FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 4, 1999

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call this meeting to order and welcome everyone here this afternoon. As everyone knows, the order of the day is that pursuant to Standing Order 108(2), the committee is studying the issue of productivity.

I must say to our panellists that this issue is a very intriguing one. We've had a few round tables already, and now I understand why this issue is a challenging one. In fact, the definitions and measurements, the different takes people have on this issue, are actually creating excitement in this committee, as was evident this morning.

We will begin with the Business Council on National Issues, Mr. Thomas d'Aquino.

Mr. Thomas d'Aquino (President and Chief Executive Officer, Business Council on National Issues): Good afternoon, Mr. Chairman. We're delighted to be before you once again. By way of reminder, the Business Council is made up of the chief executives of our largest 150 companies, and the members of the BCNI straddle all sectors of the economy, so the issue of productivity is extremely important to us, and has been important to us for as long as I've been associated with the organization.

Let me first of all say how pleased I am to have my colleagues with me. With me is David Stewart-Patterson, who is our senior vice-president responsible for policy and communications, and Sam Boutziouvis, who is our vice-president in charge of global competitiveness and economics. I've encouraged them to join me in the follow-up discussion because both of them have been intimately involved, as I have, in the issue of productivity and competitiveness now for a long time.

You've asked the Business Council to address the issue of productivity, and let me say, Mr. Chairman, at the outset that while the debate about productivity is important, I'm worried that it has become dangerously focused on arguments over how to describe the symptoms rather than how to treat the disease.

A doctor assessing a patient will normally take his or her temperature, but the thermometer alone cannot provide a reliable diagnosis. So it is with economic health. Productivity and the rate of productivity growth is simply one way to assess the health of a nation's economy. It is an important measure, but it is neither perfect nor the only measure that really matters.

So what do we mean by productivity? In economic terms it means the value of goods and services produced in relation to the time, money, and resources used to produce them. That is as accurate and as honest a one-line definition of productivity you will find. In more human terms, I might put it even more simply: Canada's productivity performance determines how much a Canadian can make for a day's work.

A higher productivity, no doubt, leads to a better life for all Canadians. It means that consumers are getting better products at lower prices. It means that employees can win rising incomes and better working conditions. It means companies can reap greater profits even while selling for less. It means that Canada's economy generates more jobs and can support a higher quality of life for each of its citizens. But, Mr. Chairman, let us be absolutely clear: a rising standard of living and an improving quality of life flow from our ability to be more productive, not the other way around.

According to media reports this morning, the Prime Minister said last night that our standard of living and our productivity will depend very much on the quality of our health care system. I believe very strongly that Canada's health care system is a competitive advantage, but while healthy Canadians may be more productive, our health care system is not what fuels productivity growth. Rather, rising productivity is what is needed to fuel our desire for better health care.

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So let us have no illusions. The aging of our population means that health care is going to get dramatically more expensive in the years ahead. Health care costs will rise in absolute dollars and in terms of the burden that must be shouldered by every working Canadian. Fewer working Canadians can only support quality health care for more retired seniors if those who work earn substantially higher incomes or pay much more of their incomes in tax. And in a global economy, Canadians will only be able to earn a lot more for each day's work if they are able to be much more productive than they are today. Even if we just want to maintain the current quality of health care, we will need to achieve a dramatic increase in productivity.

Measuring productivity, as you've learned from the hearings you've had so far, is extremely difficult. We should interpret the results carefully and, importantly, only over the long term, and we must remember that the measures we have are only estimates; they are not holy writ.

Measurement issues are especially troublesome in the service sector, which is also the major source of job growth. What is the extra value, for instance, of having 24-hour access to cash through automated tellers instead of having to go to a bank branch during business hours? As customers, such convenience obviously improves our productivity, but by how much? Similarly, companies have invested massive amounts in new technology. Common sense says they must have paid off for companies by increasing their competitiveness. But the productivity statistics, Mr. Chairman, show scant evidence of such improvements. When it comes to measuring productivity in a meaningful way, there is still much we do not know.

It is important, I submit, not to get bogged down in the details. Our goal should be to adopt policies that will lead to stronger economic growth, a rising standard of living, and improving quality of life for all Canadians. No matter how we measure it, higher productivity is necessary to reach that goal, but how to improve productivity is the challenge with many dimensions.

Some of these dimensions involve broad macroeconomic conditions. Canada is now a land of low inflation and interest rates, balanced budgets and surplus, and borders that are open to trade and investment. All of these play an essential role in creating the right conditions for strong investment and productivity growth, but clearly macroeconomic conditions alone cannot foster sufficient productivity growth to fuel a rising standard of living. We must also find ways to influence the way institutions and individuals behave in both the public and the private sectors. What is it that makes a company invest in new technology, take chances on long-term research, or take the risk of adopting innovative ways of working? What determines whether a new research project will be located here rather than somewhere else the company does business? Why does an individual choose whether or not to invest in building his or her skills?

Mr. Chairman, these are just a few of the questions the BCNI will be addressing over the next year as part of what we are calling the Canada global leadership initiative, an initiative that is very ambitious and very exciting. Our goal is to figure out what must be done to make Canada a home where companies can grow successfully in the global economy and where Canadians are once again confident in their ability to build better lives for themselves and their children.

Some elements of the solution are obvious. If you want to increase the number of people who take risks with innovation and invest in greater productivity, you have to increase the rewards for success. The best way to do this is to cut taxes at both the individual and corporate level.

But achieving our goals, Mr. Chairman, requires much more than just tax cuts. Let me be perfectly blunt. There have been suggestions that stemming the brain drain requires cutting Canadian taxes to match the level of those in the United States. With respect, that is not good enough. If Canada wants to compete for investment with the United States on an equal footing, we're going to have to do better than the Americans.

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This does not mean we should blindly mimic American tax rates and policies, to turn Canada into a carbon copy with a conscience. We have to be better in a distinctly Canadian way.

I do not think we can succeed without substantial tax cuts, but our search for answers must be broader than that. In particular, we have to come up with better ways of developing and keeping our human capital, the brain power that fuels the knowledge economy. We have to look at the effectiveness of our schools and our post-secondary institutions. We have to find ways of improving access to life-long learning in the workplace and beyond.

We need to improve the environment both for basic research and for the development of stronger linkages to the marketplace, and we have to be relentless in our search for ways to make Canadians and their employers more innovative, more entrepreneurial, and yes, more productive.

If Canada can succeed in this quest, Mr. Chairman, we will see more rapid growth, higher real incomes, and improving quality of life, and we will report higher productivity along the way; of that there is no doubt. But the challenges of the global economy are as relentless as its opportunities are vast, and if we falter, sagging productivity will be the least of our worries.

Mr. Chairman, before I conclude, if I may, I know that before this committee you've heard economists and you've heard others on the issue of productivity, and let me say to you that in the early 1980s I was one of the founding members, along with the chairman of the then Canadian Labour Congress, of something called the Canadian Labour Market and Productivity Centre. I served as co-chairman of the Labour Market and Productivity Centre for over five years. I have to tell you that many studies were initiated. We debated the issue of productivity up, down, and across, and we did not reach any definitive conclusions.

So I want you to know that where you perhaps are putting your foot, in the minds of the government and many people, for the first time, many feet have been there before. My suggestion to you is, as I suggested in my opening statement, that we should, yes, pay attention to productivity, but do not look to the word productivity, to the issue productivity, to the measurement productivity, as a way to solve our problems or indeed to build new public policies. We have to go much beyond that.

So let me conclude by trying to answer in about two minutes a question that I know has been put to this committee and that befuddles, I suppose, a great number of people who debate the issue of productivity. This is, assuming there is some degree of parity in analysis and objectives in the measurement of productivity between ourselves and the United States, why is it that Canada has so underperformed in relation to the United States? Let me give you the results of our thinking on this matter based on ten years of benchmarking global competitiveness from the point of view of Canada and in particular in relation to the United States.

First of all, one can make a very powerful argument that our macroeconomic performance in the 1980s and 1990s, with high deficits, high debt, high interest rates, high inflation, and slower economic growth, contributed very significantly to our shortfalls on productivity. Of that there is absolutely no doubt in our mind. Exactly what percentage down to the split number each of those contributed to it we cannot tell you, and there is not an economist alive who can do that, but one thing we can be sure of is that those factors contributed to the shortfall.

Secondly, there are the differences in the mix between our two economies. Canada now is much less dependent on commodities, as you know, than we were, but we were subjected to, because of our high dependence on commodities in the past, boom and bust cycles that certainly did have an impact on our productivity performance. In terms of the differences in firm size and in relative levels of productivity within the private sector, my colleagues in the BCNI get very annoyed when people say Canadian private sector productivity levels are not very good. They point to certain industries where in fact our productivity levels are among the best in the world and to some areas where it is less so. So it's very important not to paint everybody with the same brush.

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There is the lower rate of investment in machinery and equipment and in new additions to our capital stock. Canada has had, as you know, a very good record of investment in plant and machinery in relation to other OECD countries, but our record has not been nearly as good as that of the United States. Although we don't know by how much to the split number, we do know that investment in plant and machinery is extremely important to the enhancement of productivity. This is one thing that came out of the studies in the 1980s when I was involved.

There are the differences in expenditures for research and development. I'm sure that some of our colleagues, in particular from the aerospace industry, will point out how important that is to productivity.

There is our ability to adopt and commercialize R and D into innovative practices and products, which is very important. The shortfall of skilled technical and professional workers is again a very important measurement. Our relatively poor innovative capacity in relation to the United States is another important factor.

Mr. Chairman, other factors include: a depreciating currency over the last 20 years that has allowed manufacturers to hide behind the dollar rather than engage in productivity-enhancing business practices, the so-called lazy manufacturers hypothesis; a high degree of regulation; higher taxation; a nagging lack of outward orientation among small and medium-sized firms in Canada despite a dramatic increase in outward orientation among large firms; some differences in management practices; the nature of ownership; the quality of our corporate governance; and a lack of capital in certain types of business activities, such as venture capital for private start-ups.

Now, we could probably add another 10 factors to that, Mr. Chairman, but I've given you a long list of the factors that we know have weakened our productivity performance in relation to the United States.

But if you were to engage the BCNI and 100 economists to debate for the next 100 days what the various percentages of those contributions are in relation to our so-called shortfall in productivity, we would be wasting our time. Where we would be putting in productive time is if we were to realize and accept that those are problems and that each of those has to be addressed in a very aggressive way.

In the Canada global leadership initiative, we're proposing not only that we close the gap with the United States, but also that we do nothing less than be better than the United States. If we are able to do that, we will retain our home-based multinational enterprises and attract foreign direct investment. We'll attract and keep the best brains in the world and not lose some of our brightest and best to the United States. In addition to that, we will foster a much more productive climate of innovation than we have in the country at the present time.

Thank you very much.

The Chairman: Thank you very much, Mr. d'Aquino.

We'll now hear from the Aerospace Industry Association of Canada, Mr. Peter Smith. Welcome.

Mr. Peter Smith (President and Chief Executive Officer, Aerospace Industries Association of Canada): Thank you, Mr. Chairman.

I was fearful that you were going to be called for a vote, and I was simply going to say that I'd like to be recorded as “ditto”, in that Mr. d'Aquino did cover an awful lot of ground, and I certainly think you will find that many of the comments I will make today complement that particular view on the issue of productivity.

I too am delighted to be here today representing the aerospace industry and participating in your round table on productivity.

There is no doubt that productivity is a complex topic. It is often ill-conceived and misunderstood by the person on the street, but if you break down the elements of productivity, they begin to understand that it is not only a critical issue facing Canada today but also our most serious economic challenge. At stake is the very standard of living of Canadians as we enter this next millennium.

I commend you for attaching priority to Canadian productivity and for stimulating through this round table what has become, or what must become, a frank, non-partisan, and productive debate on the issue in Parliament and throughout the country. We need to engage all Canadians in this debate.

Regrettably, the issue of productivity is not well understood by Canadians. In particular, most do not comprehend the direct link between productivity and our standard of living. Without a fundamental understanding, it is impossible for many Canadians to recognize the productivity challenge facing Canada today. The result is a disturbing level of complacency that, if left unchecked, will relegate Canadians to even lower and lower standards of living. The economic promise of the new millennium will pass us by, and the consequences for industry and individual Canadians could be irreparable as progress in the global economy by competitor nations will not be stopped to let us catch up just because we're nice guys and gals.

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In the past months the issue of productivity has been clouded by the release of successive studies using a myriad of statistics and measurements that appear to be contradictory. Some conclude that we have a productivity problem; others suggest we don't. We all conclude that productivity is not a simple issue to define or measure.

Nevertheless, one unassailable fact highlights Canada's poor productivity performance. Average pre-tax family income has been stagnant for about two decades in Canada and has declined relative to our key trading partners. Canadians are on the wrong side of a growing income gap, in particular with the United States.

Income increases have to reflect productivity increases, and this is where Canada is failing. All too often people perceive productivity as being the ability to do more with less. This carries the negative connotation of productivity being synonymous with job losses because of mergers, downsizing, and layoffs.

If, on the other hand, we position productivity as being about the value of the Canadian dollar, Canadian capital investment, international competitiveness, globalization, education, employment opportunities, living standards, and quality of life, Canadians would better understand that unless we are on the positive side of each of these equations, the cumulative impact is, or could be, serious productivity challenges when we compare ourselves with other nations.

As an industry, AIAC represents more than 200 companies with annual sales totalling $15 billion that employ 67,000 Canadians. We are deeply concerned about the problem of growing complacency over productivity in Canada. Too often Canadians appear content to focus on positive accomplishments and news while ignoring warning signs about productivity. Yes, it is easy to trumpet good news and often difficult to communicate bad news. Leadership is never easy.

Canada has accomplished a great deal, and I congratulate the government on its efforts to eliminate the deficit. We should celebrate and promote Canada's leading position in UN studies on quality of life, for example. But let's not be blinded by these accomplishments and think everything is just fine and that there is nothing to be concerned about. Complacency is an insidious problem.

A good example of this complacency is the recently released KPMG study on business costs, which was released with great fanfare. Was it good news? Yes, it was in part. But key elements of the Canadian competitiveness vis-à-vis the United States are the low value of our Canadian dollar and low Canadian wages. In fact, our low dollar masks our productivity problems.

Our global competitiveness and our great export performance in the past years have largely been sustained by the eroding value of our currency. As Canada's productivity relative to that of our international competitors has declined, in particular the United States, it has been offset by our low dollar. This is hardly a positive development. In the long run our low dollar is something to be concerned about. A minor rise in the value of our dollar will wipe away our competitive advantage and cause even more harm to the Canadian economy and to the income of Canadians. Real and sustained competitiveness in today's global economy and high standards of living are built on productivity improvements, not on lower exchange rates.

In the aerospace sector we're acutely aware of the challenge of global competitiveness. With 80% of our output destined for foreign markets—that's $12 billion in exports in 1998 alone, much of it to the United States—we can't afford to see our competitiveness erode. The imperative of sustaining global competitiveness is a major factor in the high levels of aerospace R and D investment; the continuous drive for improved processes; quality initiatives such as six sigma; and wholesale changes to the way in which we design, develop, build, and support aircraft and other aerospace products. All of these are driven by a vital need to enhance productivity and strengthen our competitive advantage in the global marketplace.

What do these have in common and what are the broader productivity implications for the overall Canadian economy? Advanced industries such as aerospace can't improve their competitive position and bottom line and advanced nations such as Canada can't improve productivity and increase the standard of living of Canadians without innovation. Innovation and productivity are inextricably linked, a cause and effect.

The aerospace industry is a useful example of the impact of innovation on productivity and global competitiveness. The aerospace industry is a leading advanced technology sector in Canada and one of the largest R and D investors. In the last five years alone, industry sales have grown at three times the rate of Canada's GDP, fueled by exports that have grown to 80% of our sales. However, notwithstanding this impressive performance, we still face productivity and competitiveness challenges from our global competitors, who are investing even more in R and D and innovation.

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The evidence of this challenge has been seen recently in the eroding Canadian content of aerospace products from 66% to 54% since 1994 as Canadian prime contractors turn to foreign, especially U.S., suppliers for outsourced systems, components, and equipment. Canada's productivity agenda should be an innovation agenda, an aggressive agenda to create a strong climate for innovation in Canada with a new focus on technology, an agenda that is pursued with the same dedication that was used in wrestling our deficit to the ground.

I represent the aerospace industry, but this agenda needs to be broader than simply aerospace. We need to pay attention to all players in the knowledge-based economy, sectors like telecommunications, information technology, biotechnology, environmental technology, etc. Bold leadership is required to create a climate for innovation. We cannot succumb to the pressures of critics and dissenters. Canada has the potential to be a world leader. We have already demonstrated that in fields like aerospace.

I cannot offer a detailed prescription, but clearly Canada needs to stimulate higher levels of investment, particularly in R and D and productivity-boosting machinery and equipment. Canada lags behind its competitors in this kind of investment. Our share of inward foreign direct investment has also eroded steadily in the past 15 years. Huge new investments in technology are necessary. This is where Canada's economic future lies.

Taxes are a big part of the problem. We need to reward innovation and risk-taking, and that means financial rewards for both companies and individuals. Tax credits and tax cuts are essential. Addressing the taxation imbalance between Canada and the United States will also help us to keep our best and brightest minds, the people who lead innovation in this country.

But it is not just taxes. Easier access to the patient capital necessary to nurture innovations in their earliest stages is also very important. Creating a climate for innovation also means continued support for institutions like the National Research Council and risk-sharing instruments like the Technology Partnerships Canada program.

Partnerships are essential elements of innovation. In the aerospace sector, we have come to realize the value and leverage that can be achieved through collaborative efforts in innovation. Partnerships between private sector firms and between the private sector, universities, and government research organizations like NRC are essential. We have recognized this and have recently launched a joint program with NRC to foster this kind of partnering in the aerospace sector, which we hope will be a model for others to follow.

More emphasis needs to be placed on stimulating and removing structural impediments to partnerships across our economy. We can't afford not to. The results will mean closer links between universities and industry, more innovation, more new products, increased sales and revenue, and more jobs for our bright young people who will enter the workforce.

We also need to remove as many impediments to innovation as possible, such as unnecessary regulatory burdens, slow-moving approval processes, and indecision, all of which are enemies of innovation. Interprovincial trade barriers are a good example of this kind of impediment. Why is it often easier to do business with a firm in another country than in another Canadian province?

Finally, and perhaps more importantly for the long run, this innovation agenda must work to create a culture of innovation, beginning in our schools and continuing with Canadian businesses and the workforce.

These, I believe, are the critical elements of the productivity agenda; however, the real challenge today is developing a broad understanding among Canadians that Canada truly has a productivity problem—attacking that insidious complacency that exists. Only then can we begin to develop and implement appropriate solutions.

I thank you for the opportunity to contribute to this debate. I can assure you the aerospace sector is proud of its accomplishments, but recognizes the challenges ahead and stands prepared to work with the government to find appropriate solutions to this problem. Tough decisions will be necessary. Strong leadership, focus, commitment, and determination are essential. It is our considered opinion that the government must take this leadership role. With that leadership, support from industry, the media, and the taxpayer will be forthcoming. Canadians have proven their willingness and stamina to endure pain in the battle to eliminate the deficit, and we are confident that with strong leadership, Canadians will do no less to support an agenda that boldly addresses our productivity challenge.

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Thank you.

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

We will now hear from the Association of Universities and Colleges, Ms. Sally Brown, senior vice-president. Welcome.

[Translation]

Ms. Sally Brown (First Vice-President, Association of Universities and Colleges of Canada): Good day ladies and gentlemen. I would like to begin by thanking you for having invited the AUCC to discuss an issue—national productivity—that is of immense interest to Canadian universities, and more specifically steps that could be taken by the government to enhance it.

[English]

As you've heard already, at issue is improving the quality of life of all Canadians, but increasing productivity is only a means to this end. Many Canadians, as you know, remain suspicious about a focus on productivity because they know there's not an automatic link between the means and the end. Rising tides do not necessary lift all boats. Moreover, increasing productivity is a necessary but insufficient condition for greater social well-being. A missing link, in our view, needs to be found in supportive policies designed to equip Canadians with the skills and competencies required to capture the benefits of increased productivity.

Over the past week, experts and industry analysts have appeared before you to suggest various ways to increase our national productivity. This divergence in opinion as to the solution for our lackluster performance provides more evidence to support the Minister of Finance's views that there is no single policy measure that will ensure stronger productivity performance in the future. The solution must be multifaceted because it must address many dimensions of the problem.

In today's knowledge economy, productivity gains need not be had by working harder. They're a function of working smarter, of innovation.

So, Peter, I wouldn't have said “ditto” to all of your remarks, but I think our theme is the same as yours: Canada's productivity agenda should be an innovation agenda.

In our view, innovation is a key determinant of a country's social and economic well-being and a key driver of productivity growth. By innovating, firms become more productive, more profitable, and more competitive. This in turn can lead to social dividends in the form of employment growth, greater collective wealth, and enhanced quality of life, provided again that supportive policies are put in place so that everyone benefits.

In his 1999 budget, Finance Minister Paul Martin summarized it well when he stated:

...much of our economic challenge can be summarized in two words—knowledge and innovation. These are the new raw materials of the 21st century economy.

Much of the discussion that is occurring around innovation focuses on technology and industrial production. While this emphasis is understandable and clearly critically important, in our view the focus is too narrow. Social progress requires innovation in all sectors and in all facets of society.

It is through innovation in the delivery of health services that the quality of health, and thus the quality of life, can be improved for citizens. It's through innovation that the social organization of work adjusts to emerging needs and challenges. It's through innovation that the participation of all segments of society can be enhanced in order to strengthen our social economy. It is through innovation that systems can be developed to help individual citizens participate more effectively in the governance of their cities and their country.

In the era of computer animation, the boundaries between the technological and the socio-cultural spheres are becoming increasingly blurred. Thus Canadians must match their innovative efforts on the technological front with a comparable effort on the social, organizational, and policy fronts. This will ensure that Canadians can turn the forces of technological and organizational change to their advantage.

So we're arguing for a broad definition of innovation.

[Translation]

The creation, introduction and modification of new products, the development of new production processes and organizational structures, together with the formulation of new policies: these are all innovations that require highly qualified staff and a highly developed knowledge infrastructure.

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These two key components, knowledge and people, are more than the raw materials of innovation. They are the very essence of a university: leading edge research, the training of highly qualified people, the education of citizens and innovation.

If Canada is to become more innovative and hence more productive—in other words become a knowledge-based society, it will have to build on all its strengths, show firm resolve and not be afraid of aiming high.

[English]

We would like to suggest four key thrusts today. First, continue to build a strong and healthy knowledge environment. The quality of science and research is particularly important for those sectors of the economy we've heard from today—the information technologies, aerospace, and biotech—that depend heavily on advanced science. But it's also critical to sustain our resource-based industries. Much has been done recently to shore up the quality of the research environment in this country. There's now more money for research infrastructure, more money for sponsored research, and more money for collaboration. This is a good start. However, it's not enough. Funding levels still fall far short of our international competitors, and the gap is widening. So more work needs to be done here.

Second, we must strive to achieve a better meshing of the government, private, and academic sectors in an effort to increase knowledge transfer, thereby translating research achievements into innovations and the resulting economic and social benefits. In the past few years, collaborations between universities and the private sector have continued to develop. Researchers between the two sectors collaborate more than ever before, and private funding of research has increased steadily over the last twenty years. The government has played a key role here. By offering generous fiscal incentives, funding matching programs, and changing the legal environment, the government has been a significant source of support for university-based research. In response, universities have opened industry liaison offices to help researchers find industry partners and set up mechanisms to identify promising results and market university-based inventions.

Canadian universities are now fully engaged in the process of commercialization of the knowledge they generate. We must build on these successes through a variety of means.

Third, we must enhance the strength and vitality of the private sector. Modern economies are knowledge economies. For knowledge businesses to succeed they must recognize and support good research and possess the ability to turn scientific discoveries into successful commercial products. A strong and vibrant private sector is receptive to innovations, is able to compete internationally, and is open to research cooperation.

This brings me to my fourth and final dimension: people. The government has to show that it is committed to creating the conditions that underpin the modern economy, investments in people through education, for it is people who are innovative. Innovation is not so much about the availability of capital, although that's important, as it is about personnel. In knowledge businesses, different skill sets are required to capture the benefits of specialized knowledge. In the words of expatriate Michael Gibbons and his colleagues:

Problem solving skills are required and in particular the ability to put things together in unique ways, whether they be molecules, semiconductor chips, new alloys, software codes, movie scripts, pension portfolios or holiday packages.

University students are taught to be creative, to be problem solvers; hence, to be innovative and productive. To the extent that growth in income reflects productivity growth, measuring changes in income demonstrates that the productivity of the university graduates increases over time.

We've appended to our statement a graph that shows the income premiums for each additional level of education attained. The chart clearly shows that the income levels of our most highly educated people continue to grow over their lives. Unemployment rates confirm this correlation. They decline as educational attainment increases. For example, the unemployment rates of university graduates in mid-career stood at 4% compared to 7.7% for high school graduates and over 14% for those who have not completed high school.

Surely we can all agree that a population with lower unemployment rates and higher incomes is a welcome by-product of a more educated population, and therefore we know how important investing in education is to improving our living standards.

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This being said, universities continue to suffer from under-investments in certain key areas that are preventing them from adequately fulfilling their mandate, from providing a quality accessible education—and here I should say, to an increasing number of Canadians, if that's our goal—and from realizing their full research potential. This is due to declining core support of universities and to the comparatively weak support provided for the total costs of research.

Reductions in the core budgets of post-secondary institutions have tracked the decline in federal transfer payments to provincial governments in support of PSE. Again, we have included a graph that compares growth in public investments in university education in Canada and in the United States. We always seem to use the United States for our comparators. What is especially troubling about the graph is that the gap between the levels of core budget funding in Canada and the United States is growing wider. And this is, I should emphasize again, public investment.

Combined with the graph comparing levels of direct support for university research, you can begin to appreciate why Canadian universities are experiencing increasing difficulty attracting and retaining academic staff of international calibre.

[Translation]

Mr. Chairman, the scientific progress being made right now by researchers in laboratories around the world will transform our lives over the next century. The twenty-first century will be conditioned by what we do now. Information science and new developments in molecular biology may be in their infancy, but they will likely have a deep impact on our lives. However, there are costs attached to knowledge and innovation.

[English]

As John Polanyi recently wrote:

Knowledge only appears to be freely available to all—in fact, it is available only to those who understand its meaning and appreciate its worth.

If we're to benefit from those scientific revolutions as much as we should, we must make certain not only that our scientists are funded properly, but that we can count on a receptive business community and an educated population.

Members of this committee are being asked to grapple with all the various strategies and proposals that have been presented on improving Canada's productivity and ultimately our standard of living and quality of life. I think we're all agreeing here that what's required is a multifaceted approach focused on providing Canadians with the means to thrive in a knowledge-based internationalized world.

For our part, we're concentrating, clearly, on activities and programs that foster knowledge and innovation. We would welcome an opportunity this fall to discuss with you concrete measures to address the four key thrusts to which I've made mention previously.

But just to reiterate, we believe in the following fundamental framework: productivity is driven by innovation; innovation is fostered, not only but to a large extent, through education and research; and we believe that together we have to rethink the strategies to increase our investments in education and in our universities.

We thank you very much, Mr. Chairman, for an opportunity to come and engage in this debate with you.

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

We'll now hear from a representative of the Natural Sciences and Engineering Research Council of Canada, the president, Mr. Thomas Brzustowski.

Dr. Thomas Brzustowski (President, Natural Sciences and Engineering Research Council of Canada): Good afternoon, Mr. Chairman and committee members, and thank you for the invitation to join in this very interesting discussion. I must admit, Mr. Chairman, that I was relieved when I received your letter of invitation. Not being an economist, I wondered what I could contribute to that very erudite discussion of productivity. But when I saw the questions in your letter, it occurred to me that you're trying to understand some of the same things I'm trying to understand. And if you would permit me, perhaps I could share with you this afternoon a framework—obviously in the context of what NSERC does, which is to support university research in science and engineering—that allows me to understand the connections between the global economy, the knowledge-based economy, productivity, innovation, and R and D. I hope you don't mind that I provided the notes in bullet point form. Perhaps the points are easier to sort out that way; at least I find them easier to sort out.

Let me begin with the definition of productivity with which Mr. d'Aquino started, because I think that is the most useful way of approaching it. In plain language, productivity is the value of what is produced divided by the cost of producing it.

[Translation]

In plain language, productivity is the value of what is produced divided by the cost of producing it.

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[English]

So we have a fraction here, the value of what is produced divided by the cost of producing it. Productivity can be increased in one or both of two ways. Let's take them separately; by decreasing the denominator of that fraction by decreasing the cost of producing it, or by increasing the value of what is produced by increasing the value of that numerator of the fraction.

[Translation]

This means that we can increase productivity either by reducing the size of the production team or increasing the value of what is produced, in other words by decreasing the denominator of that fraction or by increasing the value of the numerator of the fraction.

[English]

We've already heard, and of course we've seen in the media—and we saw this as soon as the word “productivity” began to appear with some high frequency in the public rhetoric—that there's a negative public reaction, which Mr. Smith described. A lot of people react to productivity. They think of automation replacing people, companies downsizing, plants closing, people being laid off and so on. But—and I contend this is the strongly preferred course—it would be much better to increase productivity by increasing the numerator, by increasing the value of what Canadians produce, what they offer in world markets.

The question is, that's fine, but how do we control the value of what we produce? The answer I think is by doing the right thing in the market. If we think of commodities—and we are still to a large extent dependent on commodities, and maybe to a larger extent still we are perceived to be dependent on commodities—commodities are essentially indistinguishable products that are offered for sale by many producers from all around the world. Some have added value, but none are unique products. Commodity prices are low, and we've seen that they've been falling over time, and we can't do a great deal about that. In fact, we have to take the price the market offers for commodities.

This means that if Canadian producers of commodities are to stay profitable, if they're going to stay productive and grow increasingly productive, they don't have much choice. They can only decrease the cost of production. They can only downsize that denominator. But we don't export only commodities. We also export innovations, and innovations are new goods and services that we bring to market; new goods and services where we are first, where we can set the price. We know very well, and I'm sure you've heard it, Mr. Chairman, from representatives of various sectors, that in some sectors an innovation becomes commoditized, becomes a commodity product very quickly, so you have to act quickly.

But innovations are new goods and services brought to market. There are product innovations. There are process innovations. They may be incremental product improvements. They may be radical. They may be entirely new products. There are, of course, also marketing innovations and institutional innovations, and I would like to think we're capable of combining these in a portfolio of innovations that are mutually reinforcing.

But the main point I wish to make, Mr. Chairman, is that in moving into the global market with innovations, Canadian producers have the capacity to set the price. They can set the prices high enough to make a good profit, to pay for the costs of the R and D that produced the last innovation and have enough to invest in the R and D for the next one.

I believe we can control the value of what we produce through innovation—and it's a word you've heard all afternoon—and that good innovation performance by Canadian industry can increase productivity by growing the numerator, by growing the value of what Canadians produce. I think that's far preferable to downsizing the denominator. In the knowledge-based economy, successful innovations embody new uses of knowledge, and many of these depend on advances in science and technology. I would call these research-based innovations.

The OECD has said that Canada has an innovation gap, that we don't do enough innovation compared to our trading partners. There are many reasons for that, and I don't think we need to repeat those. You've heard some of those earlier. One measure of our innovation gap is that we invest only 1.62% of our GDP in R and D—that's in the public sector and the private sector together—which is far less than in our competitor countries. But the good news is that the industrial R and D spending is growing fast in this country.

• 1630

However, in terms of the capacity for innovation, the numbers of people engaged in it and the institutional capacity, one area in which we're entirely comparable with the countries with which we are compared is universities. Our enrolments are high, our student-faculty ratios are comparable, our numbers of faculty members are comparable, and the quality of what they do is right up to international standards.

Therefore, university research is becoming increasingly important in promoting innovation in two ways: in transferring technology to existing industry through collaboration, partnership, and research—and much has been made earlier this afternoon of partnership, and correctly so—and in setting up new companies to commercialize the discoveries and inventions arising out of research—and very often out of basic research—that have the potential to become successful innovations in the marketplace. I should add, Mr. Chairman, that NSERC now has a documented sample of 155 start-up companies whose activities can be traced directly to investments in basic research made 10, 20, perhaps even 30 years ago.

Mr. Chairman, my summary point is that we can increase productivity and that we can increase it in such a way that I think the public would strongly approve and Canadians would generally support, that is, by increasing the value of what Canadians produce and put on the world market by engaging in innovation. Obviously, the innovation will have many sources, but I contend that one of the important sources will be university research.

With that, Mr. Chairman, I will stop.

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

Now we'll go to a question-and-answer session. I want to tell the panel that at any point in time when you want to jump in and comment on statements made by other panellists, please feel free to do so.

Mr. Harris.

Mr. Richard M. Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman.

Thank you, presenters, for your very enlightening presentations.

I want to put this question to Mr. d'Aquino and Mr. Smith. It's with regard to government spending. We can ask, what role can the government play in its operations to promote productivity and how can we determine whether we call government spending consumption or investment? Consumption, of course, would be a detraction from productivity, and investment would be a promoter of productivity. How do we determine what part of government spending detracts from productivity and what part promotes productivity? What are the areas you would try to draw a line to?

The Chairman: Perhaps you would like to start, Mr. Smith.

Mr. Peter Smith: If I might just make reference to the aerospace sector, and I'm sure Mr. d'Aquino will cover other sectors, I will use as an example the technology partnership Canada program, which, as you well know, received an increase in the last budget to $300 million. It is not dedicated exclusively to aerospace, but about two-thirds of it is.

I would suggest that positive investment in innovation comes out of the technology partnership Canada program when you use the criteria of what it leverages. There are 62 projects after two years at a total multiple-year investment of $563 million. Those projects will leverage $2.3 billion of new private sector investment—it's a combination of both government and private sector, the majority of which is private sector—and they are expected to create and maintain 13,300 jobs at an overall average wage of $42,000. The forecast generation of sales from those products is $63 billion, and they include 42 small and medium-sized enterprises. A lot of the media coverage has been in relation to the large amounts that have been given to such companies as Bombardier, Pratt & Whitney, CAE, etc.

• 1635

Our concern is in relation to the competitiveness we face today in the aerospace industry. We are the fifth largest sector in the world. We're facing large investments by other nations that have seen the benefit of such innovation getting to product and generating sales. Our concern would be that if it were not sustained and even increased, as mentioned by a number of the panellists this afternoon, we would lose the momentum we have already gained. I think we have demonstrated quite capably as a very small nation that we have the brain power and the capability to return to Canada what the investments have been. Our challenge collectively, I think, is to talk to our constituents, be they taxpayers, shareholders or whatever, and to basically convince them of the leveraging of these dollars as opposed to the reference to spending. Thank you.

The Chairman: Mr. d'Aquino.

Mr. Thomas d'Aquino: Thank you very much. Mr. Chairman, I'm glad that question has been asked by Mr. Harris. I think we'd have to start right from the very fundamentals and say that the most useless and destructive form of spending is spending you can't afford. The classic example we have in this country is that we are spending some $40 billion a year in servicing the national debt. There isn't a member of Parliament here today who would disagree that is not a productivity-enhancing investment. That does very little for productivity. In fact, it has been terribly damaging. I think the bottom line on the spending issue is to spend only what you can afford.

There's a second rule I would apply, and here it's a matter of making choices. You have to make choices within the context of how much room you have. To put it another way, if governments had not spent irresponsibly for the last 20 years, today we would not be debating many of the issues we are debating. When the Minister of Defence is asked to produce better vehicles, more clothing, and better staff pay for our military, he would not have to reply, “I can only give $137 million because there isn't any money.” When people quite legitimately say let's do something for our children in terms of a national day care program, you would not have to reply, “I'm sorry, there is no money for that.” One could go on and on.

I would say that where common sense applies, we all know and probably can agree quite quickly on where the most productive spending can be put, surely in the areas of infrastructure, schools, education, and research and development. You've heard three eloquent speakers here today give examples of where productive investment can be put.

What is a bad form of spending? First of all, it's spending money you don't have, and secondly, spending money frivolously. I don't have to tell the honourable members of this House that we could probably come up with a rather devastating list of frivolous spending over the last 20 years. Otherwise, we wouldn't be carrying a $40-billion-a-year interest payment on our debt.

Mr. Chairman, this brings us back to the debate on productivity. The issue is not so much what is productivity or how you measure productivity. The real issue is what are all the areas on which there is common agreement where we should be using the resources and the talent of the country to invest in. I think there is very little disagreement on schools, infrastructure, health, education, R and D, and innovation—all of those things. But it's when we carry that argument a bit further and the Minister of Finance says, Mr. Chairman, I only have x amount of dollars, so therefore I have to make a choice between whether I put money into more spending for young children or into tax cuts and whether I put more money into R and D or toward reducing the debt. That is where the real issue is, and I don't have to tell you that because those are the issues you are debating every day. In my view, that is where we should really be focusing the attention and the debate within the public because that's where the real problems are today. We cannot cut taxes and go into deficit. We cannot spend all of our money on defence as opposed to spending on something else.

• 1640

So it's really a question of choices, and that's where the debate has I think become very challenging and where I think, as a result hopefully of some of your excellent hearings on productivity, you will be able to come up with some answers.

Mr. Richard Harris: There is some pretty good evidence that there's a direct link between a low tax regime and a buoyant economy. The more money people of a country can keep in their pockets to spend in the marketplace, the more corporate profits are reflected by a lower tax regime—that's good for the economy. We need only look to the U.S. We need only look to the province of Ontario, which has a pretty good economy going right now, and a lot of people can attribute it to the lowering of taxes in this province.

One of the fundamental things that I found in the years I was in private business was that the thing that determined the productivity of my operation was the ability of my company to make money at the end of the year. I was able to give my employees better working conditions, better vehicles to drive. I was able to expand my product lines because I had money to do it. I was able to increase my advertising. My ability as a company to make money determined the productivity of my company for the next year.

The things that took away from that productivity were excessive corporate and payroll taxes, regulations that appeared to serve no useful purpose, all costing money, constant government fees and licences that kept appearing almost on a daily basis, certainly the level of our dollar—in my case, I was importing a lot of products from the U.S., and every time our dollar dropped, the price of my product went up and placed me at a competitive disadvantage. And of course we can talk about interest rates and inflation.

These things I talk about appear to be, as I'm told by people in business today, still very present in the operation of their business and serve as a huge detraction from the productivity goals of their companies.

I just want your comments. What can we do to increase productivity from a corporate or business point of view? Certainly some of the very things I just mentioned have to be addressed in some very real terms by the government. Can you agree with that?

The Chairman: Any comments?

Mr. Smith, followed by Mr. d'Aquino.

Mr. Peter Smith: There is no question, certainly when we in the aerospace industry were asked to be consulted prior to the various budgets, that we made recommendations and fully agree with Mr. d'Aquino's elaboration on the issue of choices. This country had a very serious problem that the government should be congratulated on in addressing the deficit.

What we came to the conclusion on with respect to how we were going to make some informed decisions with respect to whether indeed there was a surplus...we suggested that we must sustain in part increased program spending to stimulate R and D, but also aggressively pursue the tax situation.

In the aerospace industry, about 60% of our companies are foreign-owned, the majority of which are in the U.S. There's no question that we see it daily with respect to the free flowing, or lack thereof, of labour and management between the companies, parent and subsidiary. To attract an American to Canada, one has to first discuss the issue with respect to the exchange rate; second, with respect to the difference in tax rate; and third, in coming up from perhaps California to Canada, there are things that one has to buy that normally aren't worn in California. These are real issues that we face on a daily basis.

• 1645

The converse of that is true as well. I'm simply indicating to you that as a businessman you could certainly appreciate that these are challenges that are faced daily. The attractiveness of a Boeing in Seattle to a Bombardier in Montreal is a very significant challenge to retain our staff. They're doing the same type of work and getting much more incentive for it, in two ways. One is related to their take-home pay as a result of less tax, but there is also the exchange rate.

So I agree with you in the sense that these now I think are the issues that are very much related to productivity that must be addressed. As was said earlier, they're part of the choices. Certainly we would have liked to have much more invested in, say, the technology partnership program, which we would have benefited from, but we were prepared to take a look at what was affordable, how it could be implemented, and to address those particular issues that are impacting commerce today.

The Chairman: Thank you, Mr. Smith.

Mr. d'Aquino.

Mr. Thomas d'Aquino: Mr. Chairman, on the issue of taxation, which is very much with us these days, I just want to make a very short but very strong appeal to the committee. The Prime Minister is quoted in the newspapers this morning as saying that the tax issue is not going to deliver us to the promised land. We certainly agree with that. Cutting taxes and being obsessed with the tax instrument as the only instrument that will deliver us to this better Canada and a higher standard of living is not going to do the work. It's going to take more than that. That's why we have launched the Canada global leadership initiative in which we are looking at competing for capital, competing for people, competing for innovation, competing for global market share and global influence, and competing for leading-edge governments.

That having been said, let me say this. There has been some negative reaction to some of the high-profile chief executives who have spoken out in the last week about the brain drain. What disappoints me so much, Mr. Chairman, is when I hear members of the government and other people say, well, there's really no evidence of a brain drain; those we lose are replaced by highly skilled immigrants coming into the country. Why that makes me so sad is because it's like saying you have a larder full of milk, whiskey—whatever is your taste—and because somebody steals large quantities every day but it's automatically replaced, that's all right. The argument we should be making is that we should be keeping these people, we should be building that resource, we should be building that strength, not saying, well, whatever we lose we can replace.

So the issue of loss to the United States is a very powerful, very real issue. If any of you have any doubt about that, go and talk to your own constituents; talk to the mothers and fathers of the vast majority of the graduating class of Waterloo that is swept away by Bill Gates. Just go through the system and you'll see that we are bleeding some of our brightest and best.

So it's important that we do something about personal income taxes in the country.

The Minister of Finance not too long ago was quoted as saying, well, it took twenty years to get high taxes in Canada; it will take twenty years to get them down. I'm afraid that's not good enough. We don't have twenty years, Mr. Chairman. Our view of the world—and I'm being very blunt here—is that we've launched the Canada global leadership initiative because we believe we will have lost much of our leading-edge competitiveness and home-based multinationals to the United States—a lot of our brightest people within the next five years. We will see a major shift in the real nature of the Canadian economy unless we're prepared to do some things. Taxes aren't the only things, but please make that very high on your list of priorities.

The last thing I would say is that there's nothing anti-liberal, there's nothing anti-social about cutting taxes for people in the lower income brackets, which you've already done, but particularly for people who earn between $35,000 and $150,000 a year. By our definition, by a Canadian definition, that's giving a broad middle-class income tax cut, and I can't think of anything more popular or more useful that would serve Canada right now than taking that step.

• 1650

The Chairman: Thank you, Mr. d'Aquino. I'm sure you know that was in fact one of the recommendations we made to the Minister of Finance in the last pre-budget consultation report—to get rid of the surtax and increase the basic personal amount, and so on.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chair, and thanks to all of you for your thoughtful interventions today. I think there's a lot of common ground here actually. There are some who try to pit one group against another. For instance, a group that may advocate a greater investment in higher education may be pitted against a group that wants lower taxes.

The question I would appreciate your feedback on links the two, because Mr. d'Aquino just spoke again of the brain drain issue, and Ms. Brown, you were speaking about knowledge and innovation and the quotation from the minister at the time of the budget. It doesn't do a whole lot for the future productivity of Canadians, particularly if knowledge and innovation are very important, if we're losing the number of highly skilled people that we are losing. And we hear this repeatedly. Nortel is losing 400 to 500 engineers per year to U.S. competitors, and Waterloo is losing about 50% of their computer science graduates to the United States.

Part of the problem is, as I believe Mr. d'Aquino mentioned, the marginal tax rates, particularly the top marginal tax rates. The latest Maclean's issue had an article on university graduates in Canada, and the average starting salary now for an undergraduate in business in Canada who gets a job in investment banking is $72,000. That's the average starting salary, so they're in the top marginal tax rate starting off and we're taxing them as if they are rich, when they probably have that much in student loans.

It's not an either/or situation whether we invest in higher education or taxes, but I guess the question is, if we don't lower taxes, if we don't address a significant causal factor in the brain drain issue, isn't all our investment in higher education and social infrastructure for naught, because we're going to be creating a great export of our people to the United States? That is, if we don't address the tax issue and only address the social issue.

Ms. Sally Brown: Let me answer that by saying I think there is some agreement around the table. We're not saying don't cut taxes; we're saying there need to be investments as well as other strategies. If you look at the university sector, though, there are two issues. There's the growing difficulty the universities are facing in hiring the best and the brightest faculty and losing their best and brightest to the United States. There's been an increasing amount of work that we and others are undertaking as to why they're leaving, and the reasons are multifaceted.

Yes, salary is an issue and taxes are an issue. The second most important issue is research funding. They go to the United States often, although about 40% of them go to other countries, so it's not just the United States that's providing a far more welcoming research environment. The second most important reason is they can get far more research funding. There is a mix of excellent researchers with whom they're working, and there are issues related to the quality of the research they're doing and the environment they're doing it in.

So the answer is multifaceted. Yes, likely some changes in the tax status will help retain some of those faculty members, but that alone won't, because they're saying that alone isn't the reason they're leaving. They're also leaving because the research environment here is not perceived to be hospitable and it's far more hospitable elsewhere.

In terms of students leaving after graduation and taking their education outside the country, I think first of all we have to recognize that while there's been growth in the number of students who are going outside of the country for their education in the last decade, all the growth was in the beginning of the decade, and there really isn't a mass exodus at the moment.

• 1655

In terms of graduates leaving, I think with respect to computer science graduates this is a problem. Part of the problem is that the American universities, believe it or not, are not expanding their computer science programs. They are in fact going down. Now one would ask why that would be a strategy, and we don't have all the answers. They're high-cost programs; that might be one of the answers. They're not feeding their own high-tech companies, so their high-tech companies are looking to Canada.

A solution that says just constantly increase the number of computer science graduates we're going to produce isn't the only answer either. We really have to look at a strategy that says to those computer science graduates, stay in Canada. We also need to look at a strategy that says that maybe a lot of the training after university has to take place within the private sector, and that there are jobs for the students who aren't as highly specialized and they too can enter the high-tech industries and receive good employment there. All the solutions are multifaceted. None of the solutions are simple.

The Chairman: Mr. d'Aquino or Mr. Patterson.

Mr. David Stewart-Patterson (Senior Vice-President, Policy and Communications, Business Council on National Issues): I just want to pick up on what Sally Brown said, because it is a multifaceted problem and therefore we have to talk about multifaceted solutions.

One of the problems with the brain drain, whether we talk about the brain drain out of our companies or out of our pool of graduates, is that it's not the absolute numbers; it's the relative quality of people who are leaving. Patrick Monahan at Osgoode Hall Law School gave a good example, and I think he mentioned it in the Globe and Mail a few weeks ago. New York law firms have discovered Osgoode and they've begun recruiting there. I believe he said that this year, out of a graduating class of 300, they lost 14 of their graduates to U.S. law firms. Well, 14 out of 300, less than 5%, doesn't sound like a big problem. It was half of their A graduates.

That is the kind of challenge I think we're up against. That doesn't mean we should stop producing high-quality graduates; if anything, it suggests we should expand the pool. But we do have to worry about what we are investing all this public money in if it's just going to walk out on us, if we can't keep it. A pool of highly qualified, talented young people is one of the essential prerequisites if we want to increase investment in knowledge-intensive activities here in Canada.

It is a competitive advantage we have now. Our university enrolment rates are high, but we do need to do a better job of hanging on to people. That in turn leads to the question of why young graduates leave. Again, there's not one reason. Yes, I think our tax system plays a role, but so do the salaries they're being offered, so do the stock options they're being offered, and the tax treatment of those.

I think the dominant reason comes back not even to the monetary things, but to the chance to work with the best in the business. It's the chance to get ahead and the opportunity to be at the centre of the action. That in turn brings the issue back not simply to a matter of whether we're sticking our talented young graduates into the top tax rate while they're still paying off their student loans, but to why it is they see the greatest opportunities somewhere else. Why is it that the best people in the world, in whatever discipline—law, medicine, scientific research, computer science—always seem to be working somewhere else? Again, that's not just a tax issue. It's not just a compensation issue. If it's scientific research, it has links to the funding of universities, to the research infrastructure, and to the linkages between the universities and their surrounding industries—the whole industrial cluster theory. There are a lot of elements to it. But again, there are certain things that stand out as obvious pieces of the problem that we can and should deal with.

Mr. Scott Brison: Mr. Chairman, if I can just tag on—

The Chairman: We're going to let Mr. Smith....

Mr. Scott Brison: I just want to tag on to that, and I apologize, but it's just for one moment.

You mentioned that the brain drain issue is not just a tax issue, and you're right, it's not just a personal tax issue. It's a compensation issue. It's a stock option issue. My point would be that we can't address the issue of brain drain purely with personal tax. We have to look at the corporate tax issue in Canada and the taxes on capital and earnings on capital, which are particularly pernicious because they are a form of double taxation. I appreciate your comments and would appreciate any feedback on that, because I believe that—

• 1700

Mr. David Stewart-Patterson: I have one quick follow-up on that question in particular. When we talk about compensation, we can look at the impact of taxes on the individual. That affects compensation that's left in the pocket at the end of the day. But the top-line compensation, what they're being paid before tax, is affected by the corporate costs.

Mr. Scott Brison: That's right.

Mr. David Stewart-Patterson: Why is it that Canadian companies can't be competitive while offering the kinds of salaries our graduates are being offered in the United States? What are the inhibitors at that level? What can we do to allow Canadian companies to compete more effectively for talent, to deal with the kinds of issues Peter Smith mentioned, when you're talking about what it takes to bring the best in the world to Canada if they're not here already?

The Chairman: Mr. Smith, followed by Mr. Brzustowski.

Mr. Peter Smith: I simply wanted to add a positive note. There's no question we would like to have the government address the personal and corporate tax issue. But before we get ourselves all depressed, I wanted to indicate that there are some positive spinoffs. I wanted to highlight some of the comments that I and my colleagues—both from the universities and NSERC—made.

One of the things we're trying to address in the aerospace industry to retain the talent here is that it's not always the almighty dollar that attracts the people there. There's no question the type of project, the innovation, the state-of-the-art work that is provided can in fact retain people in Canada. We've seen this.

I simply wanted to highlight that, for instance, Pratt & Whitney announced the other day one of its largest contributions to McMaster University in Hamilton. We have collaborative research projects with a number of universities. In fact, happily, we work with engineering faculties who offer cooperative programs.

So when you continue to provide that environment, we can do our best to retain the talent here. So those graduates are working on relevant commercial issues today, in part sustained by government investment and certainly in large part by business. But if we can continue to retain them in the industry that would be stimulated by lower taxes, then I think it's just a continuum you have to address. That's one of the points I simply wanted to make. Thank you.

The Chairman: Go ahead, Dr. Brzustowski.

Dr. Thomas Brzustowski: Mr. Chairman, this point of retaining our best and brightest is really of fundamental importance. I don't want to get into the debate with the experts in Statistics Canada about whether there is a brain drain or not. What there is is a loss of leaders. For example, university researchers in whom this country has invested beyond their education, another ten years of investment through supporting their research, who find.... For them, the salary and the taxes may be issues, but the prominent issue is the opportunity to do more research, better funded, and in a place that's closer to the state of the art.

It's not just the United States, because other countries have strategies. I'd like to read a few sentences, Mr. Chairman, for the record, of a head of government—the government will be identified in the last sentence of the quotation—talking about what their strategy is that leads to the conditions that attract people. Let me read:

...my government's paramount goal is to create the conditions for higher levels of employment. To do so, we must be receptive to new ideas and have the courage to change our ways of thinking, because we can only succeed in international competition through innovation and growth, high-quality products and services, and research and education. These are the keys to the future.

More emphasis will be placed on R&D. This will include not only state expenditure but also a greater prominence for this topic in public debate. Although we must not ignore the fact that technological innovations can cost jobs, they also create new employment through the development of new products and the opening up of new markets...I am therefore convinced that a leading position in highly complex technologies is essential for international competitiveness and secure long-term jobs.

I'll skip a sentence or two.

Although politicians themselves cannot guarantee the success of innovation, we must strive to create conditions that encourage it. This is why fostering education, science, and research is of prime importance to the German government. We are meeting this commitment with action—the relevant budgetary funds have been increased by nearly 1 billion deutschemarks for 1999.

• 1705

This is a signed editorial in the April 16 issue of the Science journal, signed by Gerhard Schroeder, the Chancellor of Germany. Countries have strategies.

The Chairman: Ms. Brown.

Ms. Sally Brown: If I could just add a point as well, there is a growing issue. I know it's not popular, but I spoke to the declining core budgets of universities. Part of the problem we're seeing now is that with the decline in core budgets, the faculty salaries are just not competitive at all, and the universities are replacing people who leave with junior faculty. They don't even recruit at the senior levels because they just aren't competitive.

The risk is that Canada could become a training ground for people to go elsewhere. That's a real risk we have to think through, in terms of the need to invest in our universities, so they can retain their faculty, develop the programs they need to retain the best and brightest students, and attract the best and brightest foreign students to our countries, because they'll go home and have all sorts of linkages with Canada.

So there are a million dimensions to this brain drain issue, but I would agree with my colleagues that it's becoming of critical importance.

The Chairman: As we live in a more global environment...if I can give a sports analogy, if you're a North American soccer player, your dream is to play in the Italian first division. Even if you're a Portuguese or a Spanish soccer player, you still want to play in Italy because the environment is there and it pays well. They're the tops in the world. It's the same thing with hockey players. Where do the European hockey players want to play? They all want to play in North America because the environment is the best. You're always going to have that. There will always be areas worldwide that specialize.

I think you were talking about clusters. That's an important component of attracting many individuals to areas where they can specialize and foster the type of innovation and creativity that is prevalent in those areas.

We factor that in and accept that as part of the reality. That's going to happen. There will be places in the world that will do great things and produce great products and what have you. Having said that, nothing short of a big bang in Canada, in the sense of corporate taxation, personal taxes, R and D, and other things, will make things happen. There seems to be a Canadian attitude that everything has to happen very gradually. If I hear your message correctly and the crisis is what it is, then we really have to move quickly.

Mr. d'Aquino.

Mr. Thomas d'Aquino: Mr. Chairman, when I heard you use the words “big bang”, it sent nice warm shocks through my system, because to hear the very progressive chairman of this finance committee use the words “big bang” gives me reason for some encouragement. You're absolutely right; we need a big bang.

If we don't have a big bang, what will happen? This is part of the problem we have in Canada. It's not that we will fall precipitously into poverty. It's not that all of our young people will leave the country. It's not that all of our plants will shut down. That won't happen. A lot of Canadians, and certainly some politicians, probably know that will not happen.

But what will happen? As sure as we're sitting here, Canada will become the reasonably affluent northern suburb of an economic, productive, human capital concentration to the south of us. Some people will say “So what; does that really matter?” We think it does. That's why we launched the Canada global leadership initiative.

Our point is that we have made significant progress in the last decade. Remember, in 1990 we were plunging into recession. We had inflationary performance that was way out of whack in relation to the other members of the G-7. We had soaring deficits and debt and rising interest rate costs. The mix of our exports did not have anything like the value-added it has today. When we brought Michael Porter into Canada in 1990, his assessment was that we were rapidly going down the drain.

• 1710

Look at what has been achieved in the decade. Today we have one of the lowest inflation records in the world. We've erased our public sector deficits. Our export performance in value-added is excellent. By the last measurement of productivity, we have made significant strides. We've invested in plants and machinery.

But there are some things that are still broken and need to be fixed. There is the underperforming currency—20 years of it—an underperforming stock market, the brain drain we've referred to, and the fact that we are still sitting on large amounts of debt. Your analogy of the players is an excellent one because we have the blessing, not the curse, to live next to one of the most dynamic societies and economies in the world, so the pressure will always be there.

The real question for us is this. Do we just simply do our best, muddle through, and lose those head offices, those clusters, those concentrations of energy and skills that help make the nation, or do we see them slowly dwindle away? Our argument is if we watch them slowly dwindle away, in five to fifteen years we will really be asking a serious question: Why have a Canada? Why just not make it a northern suburb of the United States? That is why we need a big bang. The big bang has to come not in 10 or 20 years; you and a whole bunch of us have to get together and generate that big bang this year, next year and the following year. We don't have a great deal of time.

The Chairman: Are there any further comments?

Mr. Smith.

Mr. Peter Smith: There's a slight flaw in your analogy. I would simply bring to your attention an example in the aerospace industry. If you agree, for instance, that Bombardier is now the third-largest aerospace company in the world—third only to Boeing and Airbus—you would normally think, using your analogy, that it wouldn't be difficult for Bombardier to recruit to this particular country, because Bombardier, unlike the other two, has produced a new product every year for the last five years.

The Airbus A 3XX is coming off design in the next year or so, but if you look at Global Express, Dash 8-400, and the number of products that have been put out, plus Bell Helicopter Textron and their rotary wing, we are facing a challenge. We have created the environment, as you say, of North American hockey or European soccer, but there are these other impediments, such as the tax regime and a number of others. This is where I simply want to say it's not black or white.

I agree one would tend to believe the sports analogy, but then there's that slight contradiction when I see a company that has blossomed like Bombardier, incapable of getting the top talent because there are these impediments.

So what's happening? As I mentioned in my comments, unfortunately for Canada we've gone from 66% to 54% value-added. That's partly because of leveraging sales, partly because of doing the work where it can best be done, where there are investments that are much more attractive, or where labour forces are equal if not better in the sense of the talent.

So when you take a look at Global Express, as an example, it was unheard of a decade ago that the most important element of an aircraft, a wing, would be built and designed offshore by Mitsubishi in Japan and brought to Canada, along with the fuselage and a whole bunch of other things. Technologically, things can be done now globally. It's our challenge to maintain the high end here and share as we can, if it's not going to be detrimental to the country, those elements of the work packages that can be used as leveraging for sales.

The Chairman: Dr. Mustard.

Dr. Fraser Mustard (Individual Presentation): I'm here under a variety of pretences. For this response I'm wearing the hat of chairman of the board of Ballard Power Systems.

Most of you have some awareness of what this means. It's located in Vancouver. God knows why anybody would want to put a new technology in Vancouver, but nevertheless some of you who come from there will understand that. It sits as a transforming energy technology for the next century. It's based in Canada.

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I'm not certain that the governments in Canada totally understand the implications of it, nor do they totally understand the political and economic forces in other jurisdictions that will not allow this to totally develop in Canada unless there's strong support strength behind it in terms of infrastructure and other things. If you just think a fuel cell technology finally developed can be put in the basement of your house and coupled to your natural gas pipeline and produce your electricity on demand, which gets rid of nuclear power plants, big dams, etc., it doesn't take any genius to figure out that this is an awesome opportunity. It has a gut technology called a polymer membrane. Research in universities can do a lot of enlightened things to make sure you've got the lead in that polymer membrane to drive this technology. It's also environmentally friendly.

I just say to you that in my exposure to this and having to transform the company under one aspect, you can recruit people to Canada. We've recruited to Vancouver a very talented person out of Dow to eventually head Ballard. You can create opportunities here, but you've got to make sure the big bang takes place, that you can keep all the forces together to keep that going.

The Chairman: Thank you, Dr. Mustard.

Mr. Szabo.

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

I'm very fascinated by the brain drain discussions, and there are certainly a lot of tentacles. We were provided with some data from Statistics Canada on this that you're all aware of, I think. One that I thought was very interesting was the fact that the U.S. is reporting that only 15% of Canadians working in the U.S. make more than $50,000 a year. If the best and the brightest make more than $50,000 and that's bad, then maybe the other 85% of Canadians who emigrated from Canada...maybe our loss is actually good for Canada, to put it on its head. They could be our unemployed or on welfare.

Ross Perot had a solution for brain drain. Some of you may know that when he started EDS in the States, he made all of his new employees, whom he was going to train and put through his very high-technology training system, sign promissory notes that were amortized over five-year periods. So if you stayed with him for five years it was a wash, but if you left early you had to pay him to leave, which would allow him to recoup his training costs. It's an interesting concept, and Ross Perot is an interesting gentlemen.

Taiwan also had an interesting experience with brain drain. They were losing a lot of their best and brightest—the same kind of thing—but then they started to establish science and research parks where the government, networking with business and industry and the research community, actually developed housing communities with shopping centres and community centres and hospitals and everything they could ever want, and they found a net gain. The people they lost were starting to come back, and now Taiwan has seven world-leading products of the high-technology, Silicon Valley type. They earned it back. So there's another strategy.

I'm sure there are many ways to deal with it, but do you know what? Because Dr. Mustard has come here, I want to throw this back to productivity, which is the macro-theme, why we're here, and suggest to you that the labour component, no matter how you measure it, really is in everybody's definition. I want to read a statement to you by Dr. Paul Steinhauer of Voices for Children. He said that 25% of our children are entering adult life with significant social, behavioural, or academic problems, and that means 75% of Canadians are going to have to work to provide the supports and services for the one in four Canadians who are unable to fend for themselves or care for themselves. Whether it's fully realized now or not, it's going to be, and that means our productivity is going to be distorted by the fact that we're not fully benefiting from our own productivity because we have to share it.

I'm really curious about why, in terms of all of the solutions people have brought before us, that nobody but nobody has ever mentioned investing in our future labour force.

Dr. Fraser Mustard: That's my job.

Do you want me to give the presentation? Do you have copies of this?

Let me begin with an opening statement by Paul Romer, which is important for any government.

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There's a fundamental difference between your concepts of business cycles and basic technological revolutions, which are deep and profound. In my view, you're in one now and all our history is that you won't be through this next year. It'll take 20 years to go through it.

If you read The Economist article from which this quote is taken, it says your investment strategies, as a region or as a nation, have to understand what is meant by major technological change. I think my colleagues call it “general purpose technologies”.

I don't think our policies have got up to that point, because basically it's how well you invest in the long-term commitment to build the new wealth creators that will determine the success of your society. So the government needs to rethink its policies, in my judgment. The material I've read I'm not cheerful about, and your tax policies and your capital gains tax, in companies like Ballard, where you use stock as a method of paying people, need to be very carefully looked at to keep the drive in those places. That's point number one. But in that article, it says investment in people is also crucial.

So getting around to productivity, I've been fascinated by the material that's come out of Ottawa recently, but I have more trust in Elhanan Helpman, who heads the institute's economic growth program, and Pierre Fortin from Quebec. They said our total factor productivity has been flat since 1975, and it's still flat, and that's a technique for measuring—and I've seen all the material you've been given on how well you're incorporating massive technological change in the economy. Their graph shows that the break point is 1975. When that occurs, it's hard to increase wages and it's hard to get distribution because you're into a flat society in which it's very difficult to redistribute resources, except through, as Ken Boulding used to say, mafia tactics. It gets into a very difficult situation when you hit this as a society.

The other analogy that shows this, if you're interested as a committee, is to go and read Paul David's paper on transition from steam power to electricity. That transition took 40 years, and all the economic issues you face today were apparent during that transition.

My honourable colleague from BCNI mentioned our good friend from Harvard, when he came up here, and if you translate in the next chart wealth creation into his language, if your society becomes a society that George Soros talks about, where you basically get your money by playing with money, you'd become a wealth-driven society and you'd slide away from where you were. The problem is it's easier to make money with that trick than by investing in the new high-risk economies, such as fuel cells. You've got to make sure your incentive structures are there to drive that, and I don't think they're properly in place in our society. So that's a little hit at that sort of thing that allows my biases to come out.

The two rectangles in the next chart point out that in good old Montreal, the aerospace industry is that upper left-hand box—traded goods and services. In a modern global economy, that's what generates your real wealth. Below it are your dynamic services, and they don't do well if they don't have something to serve. Speak to Canadian Airlines if you want to understand the nature of the service industry in this complex world. The right-hand side, in Dick Lipsey's language, is the consumption side. What you can consume over there is directly dependent upon what you drive in that upper left-hand box. We don't concentrate enough on that in our economy, in my view.

If you look at our economic performance, recognizing that we went flat in 1975, the unemployment rate has climbed; it's changing. But more importantly, coming back to your question about the Paul Steinhauer quote, look at the next chart. It shows what's happened to annual wages for men employed full-time in Canada since 1975. If you're under 45, you haven't been doing as well as the fat cats in my generation, and that's pretty significant because that's your child-rearing population. So what you're doing is you're getting some skewing in your system, which is perhaps not trivial.

The next one is the chart I use when I'm describing this before certain political parties. Back in 1973 the “good citizens”, as defined in the bottom half by median income, got their income from work, called “earnings”. Look at all the lazy slobs in 1991 getting the bulk of their income through transfer payments. All of you know that's really a manifestation of this very complex economic change hitting our society, because our economy hasn't been building forward. That's significant, because as you cut transfer payments, you begin to hit mothers and children, and you can't avoid that when you're doing it.

So if you turn to the next one—I'm of the generation, of course, that believes women should stay at home and raise their children, but they don't want to do that. So there you have the percentage of woman in the labour force. And, indeed, your labour force wouldn't succeed without them in it.

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When you look at the figures, that 77% of mothers with school-age children in Canada are in the labour force and 62% of mothers with pre-school children—a very critical period—are in it, then Paul Steinhauer's question becomes absolutely crucial in this period. You have to find ways to adjust to this. I would argue for finance not to invest in pre-school is foolish, and I'll come to what I think it should do.

Mr. Paul Szabo: Those figures include any kind of part-time work. About half are full-time and half are part-time.

Dr. Fraser Mustard: The figures are pooled. Mr. Harris' report is here, and you can have it. It's all in there for Ontario. By the way, it's called “Reversing the Real Brain Drain”, taking up on your point.

If you put modern neuroscience and your public expenditures together on the next chart, the brain's malleability—the basic core functions of your brain and my brain—is all set on conception day three. Yes, you can overcome the odds, but it's damned difficult if you get a poor basic start. Our expenditures on what I call the repair shop function for kids who are delinquent, kids who need help in the school system—all that's fair to give them. Mental health problems and chronic diseases of adult life all kick in later on.

In this report you'll find that we produce most of the evidence that the bulk of the health problems you've increased spending on are set before the age of five. I would argue that you misspent your resources. You should have put the money into the pre-school period rather than this aging population I represent. However, I'm not a politician. But you see the mismatch between the real story of the brain development and the quality of your population in this issue.

The next one is important because you've had two shootings in schools in the last period of time. You read all the blather about them, but nobody sits down and asks what happened in those very early periods that set the basic patterns of behaviour. It's extremely important. This is Quebec data, and the blackened bars are the important ones in these studies, which were done seven years ago.

Over 21% of the male children east of Saint-Denis showed antisocial behaviour when they came into the school system. A high proportion drop out of the school system, and about 30% of them will be delinquent when they're 13. In the areas around Hull and Quebec City, which are more prosperous, you don't see that.

We know the whole way your brain develops, the wiring of the billions of neurons in your head that occurs in this very malleable period, affects arousal of emotions at the same time. So if children are brought up in circumstances where there isn't good support for them, you run the risk—it doesn't matter if it's middle class, upper class, or lower class—of dysfunctional children who will behave badly. I suspect if you really could probe those cases, you'd find they were dysfunctional families, even if they had lots of money. That's the bad news part of this story.

For Mr. Harris, we had to find some proof that Ontario had a way to go. There isn't much of a data system in this country, but fortunately the federal government supports the national longitudinal study of children and youth, and we were able to pull that. The chart shows the verbal skills of children aged four and five. That measurement tool is hugely predicative in aggregate of subsequent performance down the road in a range of things, from behaviour to health outcomes and literacy. I won't take you through all the details, but the arguments are all in this document.

The vertical scale of the chart is the percent of children with difficulty. The horizontal axis is social-economic class. Just let me point out to you that between minus one and one is 66% of the Canadian population. The bulk of your children are in that group. Margaret McCain, who was my co-chair, would be on the far right and I would be on the far left, at the low end of the SES. You get the analogy here.

You'll notice that the percentage of children with poor verbal skills on the poverty side of the equation is about 32% in Ontario, and that's true for the rest of Canada. When you come to the top end of the scale, it's less than 7% in the rest of Canada, but in Ontario 10% of the children are still having difficulty.

Most of you are middle class. Some of you, if you have young children, are in that dimension where there are problems and you need to think through why those problems exist. So we told Mr. Harris, you have a problem in Ontario; your children are not doing as well as those in the rest of Canada. That's a very important message for a politician to have to take on. He has the report and it's been made public.

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We know the verbal skills story ties in to subsequent behaviour and delinquency and things like that, but it also ties in to literacy.

So coming to your question about the performance of a population's literacy, this is the gradient in literacy, by socio-economic status, for Canadian provinces. And lo and behold, you have four provinces that have a much higher performance than a bunch of other provinces. Mr. Harris, Ontario should at least have a gradient with the same slope as Quebec, if you want to be competitive in this world of a literate population. Does everybody see that? It ties back to the pre-school period. I won't take you through all the arguments for that.

So what causes this? We asked the national longitudinal survey people we worked with to examine how much of this was driven by income. Is it a poverty question? The answer is, there's a small income effect. This shows you the percentage of children in Canada and in Ontario estimated to have difficulties in terms of verbal skills, mathematics, and behaviour characteristics when they're young. In Ontario, 21% of the children in the top quartile of income families are in trouble and 35% in the bottom.

There is no threshold; there is no cutoff. This is a universal Canadian problem, if I can put it bluntly to you that way. It's not something that's going to be solved unless you're prepared to address the whole question of early child development coherently.

The next slide is a copy of the title of our report, Reversing the Real Brain Drain. And you have a mother and Eb Zeidler's grandson, who is coming out with one of the kittens we keep in our office. That's where the report was done. We actually kept kittens in the office to get the reference group to understand how play in early life wires the brain, because that's what a kitten does, if you've ever watched a kitten, and it's what a child does. That's a little passing comment for you.

So the recommendation to the Government of Ontario is that you need to set up early child development and parenting centres that have the following characteristics. You have women in the labour force; you have a range of things. Early childhood development and parenting centres begin at conception and go up to grade one. You collapse kindergarten into this process because kindergarten curricula tend to become didactic rather than play-based, because children learn through problem solving. You're asking questions about brain development. Your core capability in mathematics, to do advanced mathematics, is set between the ages of four and six.

If you think about it, children playing with six balls, with three in one hand and three in the other, are driving their weight-sensing systems, their touch systems, and vision is going to be involved because they see them and someone's going to be talking to them. When you drive multiple sensing pathways through play in early life, you actually do a very complicated, sophisticated wiring of the brain. If you don't get that, you don't acquire what's called the cognitive weight of numbers, and there's no way you can teach advanced mathematics to people who don't get it at that stage. We know you can intervene and change that outcome.

So if you want a highly literate...literacy is also interesting because when you read to a child at 12 months, you're driving five sensing pathways: smell, touch, temperature, vision, and sound. That all wires in to the sensing systems that have to develop during this very critical early period, but it also cross-wires over to arouse emotions. That's why we now know, in my view, that children who become teenagers and are functionally illiterate tend to end up in the delinquency world because of these enormously sophisticated cross-wirings that take place.

So we said to Mr. Harris, you have to stimulate the brain through two pathways: through the child-child interaction, which is called child-oriented here, and through parent interaction, and this can be non-biological caregivers. You need to collapse all these things into one program, but you must design it so that it's community-sensitive. So why not have a workplace site that employs women with children—an early child development centre? Why not? Why not create a tax credit that gives us stimulation to do that? We've tried this out on some of the people who run small businesses in small towns, and actually some of them liked the idea because they could get their colleagues as partners to create early child development centres for this.

If you go into businesses, it's a bit soft. We found that the Ontario Provincial Police run an absolutely marvellous centre for their staff in Orillia, which is open to the community. It's soundly based all the way along, and Fortune magazine has now written that businesses that will be highly regarded in the future, with women in the labour force, will be the businesses that can put in family friendly systems with early child development and parenting centres.

So we said to Mr. Harris, you have to have your private sector as an ally to move this forward. My sense, and I've given the brief outline to this, is that the challenge for western countries is to be able to do this. When Ralf Dahrendorf wrote his paper about the challenge for the west in adjusting to this new economic change, he said you have to learn how to do it, but also maintain the quality of your social environment.

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I think the challenge is to find ways to make that adjustment with women in the labour force and the profound adjustments, so you optimize the whole parenting structure in this, in relation to the workplace.

So your question is dead on. The opportunity for Canada is we probably have a better capability to do this at the moment than parts of the United States. But in doing this report, we've found that 42 states now have governors committed to early childhood development, and a number of businesses are making major steps on that road. We did not find the numbers we would like to see doing this in Ontario. I do not know about the rest of Canada.

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

You got an answer and the entire presentation.

Mr. Paul Szabo: It does raise the question, if everyone believes we still are in a scenario where we have limited resources and we still have to find ways to spend wisely to get the best value for the investment, whether or not we have another dimension. One might be just broad-based tax costs, another might be investing in children and everything else in-between. I wonder if there is any kind of consensus that there is a priority here, or at least there should be a balanced investment.

Maybe the panel could comment.

The Chairman: Mr. d'Aquino, and then we'll go to Ms. Leung.

Mr. Thomas d'Aquino: First of all, congratulations to my old friend Dr. Mustard for a superb presentation and for the work he has done, not just in this report but over many years.

I'm delighted that Fraser Mustard has made the point. When he first explained it to me about 10 years ago, I came back to my office and asked the logical question, if Dr. Fraser Mustard is right, then let's look at where the country is putting its resources. If he's right, you'd have to conclude we are very badly misaligned in how we're using our resources. This brings me back to the issue of choice I spoke about earlier.

We have made many choices in this country over the last 20 years, and we've made many of the wrong choices. The most dramatic example I gave you of that was $41 billion of interest payments. Just think what Fraser Mustard could do with $41 billion, if we weren't paying it to make up for very profligate spending in the past.

The point I really want to make here is there seems to be a debate rising in this country that you have to choose between children and tax cuts. I suggest that is totally the wrong way to go. I know that debate is somewhat alive in your caucus. While I'm a great supporter of that kind of debate—it's very constructive—I really think those individuals who think you're either on one side or the other are totally missing the boat. Not only will they not be part of the big bang, but they will help deliver Canada to what I call third-rate status.

We have to do both. How do we invest in children? We do that by taking a good hard look at where we're spending money now and make a decision on how to realign some of those resources. No one in this room can question that there's a lot of room for realignment.

The second point is if we don't put more disposable income into the pockets of people—hard working men and women across the country who are helping to create wealth—how on earth will Dr. Fraser Mustard's program be paid for? That is the inextricable linkage between tax cuts, innovation, investment, and using money intelligently in an investment sense of building, particularly the minds of our youngest people.

I'm a convert to Dr. Mustard's point of view. That's why I have said publicly, and I would repeat again today, that there's a lot more room for investing money, time, and effort into our very youngest. But to do that we need to have a minister of finance who does not say “I only have a limited amount of money and I have to look after many constituencies”. We have to make choices.

That's the recommendation we gave to the Prime Minister in the lead-up to the last budget: Prime Minister, please make some choices. That is why I was so pleased, Mr. Chairman, in the report you wrote in the lead-up to the last budget. I thought your committee made some very intelligent choices as well.

So again, when you hear the black and white argument that it's either children or tax cuts, please dismiss it as very unconstructive.

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

Let's go to Ms. Leung first.

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Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman.

I want to say all of you had very fine presentations. First, I want to mention to Dr. Mustard that B.C. is well known for natural beauty and high-tech. I'm from Vancouver, so I wish you would visit more often.

Dr. Fraser Mustard: I go there frequently.

Ms. Sophia Leung: I know. I think we also have a lot of high tech-industry. That's why I mentioned that, and I really don't see any disadvantage to having that in Vancouver.

Now after all the very eloquent discussion.... We mentioned competitiveness, but I also strongly feel that culturally induced competitiveness plays a very important part. I travel a lot. I have a lot of contact with people from different parts of the world, and I always find that the view about Canadians is that they are very gentle, they are very trustworthy, they're kind, but they're not competitive. They are not.

People from Asia, from Hong Kong or Taiwan are very, very competitive. I just wonder whether this is related to the educational system. We have a different attitude, I think. A lot of visitors say we Canadians are so lucky, living in such a beautiful country with mild weather—I'm referring to B.C.'s beautiful weather—and you have such a fine system, you don't even have to work, you just enjoy your life.

I feel very insulted. What do you mean? I work so hard. They say, well look at your system. You're born here, and from cradle to grave you are literally looked after. I don't think we go that far, but what I'm trying to say is, is this culturally induced? We are in a milieu. We are, on average.... I'm not talking about poverty; we do have poverty. But as an average Canadian, we're not really raised to compete. As you know, if a child in Hong Kong fails school, he or she will shame the family, will commit suicide. That's a very common thing, although very extreme.

What I'm saying is that here we are, in the meantime, saying things like, on the weekend, have a good time. We never say, you work harder. Other cultures say work harder. I'm saying that such culturally induced competitiveness is missing here. I like it here; it's an easy life. But it's not easy as an MP, as you know.

Anyway, I just wanted comments on that—from any of you.

The Chairman: You raise a very interesting point. Attitudinal change is required in our market, in our country. I think that's—

Ms. Sophia Leung: Yes. It's linked with your hockey and soccer; that's cultural.

The Chairman: After Mr. Smith sent those hockey players and soccer players back to the dressing room...I'm not using that analogy any more.

Ms. Brown.

Ms. Sally Brown: I have a brief comment on that. I spent the morning making a presentation to the federal-provincial deputy ministers on international education. AUCC is a member of a coalition of other groups interested in international education. What we presented to the federal and provincial officials was that Canada needs to develop a flagship program. We need to develop our own Fulbright program, our own Rhodes scholarship program, to send a message to the world that studying in Canada is an excellent idea, that we have a high-class system. We should be able to offer full post-doc. We should be able to offer scholarships for PhDs that are meaningful.

The reaction at first was, oh, we couldn't do that; we're not up there with the United States in terms of the Fulbright program or whatever. But I think this is part of the same question. We're saying, of course we are. We have an excellent education system.

The problem is, nobody knows it outside this country. I think we do need a cultural shift in terms of promoting what we do well, and with very little investment; go out and brag about it. Offer those sorts of scholarships that say to young people, come here, and say to the young students who are here that this is a system that is proud of itself, and that maybe they should stay here and go to school if we're capable of attracting that kind of quality from another country. So I think there does need to be a bit of attitudinal shift in terms of the emphasis we place on marketing ourselves.

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The Chairman: Anybody's who's tried to place a child in a gifted program in the province of Ontario or perhaps in any other province in Canada will find it's very difficult. It's extremely difficult. So I think the notion of pursuing excellence and being go-getters is not such a bad idea, Ms. Leung.

Dr. Mustard.

Dr. Fraser Mustard: I find this an intriguing question. I may be the longest in the tooth of the people around the table.

Canadians have been competitive, but I think you have to watch what your incentive structures are really like. I happen to think the capital gains structure is out of whack. Having to work with what could be a very crucial high-technology company that's transforming.... I think the capital gains tax structure in terms of share options, which these businesses have to use, should be totally rejigged. A little incentive doesn't hurt to move the subject forward.

Certainly, with the scenic climate and all the lotus-land qualities of Vancouver, we had no problem in recruiting an extraordinarily top-talented person out of the States to Vancouver to be groomed for the leadership role in Ballard. That's because Geoffrey Ballard came from the States. He was a Canadian. He came back and started it. Two immigrant Israelis took over the company and marketed it to big players like Daimler and Ford.

You now have this thing in place that says, yes, there are people who are competitive, who can take risks and move things forward, so it can be done in the country. But I think you have to be very conscious of the incentive structure that must be in place to make this go, and to recognize that the incentive for this is different from the incentives for capital gains and other ways.

The Chairman: Thank you, Ms. Leung.

Mr. Smith.

Mr. Peter Smith: I would just like to add that on a very small scale, obviously, we in the aerospace industry have gained an awful lot on the basis of the cultural exchange and competitiveness issue in that the aerospace industry in Canada has grown over the last decade by about 140%, exporting to about 42 countries. You don't do that easily, but you learn every time. I do agree with you that there is a percentage of people out there who perceive Canada as being very complacent; however, I think we are doing exceptionally well. We certainly could do better.

Personally, I find the tragedy is that we make it too easy in Canada to allow young children to drop out of school. There are those safety nets, and often you can either go down a main street in Ottawa or a main street in Vancouver. We speak an awful lot to school children. Perhaps, having heard Dr. Mustard, we might want to speak to them when they're younger than they are when we speak to them now, for the simple reason that we need to continually invest in attracting them in areas like mathematics, science, and others so we can have the leaders in the future.

Thank you.

The Chairman: Thank you.

Mr. Patterson.

Mr. David Patterson: I'd like to pick up on another part of the question asked about attitudes and what we need to look at here in Canada. Fraser Mustard has referred to the incentive structure when it comes to innovation, entrepreneurs, and so on. I think that's just one aspect of a more troubling attitude we have as Canadians, and that is our attitude to success and those who succeed.

We talk about the trouble we have losing our best and our brightest and why it is they're going away. Part of the problem, I think, is that we don't celebrate success. I don't just mean in the sense of handing out awards. I mean handing out rewards, and the ability to reap rewards. This comes back to the tax system. We say we want innovation. We say we want people to take more risks. Yet we turn around and hit anybody who does succeed with punitive levels of taxation, whether it's on their stock options, on incomes they take out, on the capital gains they reap when they sell their companies, or whatever. The fact is, taxing the rich seems to be very Canadian, even if the rich are still paying off their student loans.

It seems to me the real question is one of our attitude—do we want Canadians to have the opportunity to get rich by any measure? Do we want good jobs in this country, and do we want our kids to have an opportunity to take those good jobs? Do we want companies to create those good jobs in this country?

• 1750

It seems to me we have to look at our attitude towards that question, because if we want to have successes to celebrate, we have to make sure that the people who can succeed, who are willing to succeed, who take the chances, who make the investment of their time, money, and energy, and who make it, once they've made it, stick around and pass on their success to the people around them. I think that question of attitude is one we have to look at ourselves, and at what is it we really value in this country.

The Chairman: That's a good point.

Go ahead.

Mr. Sam T. Boutziouvis (Vice-President, Economics and Global Competitiveness, Business Council on National Issues): I might add that I think the attitudes are changing a little bit, because if you see some of these kids who are graduating from Waterloo and are going down, stock options are a big issue to them. I feel that in the United States in particular, stock options are becoming a very big issue, not just for management and large and medium-sized enterprises, but also for people who work in companies. Management realizes, of course, that if they offer stock options, it actually provides a built-in incentive to succeed and to be innovative and creative, obviously for the benefit of the corporation, but for the benefit of the people themselves.

There was a very interesting presentation at a Statistics Canada conference a couple of months ago. A fellow from Harvard called this the democratization of capitalism, which I think is spilling over into Canada as Canada becomes more and more integrated into the North American marketplace.

The Chairman: Thank you, Mr. Boutziouvis.

We'll hear from Mrs. Redman, and then we'll go to Mr. Brison.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I feel I need to comment. The University of Waterloo is in my community, and I think one of the things that sometimes saddens me is how we as Canadians brag about the fact that Bill Gates is down the street recruiting our graduates. It's further to what Ms. Brown said, that it somehow legitimizes the fact that we must be doing good because the Americans want us, and somehow we can't succeed on this side of the 49th parallel. I do find that troubling.

Mr. d'Aquino, I want to ask you two questions. In your presentation you talked about the fact that the impact that one would expect to see in the growth of the high-tech sector really isn't there, and you acknowledge that it's part of the quandary of figuring out productivity. It's something that really surprised me. The high-tech sector is alive and well and thriving in my community. I wonder if you have anything more to say on that matter, or if anybody does, other than the fact that it doesn't seem to be making the impacts one would expect.

My other question is, if taxes matter, then is the United States really the most relevant yardstick? We had a Mr. Kesselman here, and he was talking about the productivity levels that outstrip the United States and Europe. He also said that despite the fact that the tax rates were comparable overall, the tax mix was quite different and they weren't relying on property tax and on income tax, but rather on value-added tax. I wonder if anybody would like to comment on that.

Mr. Thomas d'Aquino: I don't recall that in our statement we said our high-tech sector was not performing.

Mrs. Karen Redman: No, it was that you didn't see the impact of that performance in productivity; it hasn't translated.

Mr. Thomas d'Aquino: I see, the productivity paradox, yes, and that is not limited to Canada.

Going right back to the early 1980s, when I got involved with the productivity issue, I kept shaking my head and asking why it was that in some sectors I had seen with my own eyes very significant investments in plant machinery, technology, and upgrading of skills, yet we saw no increase in the statistics. Our chief economist knows how many times I've beaten my head against the wall in the last three to four years, when I have said, Sam, why is it that we can look at 50 companies in Canada that we know intimately that have invested heavily, upgraded their technological skills, and put a lot of money into people and we aren't seeing a blip?

When Statistics Canada came out in 1997 and said Canada had suddenly experienced a great surge in productivity in fact that well exceeded that of the United States, I said, aha, finally we're beginning to see some evidence.

The point I was really trying to make overall is that this debate about productivity, in my view, has been sterile to some extent. It has been useful in the sense that it allows us all to debate about the question, what it is, what it is not, and why some other measurements are more important. But our central thesis is that an intense focus on productivity, what it is and how to measure it, is really not very productive at all. What is productive, I would maintain, is the kind of conversation we've heard around this table, where Dr. Mustard comes in and tells you something about how investment in post-natal children will make a huge difference, and he can show you the evidence that it will do so; or when our friends in the university sector say that investments in research and development and other forms of technology will produce results that are demonstrable; when we say to you that cuts in personal income taxes that allow Canadians to have a higher degree of disposable income and that “incentivize” men and women who are running small start-up companies to do more and want to do more—that is all hard evidence that we should be looking at, as opposed to getting caught up on whether there is a difference or not and how we really measure it.

• 1755

One of the individuals who appeared before your committee, Professor Harris from British Columbia, was in my office I think the day after or the day of his testimony before this committee. I said, “Rick, you are considered to be one of the best scholars in the country on the issue of productivity. Tell me, in your opinion how long is it going to take before we can reach some form of harmonized, cohesive understanding and acceptance of measurements simply between Canada and the United States?” He said, “Tom, I think it'll take up to five years to do that.”

We don't have five years to wait while academics debate how many angels there are on the head of a pin. The one thing we do know is that the meat and potato things we've been talking about around this table are highly relevant. But the real debate, Mr. Chairman, is the debate about choices.

Your second question was on the issue of taxes. When we launched the Canada global leadership initiative, a number of the press reports attached to it that this is a great national campaign to lower taxes. This was despite the fact that there were five major elements in our initiative and of them tax was only one component and despite the fact that we repeatedly said that taxes alone—a significant reduction in personal, corporate, capital gains taxes alone—will not solve Canada's problems. We meant it. Despite that, the media said it's another great drive on the part of big business to bring down taxes.

But the truth of the matter is that taxes are important, and I've made this argument, Mr. Chairman, to the Minister of Finance, and we did so recently when he visited us in Toronto. If one assumes that people who are earning $35,000, or even more in my view.... It's disgraceful that there are people in Canada earning $12,000 to $13,000 a year who are paying taxes. When we have individuals, as David, my colleague, was pointing out, who in fact are being taxed at the highest marginal rate two or three years out of university while they're still trying to pay down their student debt.... If we have a system that kicks in at the highest marginal rate at $67,000 or $71,000, as opposed to $261,000, you really don't have to be a rocket scientist to say this is going to be a profound disincentive, not just to young people but to many people.

I know people say, and some people have said to me, Tom, that's tough; if people are not prepared to pay a higher price for living in Canada then hasta la vista. If they want to go to the U.S., those are not the kinds of people we want. I don't think this is a very constructive response either.

This is why we made the point that it's not good enough, Mr. Chairman, that we try to close the gap with the Americans, as Mr. Manley, the Minister of Industry, has bravely said this week. We must go further, not just on taxes but in every other respect, to make Canada more attractive than the United States.

I finish up with a final point. People say, how can we compete with the mighty American colossus? People say, give me an example of a small country that has performed, and I say I'll give you four. I'll give you Switzerland, the Netherlands, Hong Kong, and Singapore. Those are four countries that are among the most competitive in the world, that have one of the most attractive investment environments in the world, that are growing, and that are innovating.

You don't have to be big to compete. We can do it in Canada, but what we have to do is get the right mix together.

• 1800

I come back, Mr. Chairman, to what you said. We need a big bang very quickly.

The Chairman: Dr. Mustard.

Dr. Fraser Mustard: I would like to comment on Tom's point. You need to look very critically at how you reward investment through your tax policies. If your structure rewards investment in creating the new businesses of the new world, that's different from rewarding investment in what I call playing with money. Michael Porter made that very clear in his description of this country. Britain slid into being a wealth-driven country at the turn of the century we're still in, and it has had a huge job getting out of it.

Conservative Cabinet Minister Joseph Chamberlain said to the banks in 1904, “You didn't create the nation's wealth; you're products of it. Would you please learn to invest in the real economy that's crucial for the future?”

Tom's point is right. If you have the right incentive structures in place, you can drive your economy. But at the present moment, I don't believe we have them in place.

The Chairman: Thank you.

Next is Mr. Brison, and then we'll go back to Mr. Pillitteri.

Mr. Scott Brison: Thank you, Mr. Chair.

Further to Mr. d'Aquino's comments about smaller countries that have set examples we should be aspiring to, I would argue that Ireland is an example of a country that developed innovative policies relative to higher education and combined that with an aggressive corporate tax policy and succeeded in achieving and developing economic growth. That's a fifth example for you.

Dr. Mustard, it's great to have you here today. I have actually referred to some of your studies a number of times in the House and at this committee.

One of the numbers I've heard for the return on societal investment in early intervention and head start programs is something like $7 for every $1 invested in high-risk situations. I think it was by the age of 25 or something. Some of those figures were developed through studies in inner cities. I represent a rural riding, but the demographics of poverty and high-risk situations in rural communities are very similar to those that exist in an inner city in terms of such issues as substance abuse, teen pregnancy, unemployment, high school drop-out rates—all those things. So I'm very interested in these issues.

I'll tell you about a challenge we face as policy-makers. It's something I wasn't really aware of until I became an MP in June 1997, and it's something I'm very frustrated with. We all sit here and hear these kinds of ideas with compelling evidence as to what we should be doing and the types of policies Canadians need. Yours is one of them, and I really believe in that. But unless it's on Canadians' radar screens, unless it shows up in polls and in focus groups, the ability to get the political will on Parliament Hill to do anything on an issue is very limited, and I find that very frustrating.

There's a French saying—my French is very poor so I won't expose you to that yet, but maybe next year—that part of politics is pedagogy, that there's a role to educate, and as politicians and representatives we should be doing that. I think we're dropping the ball on that. I don't think the government is doing a good job on that. I think we're seeing focus group economics and focus group public policy.

I would like to think we would be able to develop policies similar to what you're suggesting in terms of a national strategy relative to early intervention and head start programs, but until it shows up in the polls, we're not going to do that. I'm frustrated with the fact that that is the case.

I would appreciate your feedback on that and on how we're going to create a political climate that encourages thinkers to enter politics and be people of courage to implement the types of policies that, I would argue, were more common under the previous government, such as free trade and the GST. They certainly were not on the political radar screen, but they were necessary at the time. They in fact led to economic growth. I would appreciate your feedback on how we're going to create the political climate that will lead to better public policy.

• 1805

Dr. Fraser Mustard: I'm apolitical, so what I'm going to say is not in support of any upcoming election, etc. The Premier of Ontario, for the exact same reason you asked the question, asked me to come and see him over a year and a half ago. I knew what he wanted to talk about was a social environment change in the early years, so I went armed, as I did with you people, with my two-by-fours to whack him between the ears to make sure he understood. I didn't have to do that. He began the conversation by saying, “I want to talk about zero to three”, which was really quite stunning. There was no election coming up.

He created a minister for children. Last April I got a phone call from his office saying they were putting the early years comments in the throne speech, and they wanted me to look at it. He apologized for not getting back to me sooner. I didn't have a clue as to why he was apologizing, but then it dawned on me that it went back to this earlier meeting.

Down came the terms of reference for an early year study, and guess who was chairing it? It was me. Nobody asked me if I'd chair it. When I looked at the terms of reference in terms of how they were constructed, I saw that they were dead on.

So that's political leadership, if I can use that, by a premier wanting to do something.

He got the report he knew he would get when he asked me to co-chair with Margaret McCain. It doesn't necessarily fit some of his political agenda, but he has it. His response to it—I never know if you can believe politicians—is that he's going to do something. There's a budget speech this afternoon. I don't know if there's anything in that.

But he himself is committed to doing it. So our recommendation says that he has to stand up and lead in Ontario and make this case understood by people. He has to confront the people in his own party who don't believe in it, and he has to do it. We've set that in the terms of reference for him, which he seems happy with now.

That's one thing you people in politics could do if you wanted to.

The second thing you should know is that the rest of the world is moving anyway. The World Bank has a very important agenda in this. The Inter-American Development Bank, which is led by the economist who did the GATT round from Uruguay, is committed to early childhood in order to get rid of crime and violence in the cities. He says that Latin American cities cannot grow until they can get rid of that, and they can only do it through early child investment. That's a huge leadership role. The Inter-American Development Bank's annual meeting was held in Paris this year. I was there for other reasons, and I went to their meeting on early childhood. He got up and said it, and then Amartya Sen, a Nobel Prize winner in economics, spoke next. It's a marvellous speech, and you should have copies of it. Sen said that this has to be a high priority for investment. So it's beginning to come forward.

Now maybe I can get some of our business community to stand up and say this as well and take some leadership in putting some early child development centres in their places of employment. It's a disgrace that they don't do that, and Fortune magazine has said that businesses will be ranked in the future by how they handle that.

So these are a series of things you can do.

I'll shut up by reading from the World Bank's theme by Mary Young, which is a message for all of us:

Because learning begins at birth...the starting point for involving families in [early childhood development]...must be as early as possible.

Knowledge and understanding of...programs is no longer the constraint facing early child development. Rather, transforming this knowledge into action is the major limiting factor in implementing [early child development] programs and requires the combined support of governments, [non-government organizations], the private sector, and the media. The challenge to care for society's youngest members is not just a challenge for a single country...it is a challenge for the entire world community.

That's the hard bottom line for this. It seems to me that you have to make certain that the finance sector of your government understands this challenge and how to respond to it.

So I look forward to leadership from you, Mr. Chairman.

The Chairman: Thank you.

Thank you, Mr. Brison.

We'll have one final question from Mr. Pillitteri.

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

I'm glad I'm a businessman. While I'm sitting here, I sometimes wonder if I'm going to waste or if I'm becoming stale. But let me assure you and some of my colleagues here that as a businessman and as a business in Canada we're very competitive.

I may also say that prior to 1988 I was on different sides from Mr. d'Aquino in believing that certain segments of the industry would have suffered badly, which we did.

Specifically, I'm talking about how fast the agri-food industry has changed. It has changed so fast that it would make somebody's head spin around here. It even surprises me how fast that has changed.

My question is to Mr. d'Aquino. By eliminating the 3% surtax, it has been a tax cut by.... Of course, the 5% surtax is still in place. Some reports have said it would be as high as $600 million a year to eliminate the 5% surtax. Now we have the kick-in—

A voice: It's $650 million.

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Mr. Gary Pillitteri: By having the cutoff at $65,000, you enter the high rate, and the Americans are at $261,000, or the equivalent of $400,000 Canadian. Tell me something.

When you say a big bang for your dollar, what kind of a bang would you have to have to try to achieve that equivalent within a personal income tax? We know that all other taxes are comparable, but what kind of a bang would you have to choose? Have you done any studies on how much revenue it would take from the Canadian government?

Mr. Thomas d'Aquino: Mr. Pillitteri, thanks very much for that question. I'll be very brief, and I'll also ask my colleague, David Stewart-Patterson, to say something about it.

When we talk about big bang—incidentally, it was the chairman's use of the term “big bang”; the last time I heard big bang was in the city of London—when we talk about a major change, we're not thinking in terms of Paul Martin's 20 years to get them up and 20 years to get them down. We're talking about very significant changes in Canada over the course of the next five years. When individuals say we can't do all of this at once, what we're saying, and what we've urged the Minister of Finance to do, is to make a commitment to tax reduction over a period of five years. He has been very reluctant to do that. We've said look at the success you've had with your rolling two-year targets on deficit reduction, which has been the single greatest accomplishment, if I may say so, of the Liberal government.

But a commitment to a five-year tax reduction program that would be incremental but significant, so that people would say yes, I know that in two years, three years, and five years I'm going to see a very significant reduction in my taxes, is exactly what we need. Once the commitment is made and once the full government is behind it, then it'll be easier to implement. Believe me, the people of Canada are behind it. You don't see many politicians asking for tax increases.

Should it be $5 billion a year for the next five years, which is a $25 billion tax cut? I think that is in the vicinity we should be talking about. You then are going to have to decide a very difficult question: How much of that is going to be reductions in employment insurance premiums? As you know, they are way too high and are going to have to be brought down. The more dramatically you reduce the employment insurance premiums, the less money you're going to have to spend on personal income tax cuts.

You all know and all the evidence points to the fact that capital gains cuts will be productive, but the Liberal philosophy says first let's deal with personal income tax cuts, and then maybe somewhere way down the road we'll talk about capital gains. So we can't have everything we want

But at the very least, Mr. Pillitteri, what the government needs is a five-year strategy. By adopting such a strategy you will immediately induce a much higher level of confidence on the part of young people and business people—you're a businessman, so you know exactly what I'm talking about—than if you simply say don't get terribly excited about the surplus I'm going to have. It's not going to be very big, and anything I'm going to give you, I'm going to have to give one year at a time. That isn't good enough.

So big bang, as we would define it, is $5 billion a year for five years. Then you're really getting serious. Incidentally, in relation to what some of our major competitors have done, that is not a big, big tax cut, but it's significant enough, I would argue, to make a difference in Canada.

The Chairman: Thank you very much.

Mr. Gary Pillitteri: Would you want that at the low end, the high end, or across the board?

Mr. David Stewart-Patterson: If I can speak to that, in the strategy we put forward as part of our recommendations for the last budget last autumn, we talked about broadly based tax cuts, including substantial increases to the basic and spousal amounts, the kinds of things that were brought in as part of the last budget. But the focus of our reduction in tax rates was on the range between the average industrial wage, which is basically where the middle income tax rate bracket kicks in, around $30,000, up to about five times that. We picked a number of $150,000. We didn't say never mind $260,000, never mind $400,000. We said where it's really biting is in that middle range there. That's where a lot of highly skilled people are facing a huge gap with regard to that in the United States.

• 1815

One thing that's important to note is that tax cuts at the top end are in fact relatively cheap, because there aren't enough Canadians making really good incomes.

So when you talk about eliminating the 5% surtax entirely, you're talking about roughly $650 million to $700 million a year. Now that's a lot of money, but if you want to simply move the floor of that up from $60,000 to $150,000, which is what we recommended.... It was parallel to the committee's recommendation; you had recommended phasing it out. We said move it up from the bottom. But it was about $400 million a year to do what we suggested. That is equivalent to a reduction of 5¢ in employment insurance premiums.

To give you another comparison, reducing the middle-income tax rate, the 26% rate, by a single percentage point would cost, according to the Department of Finance, something in the order of $1.2 billion a year, because there are lot more people in that bracket.

So I think the gap at the very top end with respect to the United States is significant, but it's not decisive. Where the real problem lies is in that middle- to upper-income range, where at the point Canadians start paying the top marginal rate here in Canada, Americans with the same salary are still paying 12 percentage points less than the American top rate, which is already lower than the Canadian top rate.

That is the kind of gap that does make a difference when people are deciding which job offer they're going to take and where they're going to work and settle with their families.

The Chairman: Thank you, Mr. Pillitteri.

Unfortunately we have to end. We have the task force on youth entrepreneurship that has to occupy this room.

I do want to thank all the panellists. It's been a very interesting discussion about productivity.

I just want to leave with one final thought here, which is that we all agree the status quo is simply not an option. Globalization and technology have really redefined time and space globally, and we as governments need to respond to that new definition of the marketplace. That's extremely important.

Dr. Mustard, thank you very much also for your presentation.

The meeting is adjourned.