis: Okay.

This week's The Economist refers to the weighted value of the Canadian dollar having fallen over the last year. What has been the impact of this on our current account, and what do you think is going to happen, say in the next year, in terms of that weighted dollar?

Mr. Gordon Thiessen: The decline in the dollar, as I was explaining, is to a large extent the result of the decline in primary commodity prices, and because primary commodity prices went down, even though our sales were reasonably well maintained, the value of those sales were lower. So that was not helpful to us on the current account of our balance of payments.

So while our manufacturing exports were going up and were helping our balance of payments, that was being offset by the fact that the value of our primary commodities, which account for 35%, sometimes 40% of our exports, was going down.

So the low dollar, which reflected those primary commodities, to some extent really just offset some of that negative effect. It certainly helped our manufacturing sector. But it doesn't lead you to immediately believe our current account is going to improve enormously.

Nonetheless, I must say I believe over time that current account is going to improve. I believe the kind of restructuring and the new investments that have gone on in Canadian industries should make us increasingly competitive. As I look forward, I believe that current account deficit is going to shrink. In fact, I believe at some point it will disappear. I can't imagine over long periods of time this economy would continue to run current account deficits.

Mr. Nelson Riis: What does that mean in terms of the trade-weighted value of the currency, then? I guess I'm asking about looking ahead.

Mr. Gordon Thiessen: Looking ahead—that will depend on a number of things. If our inflation rate stays low relative to others, that will probably create a tendency for that trade-weighted value to rise slightly. But probably the most important things will be that if commodity prices go up, that will tend to cause the trade-weighted value to rise; and secondly, if our productivity growth improves and is better than that of some of our trading partners, that will also cause it to rise.

Now, all of those are difficult things to predict. But if you see improvements in all those areas, then you should also see an improvement in our currency.

Mr. Nelson Riis: Governor, many people have referred to the Minister of Finance's projections as being quite far off, particularly in the last few days. Now, you mention it in your presentation, and I think for the past 18 or 19 months you've been using the target of 3% to 1% for inflation. I notice you've never hit over 3%, and we've often, about 40% of the time, been down under 1%.

It seems as if the projections aren't even close. If we're worried about 3%, why wouldn't you bring that down a little bit? Or are those projections a little bit skewed for some other purpose?

Mr. Gordon Thiessen: No, absolutely not.

We tend to focus on what we call a core rate of inflation, which is the CPI excluding food, energy, and the effect of indirect taxes, just because that adds a degree of volatility. If you look at that, since 1993 there have been very few occasions when we've been below, only a couple of months. But you're right that we are near the bottom of the range. We are in the range, but we are near the bottom.

I guess the point is we've been hit with this really major shock. With this Asian crisis, the impact on commodity prices really has had a tendency to push our inflation rate down and weaken our economy. So I think it's not surprising we would be in the bottom end of that range. We don't see that turning around very rapidly, so we say we expect to continue to be in the bottom of the range over the next year or so.

• 1900

Mr. Nelson Riis: Governor, you mentioned the strength of the American currency, and we all appreciate the dominance of that currency in global markets. Now we're seeing the integration in Europe towards the Euro, which presumably is going to be a very strong currency. This might be perhaps an impossible question for you to respond to, but if we have a strong American currency and we now have a currency gaining strength in terms of the Euro, what does that mean for a place like Canada and for our little currency? Some people, as I'm sure you're aware, are projecting that this might mean an integration with the American dollar in some form. What can you say towards that speculation?

Mr. Gordon Thiessen: I don't think that follows. Even if you have two major currencies, and indeed you could have a third if the Japanese economy started to improve, it doesn't mean there's no room for other currencies to float vis-à-vis these major currencies. I don't think it follows that because the Europeans have opted to go for a single currency it is somehow the way of the future for everyone else.

To some extent, the decision to go for a single currency in Europe was a political decision and not an economic one. It really had to do with wars in Europe. But it's also the case that these economies, especially the ones at the so-called core of Europe, are very similar. If you look at France, Germany, Austria, the Netherlands, and Belgium, these are very similar economies. They're all largely manufacturing economies. They don't have this issue we have where primary commodities are important to us and they're not so important to the U.S. So they don't have to deal with those kinds of shocks that we do. I think you can argue there's a case for them to have a single currency, but I don't think it follows that we should necessarily do the same thing.

Mr. Nelson Riis: I asked the Minister of Finance this question and I don't think he answered very thoroughly, so I'll ask you the same question in regard to the exposure of the Canadian banks to the derivative market and what this means. Forget what it means, because I guess we all appreciate what it means, but to what extent do you think our Canadian banks are exposed in this particular sector?

Mr. Gordon Thiessen: I think you have to be very careful how you use the term “exposed”. It is certainly the case that they have a book of derivatives, but in most cases the way they use it is to try to hedge to protect other risks they have. So if, for example, you take on an exposure to say the oil industry, and that exposure is going to depend on what happens to the price of oil, then you may well want to reduce the risk of the exposure by hedging yourself in the forward oil market. So if the price of oil tumbles, you will be protected in the exposure of those loans you've made to the oil industry. That's a perfectly legitimate thing to do. If you just look at the bank's exposure, you say it has an exposure to a forward oil contract, but it's an exposure that offsets a loan exposure somewhere else.

So you have to be very careful in how you look at these things.

Mr. Nelson Riis: I don't want to misinterpret what you're saying, Governor, but are you suggesting that having an increased involvement in the derivatives market would put the banks in a less risky situation?

Mr. Gordon Thiessen: It could. If they do this well, derivatives can be very helpful, because it allows you to—

Mr. Nelson Riis: They can go bad so quickly.

Mr. Gordon Thiessen: Of course, they can, as loans can go bad.

Mr. Nelson Riis: But not as quickly as derivatives.

Mr. Gordon Thiessen: Not necessarily. It depends. But it is true that these markets are relatively new. They are not as well-developed as traditional markets are, and there are occasionally people who do speculate in these markets. You can speculate in them very easily because you don't have to put up a lot of money. So you can lose a lot of money. But by and large, this notion that you can choose to keep the risks you feel comfortable with and get rid of the others through the derivative market is a great step forward. It really is. So these markets used well can be very effective.

My colleague, Mr. Noël, knows hugely more about derivative markets than I do.

• 1905

Mr. Tim Noël (Deputy Governor, Bank of Canada): These are very complicated issues and a lot of mathematics go into it, so it is very necessary for the institutions that play in these markets to understand these things very well, to have good risk management models to deal with it, and to have good reporting relationships to make sure the risks they are trying to counter are indeed the ones that need to be countered. So it's not to say that these aren't with risk, because if they're used by people who don't know what they're doing, there are some big risks, but I think our big banks are reasonably well-managed in that regard.

Mr. Nelson Riis: I hope you're right, Mr. Noël. I remember talking to someone in the derivative sector of one of the big banks. I was asking how much money he made, and he said he makes an incredible amount of money, but he doesn't know every day whether he's going to have a job by the end of it because of the volatility of that particular sector. Anyway, I appreciate it.

Thank you very much, Mr. Chairman.

The Chairman: Thank you. Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you.

I'd like to comment on Mr. Riis' comments. We don't know whether we're going to have a job in our business either, but we don't make a whole lot of money, so it doesn't sound like such a bad trade-off. But we're all right for three or four years in any case.

Thank you very much, Governor and Mr. Noël, for being with us today.

I have a couple of questions. First, you were talking about some of the issues relative to restructuring our private sector to make it more productive and internationally competitive. Has the decline in our productivity over the past 20 or 30 years been very closely related, in your opinion, to the secular decline in the Canadian dollar?

Mr. Gordon Thiessen: No, I don't think so. I think the decline in the Canadian dollar has been more a reflection of the lack of productivity growth. I think it goes the other way around.

Mr. Scott Brison: That's actually what I was suggesting, that the Canadian dollar was reflecting the secular decline.

Mr. Gordon Thiessen: There are some people who believe it's the reverse, of course.

Mr. Scott Brison: Yes. Given that, there were some issues we've addressed, such as free trade, the deregulation of financial services and transportation, those kinds of issues—it certainly helped.

Would you suggest that comparatively high taxes in Canada are also an impediment that should be addressed to improve productivity, and also things like interprovincial trade barriers? Are these the types of structural impediments to productivity that you see?

Mr. Gordon Thiessen: Interprovincial trade barriers I think certainly are. That's an easy one. I think you need to look hard at taxes. I think, just as Mr. Bevilacqua has said, you want to look at everything and ask how is it going to contribute to productivity. Is it or isn't it? The way we've set things up, is it likely to impede productivity growth or contribute to it? I like that notion of putting the onus on people to explain whether it will or will not.

Mr. Scott Brison: This summer, when the dollar seemed to be in free fall for a period, there was a lot of pressure on the Bank of Canada to intervene, and you had indicated at one point—and I'm not exactly sure what you said—that the Bank of Canada was now prepared to intervene at that juncture. You effectively tipped your hand to the markets relative to that, or at least that was how it was played in publications.

I heard Mr. Riis refer to The Economist, and I know there was an article in The Economist about this, effectively indicating that somehow by tipping your hand the Bank of Canada had committed an almost unprecedented act of economic naïveté for central bankers. That's not really any more harsh than what The Economist was saying— I'd like you to comment on that and what you said, how that was interpreted or misinterpreted, and whether or not you would do things differently if given the opportunity.

Mr. Gordon Thiessen: You won't be surprised that I certainly feel we were badly misinterpreted. I didn't say anything of that sort. What we said in this report last May was that if no surprises came along, no major shocks, it looked to us that monetary conditions were about right. That's what we said—monetary conditions, the combined effect of interest rates, and the exchange rates. We didn't say we weren't prepared to defend the exchange rate. We didn't say we wouldn't change interest rates. We didn't say what we'd do if a shock came along.

• 1910

Not very long after that the situation in Japan deteriorated very sharply. That economy, which already looked like it was sliding into recession, slid very much further. Not long after that, we found out that in the first quarter the Japanese economy shrank at a rate of 5%.

At that point, the Japanese government also got into political difficulty, and that raised questions as to whether they were going to be able to cope with their macroeconomic problems or their banking problems. Indeed, there was an election in Japan in either late June or early July. As a result of that, primary commodity prices, which had been starting to tick up in the early spring in Canada, plummeted. At that point, all the commodity-related currencies, like the Canadian dollar, the Australian dollar, the New Zealand dollar, and indeed the Russian ruble, got hit. The Russian ruble got hit hardest of all, until finally it created a crisis in August. That was a major shock, and in those circumstances we had to react to that.

I think that's a perfectly legitimate thing for central banks to have to do, but it did suggest that conditions were different and that what we had said we might do if there weren't going to be any major shocks was certainly off the table. So I believe we were really badly misinterpreted there.

Mr. Scott Brison: Well, you can have some empathy for politicians sometimes, then, if that's the case.

The intervention you made in August was a massive intervention in the currency market, and it did have an impact in the short term, but I guess the sudden turnaround, from your perspective, was based on what had happened in Japan and seeing a crisis on— In your opinion, the intervention was effective at that point.

Mr. Gordon Thiessen: It certainly was. The real problem was that we did that in early August. It seemed to stabilize the currency market, and then the Russians depreciated their currency and declared a unilateral moratorium on debt service. This resounded around international financial markets, and we got swept away. So our attempt to stabilize the currency with intervention in early August basically got drowned in this wave of panic that came across markets.

Mr. Scott Brison: I have a couple of questions that have to do with global issues, and I think the job you're doing requires, in many ways, more of a global perspective than perhaps it ever has in the past.

I would appreciate your feedback on the Jeffrey Sachs proposal or some of the suggestions he has made relative to a global central bank and some of what he's positing on that.

The other suggestion I've read in an article that someone had written recently was that there may be potential after a period of time of observing the success or failure of EMU— I would suggest that this is a long way off, but I'd be interested in hearing your feedback. It sounds a little esoteric, but I think it's important to at least think about a global currency. In fact, currently we do get into problems sometimes when governments operate monetary policies inconsistent with their fiscal policies. You indicated that may have led to the problems in Asia, and so on, and this may be one thing to look at in the long term.

The last point on which I'd appreciate your feedback—and I'll give them all to you now so that you can do them in order—is there's been some suggestion of a Tobin tax to try to discourage currency speculation. I know the UN has referred to it as a Luddite measure, and some opponents of it suggest that it would reduce currency speculation, and in doing so it may reduce some of the positive currency speculation, in fact eliminating the ability for countries to operate fiscal policies inconsistent with their monetary policies, and so on. I'd appreciate your feedback on the Tobin tax, because I think it is going to be something that will be debated in Parliament in the upcoming months, and people should have an understanding of both the pros and cons of it.

Thank you.

• 1915

Mr. Gordon Thiessen: With respect to a world central bank, we are a very long way away from it, and I'm not sure how it would work. Even in Europe there is a real issue about the relationship of the European Central Bank to the European Parliament, the national parliaments, and this is not a comfortable situation.

If, let's say, in Germany and France you have a rapidly expanding demand, and that requires reasonably high interest rates and a strong currency, what's going to happen in the peripheral country when you don't have a national fiscal policy, a national parliament? It's not easy to see how that would work. I can't see that there is enough of a pay-off that I would rush down that track.

If you have a world central bank, you'd obviously have to have a global currency. The two would have to go together. It doesn't make any sense otherwise.

Mr. Scott Brison: It would reduce the ability for sovereign governments to participate on the monetary policy side, but they would still have all their fiscal levers. Arguably, there have been countries that have even tried to devalue their way to prosperity by using monetary policies in inappropriate ways.

Right now it's long term. You don't see anything positive from the perspective that forces governments to be more rigorous in their fiscal policies?

Mr. Gordon Thiessen: Yes. Any kind of fixed exchange rate can do that. I'd like to believe that over the course of the last 20 years we've learned rather a lot. And we've learned that monetary policies that are too easy or fiscal policies that neglect the accumulation of debt can both get you into trouble. You want to very careful about both of those.

You see that around the world now. It doesn't matter what sort of government is in office. In the main industrial countries everybody shares a kind of common belief in the importance of those two things, because we've seen through the last 20 years how both of those things can get you into difficulty.

So I don't think you need a world central bank or a global currency to get you that discipline these days. And it doesn't allow you the kinds of flexibility that I was just talking about of our having to deal with shocks to commodity prices, up or down. So I think that kind of flexibility can be useful. If you are going to have it, you have to follow very disciplined, very clear monetary and fiscal policies, because if you don't, you can get yourself into some difficulties.

On the Tobin tax, I don't think it's a good idea. Speculation can be very helpful and it can be disruptive. Under most circumstances it is helpful. If you take the case in Canada where during the winter we tend to import a lot of foodstuffs, there is a tendency, for example, for our trade to potentially shift into a deficit just for a period in the wintertime.

That normally doesn't affect our currency a great deal, because even though we're running a deficit on trade and that would tend to depress our currency, there is a feeling among people that it's a temporary thing, the Canadian dollar will recover. So they speculate on the Canadian dollar, and they push it up, so it's relatively constant through that piece.

You have a whole lot of speculators that get rid of the anomalies. The Canadian dollar's a little high relative to the Australian dollar; for no good reason they will arbitrage between the two. All that can make markets work very smoothly. That sort of speculation is basically done with very narrow profit margins. If you were to impose a Tobin tax on that, you would discourage all that useful speculation.

The disruptive speculation usually assumes that something dramatic is going to happen. Your currency is suddenly going to fall or it's going to go up by large amounts. Currency speculators of that sort expect to make very high rates of return. They're not going to be dissuaded by a Tobin tax. A Tobin tax discourages useful speculation without discouraging potentially harmful speculation.

• 1920

Mr. Tim Noël: I would like to just add that speculation also adds to the debt and liquidity of markets, which is to the benefit of all the people who are on the real side of the economy. Plus, they allow people to lay off risks that speculators are willing to take, therefore allowing people who are in the normal business of not taking risks to lay off those risks to someone else. So they do play a lot of very good, useful roles in the economy.

The Chairman: Yes, go ahead.

Mr. Scott Brison: The Tobin tax idea was first introduced about 20 years ago. It pops up every now and then, particularly in times when there is a crisis. Of course, since the Asia crisis it's been discussed quite a bit.

I read one report that suggested that speculators may in fact have, in what seems to be almost a perverse way, helped even with the Asia crisis in preventing something that would have been far worse down the road if in fact governments— Again, pointing to the inconsistency of fiscal and monetary policies and an unsustainable monetary policy, they forced the sovereign nations' hands in a lot of those cases to do what they should have done anyway. Do you think that's a reasonable statement?

Mr. Gordon Thiessen: If those currencies had been floating exchange rates, I think I'd agreed with you. What would have happened in those circumstances, given the problems they had in their policies, is those exchange rates would have floated down. They would have raised the issue about whether the fiscal and monetary policies were correct ones or not.

Because those exchange rates were fixed in Thailand, South Korea, Malaysia and the Philippines, what happened in this case was the speculation raised the pressure until there was a build-up of steam. When it finally broke, it created a major crisis. In fixed exchange rates speculation of that sort can be disruptive. With floating exchange rates your point is better taken.

The Chairman: Thank you, Mr. Brison.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman.

I see that before Mr. Brison asked you a question, he was looking on this side. I assure you that Brian Tobin is not on this side nor is there any Tobin tax on this side. So if you want to have a discussion in the House, it would be by yourself or with anybody else willing to have the discussion.

Mr. Scott Brison: The Tobin tax is not named after Brian Tobin.

Mr. Gary Pillitteri: I do understand that. I just thought he'd take that literally.

Thank you very much, Mr. Chairman. Good to see you again, Mr. Thiessen.

I want to ask you a couple of questions. Some 20 years ago or more, Canada was more based on the commodity base being over 60%. Yet almost 11.5% of the total investment in Canada was foreign investment. We have turned to an economy that is about 30% commodity-based, and yet we have attracted only about 4.5% foreign investment into Canada. The two actually should be in reverse. Actually our performance as a country— rather than just being in natural resources, being in manufacturing would be of more value to the Canadian dollar. That's one part of the question. Do you see any relation to it?

There's a tendency for money speculators to want to increase the foreign content rule from 20% to 30%. That would mean more capital flowing out of Canada that would also be putting pressure on the Canadian dollar.

What do you have to answer to that three-part question?

Mr. Gordon Thiessen: With respect to foreign investment, one of the things that attracted foreign investment to the primary commodities area is that frequently you needed large, massive amounts of investment. So if you are going to open up mines in northern Ontario, if you're going to develop the oil wells of Alberta, you need a lot of money. Frequently, that's where we attracted a lot of foreign investment. There were big investments to make in mines, machinery, and so on. That attracted foreign investment because it was lumpy, and it was very difficult for us, as a country, to provide that investment by ourselves.

• 1925

So it doesn't surprise me that as we move from a commodity-based economy to increasingly a manufacturing-based economy, we might become less reliant on direct foreign investment.

But I must say I don't have a strong view about that. I think if foreigners are encouraged to invest in Canada, that's a good thing. If they invest in our manufacturing sector, that's a good thing. That's because typically that investment brings with it a lot of know-how and entrepreneurship, and I think we should be happy to accept it.

So my only comment is that I think primary commodities have typically tended to attract more foreign investment just because it's so lumpy. I don't have more of an explanation than that on that question of yours.

Have I completely understood your question? Perhaps I haven't.

Mr. Gary Pillitteri: Well, possibly you have not fully understood my question. As we are more in the manufacturing sector today, we attract comparatively little foreign investment. Actually, their investment in Canada would be more secure because it's manufacturing rather than commodity-based.

The question I'm asking should be reversed. Actually, the Canadian dollar should have more value than what it has today.

Mr. Gordon Thiessen: But you see, here's the thing about those commodities. If you went in and developed the nickel mines in Sudbury, you could make a very large profit on that investment. In developing that ore body and bringing it to market, there's a big potential rate of return. So that tended to attract foreigners. Whereas if you're coming into the manufacturing sector, it's likely to be a smaller investment. It may not yield the big potential returns that you can get from opening up a nickel mine, an aluminum smelter in Kitimat, or something like that.

Mr. Gary Pillitteri: How do you feel about the pressure being put on for a foreign content of more than 20% in RRSPs?

Mr. Gordon Thiessen: I don't know exactly when you should look at that, but I must say that over some long period of time, as the Canadian population ages, we are going to become bigger savers than we are now. I can imagine a situation where we will run persistent current account surpluses and we will be net lenders to the rest of the world. In those circumstances, I think you will want to allow Canadians to have a wider range of investment opportunities.

That's in the future. Exactly when you take account of that, I don't know. You may want to wait until you see us move closer into a current account surplus than we are now. But when we do move there—I think we will move there—then I think one will wish to ease some of the restrictions.

Mr. Gary Pillitteri: This is the last part. In the last few years we've been looking at a 65¢ dollar. As business people, we tend to have a tendency of starting to feel comfortable with that kind of a price being on it and being very competitive. Actually, this is under-competitive. Does our being so comfortable with a 65¢ dollar down the road pose a question? As Canadian business people, we're very competitive. We could, without a doubt, take our place in the world. But do you think that poses a threat in the future?

Mr. Gordon Thiessen: I have to admit to you that it does worry me a bit. Right now, our currency is weak to an important extent because of this weakness in commodity prices and the weakness in our primary industries right now.

But it does mean that if you're not in one of those industries, then the currency is very, very cheap. It's undervalued and may not be providing the same incentives to become more productive and competitive in our manufacturing sector than one might like. It would be really unfortunate that with what I think is an undervalued currency, our manufacturing sector would become just a little too comfortable and not continually look for the productivity gains, the competitiveness gains, that we really need if we're going to have our standard of living go up over time.

• 1930

So I have to admit to you that I am a little concerned about that, and I certainly hope our Canadian business sector understands that this is an undervalued currency and they shouldn't count on it being this weak for a long time.

Mr. Gary Pillitteri: Mr. Thiessen, as you say, with the monetary policies, you're looking into your crystal ball. Being a business man and all, one might as well try to benefit from it. When do you see interest rates going up in Canada, if at all, and I hope not?

Mr. Gordon Thiessen: I think you would see it if we had a booming economy that was pressing hard against the limits of our capacity and tending to push our inflation rate through the top of our 3% band.

The Chairman: Did that tip help you at all?

Mrs. Redman?

Mrs. Karen Redman: Thank you, Mr. Chairman.

I would like to thank you. I always learn a lot when you come to see us. I've never heard the term “lumpy investments” before, so that's a tidbit I'll take away with me tonight.

On page 19 in the report, you make the point that the bank had to help financial markets focus on economic fundamentals. The quote I'm referring to is:

—the Bank has had to place particular emphasis on calming financial markets, so that participants could focus on economic fundamentals—

It begs the question, are the traders that are worried about the volatility of the market sophisticated enough to know that Canada is not a resource-based economy and that the fiscal situation has improved considerably?

Mr. Gordon Thiessen: I think so, on the fiscal side. That story is certainly pretty well known.

I must say, I think there is still a tendency to exaggerate the commodity base of the Canadian economy. These are not just traders, because traders have a very temporary effect on markets. People who have longer-term effects on markets are investors. They're the ones who decide whether they want to hold assets in Canadian dollars or in some other form. I think there is a tendency to exaggerate, to see Canada as it was 20 years ago, rather than as it is now. It's very important for all of us to constantly remind people that the fastest-growing sector of our exports is non-automobile manufactured products, and not everybody appreciates that.

Mrs. Karen Redman: Thank you.

In chart 13, I'm looking at the comparison of the Canadian dollar. The bottom line says “Canadian dollar index vis-à-vis G-9 currencies”, which I take it is the G-10 with the United States out of it. It continues to plummet, and my question is why?

Mr. Gordon Thiessen: It is because the U.S. dollar has very recently been quite weak, particularly against the Japanese yen. There has been quite a turnaround. The yen, which was weak for such a long period of time, has sort of snapped back a little in this recent period. That very sharp decline reflects the fact that as we were keeping pace with the U.S. dollar, it was falling against the yen, and to some extent against the Deutschmark, and we were going down with it.

If that chart were updated, you would see a little bit of a turnaround since then, but that's what that reflects—recovery in the Japanese yen.

Mrs. Karen Redman: I have one final question. You have actually touched on this issue in a couple of other answers. If we assume that we had a fixed exchange rate, how would our economy have adjusted to the East Asian crisis, and how would we have adjusted to the lower commodity prices?

Mr. Gordon Thiessen: When you have a decline in commodity prices such as we've had, that is going to have a big impact on incomes in Canada, basically our wealth.

It's like any family. If all of a sudden someone says the business you own is now worth 15% less because the prices you're going to be able to get from now to as far as we can see in the future are going to be 15% less, you're going to find the value of that business has basically gone down by 15%.

• 1935

That's what happens to us as a nation when commodity prices go down that way. It means as a country we are not as well off as we were before, and in those circumstances we're going to have downward pressure on our currency. We're not going to be as well off as we were before. And that's going to hit us as a country.

If we try to fix our exchange rate and keep it at a given level, that impact on our wealth, our income, and our standard of living is still going to happen. You can't make it go away. So you will see it in terms of a weaker economy. You will see it in terms of downward pressure on prices, wages, and salaries. That has to occur until those things go down to the point where they reflect the fact that we're now not as well off as we were before. In that process we're likely to have higher interest rates to try to keep that dollar up there.

So it can be a rather uncomfortable and difficult process. You can see, for example, the difficulties some countries such as Brazil are going through these days in trying to maintain the pegged exchange rate through this period.

The effect on your economy of declining commodity prices is there in both cases, so it's really a question of how to adjust to it. Do you adjust to it through falling prices, wages, and employment, or do you do it through a weaker exchange rate?

Mrs. Karen Redman: Thank you very much.

The Chairman: Thank you, Ms. Redman.

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman and thank you, Governor, for your insights. I think others have said, and I will repeat it, that it's always an education to hear your explanations of the dynamics we're facing. They are certainly complex.

One of the questioners talked about pegging the dollar, and you indicated that back in 1950 we were the first country to unpeg the dollar since the war. I looked at the charts and found that in 1950 the dollar immediately dropped to about 95¢, inflation started to rise, and we entered into a recession. That was kind of interesting. I don't know whether it means anything.

But I started looking a little further in the chart and I saw that in 1957 and the early part of 1958 we had another recession, and in late 1969 and early 1970 there was another. There was a small recession in 1980, and then from late 1981 through all of 1982 there was another Canadian recession, with another one from mid-1990 to mid-1991.

I also looked at the American experience and found some parallels. They had recessions in 1953, 1954, 1958, 1960, 1970, 1974, 1982, and 1990. They've had more recessions; the frequency of recessions over the last 50 years is greater. But the one thing they have in common is the recessions occurred relatively close to the end of a decade.

Then I looked at the inflation performance just prior to entering into a recession, and as one might expect, inflation was rising.

Now, here's the question. I think you're anticipating me, aren't you? Over the last five decades, over the last 50 years, there has been a clear pattern not only in Canada but in the United States that indicates the cycles still do exist. If inflation is the trigger, as you describe the relative utilization of capacity or overcapacity utilization, your assumption on inflation right now at the lower half of the 1% to 3% range says to me that despite five decades of experience and trend lines and cycles, you're not prepared to hedge against the possibility of entering a recession going into the new millennium.

• 1940

I wonder whether or not you have any thought about these cycles and whether you feel the dynamics of economics and monetary policy management have really changed. I'm asking this in the context of the words you've used here—volatility, nervousness, instability, global uncertainty, etc. Those things have histories as well. There's the line that if you don't know your history, you're doomed to repeat it. Where are we in terms of following cycles?

Mr. Gordon Thiessen: I don't think the business cycle has disappeared, but one of the interesting things, in my recollection of all those cycles, is that the ones in the early 1980s and again in the early 1990s were the worst we'd had in the post-war period. They were both deeper and tended to last a bit longer than some of the others. They were also preceded by the highest inflation. We had some inflationary spikes around the time of the Korean War, but they were very brief and weren't as persistent as the inflation rate increases through the 1970s and then again in the 1980s.

I think the severity of the recession is very closely linked to the severity of the inflation beforehand. As that inflation rate goes up, people speculate more and more. They try to protect themselves against inflation. They speculate in the property market. They speculate on any hedge against inflation, on anything from precious metals to paintings or whatever. You end up with a lot of debt accumulated during those periods. When things finally go wrong, you're left with that very heavy burden of debt and you end up with a much worse recession because those people with those heavy debts in the recessionary period are in grave difficulty, as you can recall was the case in the property market in the early 1990s.

I think there's no question that the higher the inflation is, the worse the recession is. But the point I'd like to make is if we manage to keep our inflation rate relatively low, we will still have fluctuations, but we shouldn't have those dramatic fluctuations.

On whether there is something significant about the timing in the decade, I don't think so. I think that's pure chance. If we were building up to another inflationary head of steam right now, I would say you'd have real cause to worry that we were going to repeat what we did in early 1990 and early 1980. I don't see that right now. I can't tell you we're going to avoid recessions altogether, but we sure aren't going to have the kind of recession we had in 1991 or 1981.

Mr. Paul Szabo: What you've said is exactly what this chart shows, with elevating inflation leading into a recession and the rising interest rates. In not one case can I see in any part of Canada's history where we were below 3% inflation and heading into a recession. So historic numbers would tend to support that.

Having said that, we are in global uncertainty and things happen and we're part of it. We can't extract ourselves from being part of the global influences. How would you assess Canada's relative resilience to a downturn compared to the average recession we've had over the past 50 years, in terms of its relative resilience and preparedness?

Mr. Gordon Thiessen: I believe we are in better shape than we have been since the 1960s, because through most of the 1970s and 1980s not only did we have relatively high inflation rates, but we also had ongoing fiscal deficits and accumulation of debt. Those things made us far more vulnerable when bad news came along.

• 1945

When the world economy is in some difficulty, you look around the world as an investor and ask where you want to be and where you don't want to be. You will recall, I'm sure, 1995 and the Mexican currency crisis, when a lot of investors, both Canadians and foreigners, looked around and asked where they wanted to be. Many of them said they didn't want to be in Canadian dollars because we had a fiscal situation that didn't look to be under control. So I really believe we are better placed now than we were before.

The other thing that gives me a lot of comfort is the business sector in Canada. It seems to be just so much more closely oriented to the fact that we're in a global economy and need to be competitive globally. We have to be able to sell into international markets. Certainly the business people I talk to seem far more oriented that way than they've been for many years, and I take a lot of comfort from that.

Mr. Paul Szabo: Until the terrible recession of the early 1980s, the Canada 90-day T-bill rate and the consumer price index pretty well tracked; the curves were very close and there was a very small spread in terms of the rate. But since that terrible recession where we had a lot of ripple effect or domino effect, the spread between the T-bill rate and the consumer price index has been widening. It seems to have flattened out, at least in terms of the rate of divergence. But today the T-bill rate is about 50% higher than the consumer price index. It's 4.2% for the CPI and roughly 6.4% for the T-bill rate.

What has really caused the divergence of those? Is it an indication that something has really fundamentally changed as a result of that recession in the 1980s?

Mr. Gordon Thiessen: Currently, the treasury bill rate is just under 5% and the inflation rate is roughly 1.5%.

Particularly going back to the beginning of the 1980s, I think a bit of a shock occurred. The inflation risk was higher than we'd seen it before and the fiscal situation looked to be under less control than before. In both cases, I think what we call “risk premiums” were starting to build up in our interest rates. Investors were just feeling sufficiently uncomfortable about the future that they required higher interest rates to feel comfortable, because they were worried something nasty was going to happen.

If you go back to the earlier periods, particularly in the early 1970s, interest rates were relatively low compared to the CPI. In fact, there were some times when we had negative real interest rates. If you put your money into a T-bill you would be worse off at the end of the year than you were at the beginning of the year. So in the early period there was a sense that inflation couldn't stay that high and no one was going to allow inflation to eat up the value of people's savings that way. By the time we got to the 1980s there was a real sense that maybe inflation was going to eat away our savings and maybe something nasty was going to happen to our public debt. So the differentials widened out. I think they're narrowing back in now, but they're never going to go negative again the way they were in the 1970s. That just was not a viable situation. You can't have your savers worse off at the end of the year than they were at the beginning of the year.

Mr. Paul Szabo: It's depressing. It looks like your projections are poised to throw the charts out of their symmetry. I hope you're right, and I thank you for those thoughtful explanations.

The Chairman: Thank you, Mr. Szabo.

Governor, I just want to comment on an issue Mr. Pillitteri brought up, as well as Minister Martin in his economic and fiscal update, that the world has an outdated view of Canada. But like most statements, that's where they end. What's the solution to that problem? Whose responsibility do you think it is to change that view of Canada abroad? In light of the fact that we do live in a global market, do you feel more resources should be dedicated towards changing that world view of Canada?

• 1950

Mr. Gordon Thiessen: That's a good question. I think it's certainly incumbent on all of us, including those of us at the bank, to make this point more strongly perhaps than we have made it. Given that I've got colleagues right now who are heading to New York and London to talk about this monetary policy report as I'm talking to you today, I think I need to underline to them that they should make this point. I think we do have a responsibility to make that clearer than it is right now.

The Chairman: I would also add, quite frankly, that even domestically, if you were to ask Canadians about their view of the country, they probably have an outdated view of the country as well. We can't let this go on forever because of the many lost opportunities that result from not having a proper view of our own nation out there.

Mr. Gordon Thiessen: I agree with that, although I would never want to leave the impression that I think it's a terrible thing that we still have important primary commodity industries. You can't come from Saskatchewan, which is where I'm from, without believing those primary industries are still important.

The Chairman: Mr. Riis will be followed by Mr. Epp. Go ahead, Ken.

Mr. Ken Epp: I'm curious about your projections on inflation. You don't include tax, yet it's quite clear, at least from data we have from various studies, that for the average family, the after-tax income has gone down substantially in real terms because of increased taxes at all levels. So my question is, why do you not include taxes when you are talking about CPI in terms of setting your targets?

Mr. Gordon Thiessen: The only taxes we take out are sales taxes. You see, if you've got an increase or a decrease, you will see in our chart on the CPI that there's a point at which the CPI, which doesn't exclude taxes, goes down to zero in 1994. This is chart 1 on page 6. That's essentially because of the reduction in cigarette and tobacco taxes.

The point is that you can get a very misleading impression about the basic trend of inflation. Taxes can go up and down, but really what determines inflation is the pressure of spending and our capacity to produce. So you want to take out those adjustments of taxes to see what the trend looks like. So we only take sales taxes and excise taxes out of the CPI. Income taxes are not included in the CPI.

Mr. Ken Epp: But we've been told over and over in this committee, as we've been listening to people who are looking at the next budget coming up, that they have a lot of concern about payroll taxes and taxes generally that are causing the brain drain in this country and so on. There's little doubt in my mind that taxes have a large effect on our productivity, which is the issue you're talking about. Our dollar would be stronger if we had a better level of economic activity in the country. It seems to me that inflation per se, including the tax load on Canadians, would be a better measure.

Mr. Gordon Thiessen: I don't think that's something monetary policy can affect, though. Monetary policy can affect the level of demand in the economy compared to our capacity to produce. Monetary policy can say to Canadians that we can keep the trend of inflation that reflects demand relative to capacity low and stable over time. If we do that, we're going to give you an economy that's less volatile and more predictable. I don't see that monetary policy could possibly operate on anything that had to do with income taxes. That's just outside our ability to do anything about. So including that somehow in the consumer price index strikes me as not being a good idea.

• 1955

Mr. Ken Epp: Maybe I'm wrong here, and I yield to your greater wisdom easily. If we were to take an extreme case, let's say that taxes were to increase 10% per year every year from now on, you'd be compelled to include them, wouldn't you?

Mr. Gordon Thiessen: Not if they were income taxes, no, because they would not affect the price level. You see, what we're trying to do is get rid of variations in the price level that make it difficult for people to make decisions about savings and investment.

So if income taxes were going up every year, that would certainly have an effect on people's willingness to spend, to save, and so on, but it wouldn't have a direct effect on the price level. To the extent that changes in income tax affect the total amount of demand spending in the economy, we would certainly take that into account, but not a direct impact on the consumer price index. I don't know if I'm clear there.

Mr. Ken Epp: I'll take your word for it, although I'm not convinced. It seems to me if you increase income taxes 10% every year, after about two or three years Canadian businesses are going to have to charge an awful lot more for their product in order to stay afloat or they will go bankrupt. They will have to pay that much more to their employees; they will have to pay that much more for input costs because they will reflect the increased income taxes from those businesses and their employees. And your price would be driven up simply by taxes. But you're saying that taxes don't affect prices.

Mr. Gordon Thiessen: Not directly. Changes in taxes may affect the pressure on demand coming from the government, but it's not going to have a direct impact on prices. The fact that individual employees have to pay more income tax doesn't automatically change the price the employer charges for anything.

So if you're an employer and you're paying your staff a certain salary and the government raises their income tax, it's those people who have to pay the tax, not the employer. So it's not going to affect the employer's prices directly.

Mr. Ken Epp: If I'm in the software business and I want to keep this guy and prevent him from going to the United States, I have no choice. Or I can go out of business, which now reduces the supply, which will also increase the prices. Maybe I just don't understand. Maybe we'll have to talk about it some other time.

Nelson, you do it.

Mr. Nelson Riis: I'm going to change the topic, in a sense. I have two questions, Mr. Thiessen, but one is a follow-up on my friend Mr. Szabo's questioning.

You gave a very positive and optimistic scenario in terms of response, and I was reminded of John Kenneth Galbraith's comments maybe two months ago. He actually went out and predicted a depression was coming. Can you comment on why somebody like that would say something like that and why you would say something like you say?

Mr. Gordon Thiessen: I don't know. I must say, I doubt that Professor Galbraith follows the economy all that closely any more. So I don't know what would cause him to do that.

I think to have that kind of scenario you have an awful lot of things that have to go very badly wrong, and I don't think the likelihood of that is very high. You really do have to have a lot of nasty things happen at once.

Mr. Nelson Riis: I was surprised when he actually said that.

My last question, Mr. Chairman, is again a little bit off the general theme, but earlier today I happened to be meeting with Dr. Suzuki, who is making a presentation at Carleton University tonight. He asked me if I was going to be joining him to hear what he had to say and I told him, no, I was coming here and would be listening to you. He asked if I'd have a chance to ask you questions, and I said I hoped so. He asked me if I'd ask one for him.

So I guess this is permitted, although I don't know. We normally don't ask questions on behalf of people. That's fine, Mr. Chairman, presumably?

The Chairman: The Reform Party does it all the time.

• 2000

Mr. Ken Epp: It's our policy.

Mr. Nelson Riis: Governor Thiessen, Dr. Suzuki asked me to raise this kind of general question. He mentioned that the words “economy” and “ecology” share the “eco”, which is home. He said coming from the scientific perspective that he comes from, in his judgment growth doesn't occur forever in life. That is self-evident, I suspect. He said when he listens to central bankers and others—I'm not picking on you, particularly—who talk about the economy— as in your report, you spend a lot of time talking about the growth and expansion of the economy and so on, which is again usual. He asked, does he actually believe the Canadian economy, and economies generally, can actually continue growing forever, or is there a limit beyond which we can't grow economically?

Mr. Gordon Thiessen: I think that all depends on productivity. If we managed to constantly increase productivity, in other words, to produce more with the same amount of resources, then yes, we can grow forever.

Mr. Nelson Riis: So perpetual growth forever is possible?

Mr. Gordon Thiessen: Yes, it is. But productivity has to increase.

Mr. Nelson Riis: That's the assumption that's built into that theory.

Mr. Gordon Thiessen: You have increased efficiency. We have had almost—

Mr. Nelson Riis: That's a question I suspect he would pose. He wouldn't accept the answer, as I am, obviously. He'd be getting really excited—

Mr. Gordon Thiessen: He would worry that we'd run out of resources.

Mr. Nelson Riis: Well, he'd be worried about running out of resources, obviously, but also about whether you can maintain productivity ad infinitum. I guess he would question that.

Mr. Gordon Thiessen: I think that is a question. I think the remarkable thing, as you look at this century, is the extent to which productivity has grown. Now, there have been periods like the Depression when it didn't, but through much of the rest of the time productivity in the industrial countries has grown pretty persistently.

The other thing is there are a lot of underdeveloped countries where the potential for productivity growth is enormous. If that happens, that in fact can make all the rest of us better off because it means there are likely to be more products coming from there at better prices than before. I think the potential for productivity to rise and for the world generally to become a wealthier place is certainly there. That is particularly true in the developing countries.

Mr. Nelson Riis: Governor Thiessen, I'm not a philosopher or a very good historian, but when you think of other economies that have developed on a large regional scale, not many of them have lasted forever for some reason—

Mr. Gordon Thiessen: I think those have been political regimes that haven't lasted forever. Although there can be ups and downs politically, certainly in the last century or so the economies of the developed countries, on balance, have been growing pretty persistently through the piece, and that is mainly because of productivity improvements.

Mr. Nelson Riis: It's a temporal thing. I don't know if we'll have the chance in another 100 years to re-examine this. Thanks for allowing me to go on like this, Mr. Chairman.

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

Governor, Deputy Governor, we really appreciate your statements. We always look forward to your report and we welcome, of course, the good news you've brought with you this evening. On behalf of the committee, thank you.

Mr. Gordon Thiessen: Thank you, Mr. Chairman.

The Chairman: The meeting is adjourned.