FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 5, 1999

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[English]

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

As everyone knows, today the finance committee is studying the issue of productivity. I must say that in the first few round tables we've had thus far, it has been quite a challenge to come up with agreement as to what in fact has an impact on productivity in Canada and indeed internationally. But I understand that this round table is going to have all the answers, so all the members here are keen to hear what you have to say.

We will begin with a representative from the Bank of Montreal, Mr. Rick Egelton, the senior vice-president and deputy chief economist. You will have approximately five to ten minutes to make your introductory remarks. Thereafter we will engage in a question and answer session, but I would also like to see interaction among the panellists wherever you feel it is appropriate.

Mr. Egelton, welcome.

Mr. Rick Egelton (Senior Vice-President and Deputy Chief Economist, Bank of Montreal): Thank you. It's a pleasure to be here before the committee.

To set up the context, I was amazed, really, over the last number of months to see the notion of multifactor productivity widely debated in the popular press across Canada in two official languages, a concept that maybe 63 people in the country have an idea of, and maybe four people really know what it is. Hopefully, some of those are here today.

I'll give you our sense of where we see the productivity debate in regard to whether Canada has been doing well or is doing poorly.

In our judgment, it seems to me that most of the literature on the issue would suggest that over the last twenty years, Canada, along with most other countries in the world, has not been doing particularly well. But at least relative to our major trading partner, productivity growth in Canada has been slightly better than in the United States. The area in which it's lagging is largely in manufacturing, but even there, it's only two small subsectors of manufacturing.

So I think, just as an opening, the hysteria surrounding the collapse of productivity growth in Canada is in many respects much ado about nothing. Productivity growth in Canada over the last couple of decades has in fact been better than in the United States. That doesn't mean it's an issue we shouldn't worry about, because over the longer term it's the only way we as a country can enhance our living standards. But I think it's important to put it at least in the context that we're not in the midst of this surging productivity crisis where we're in a sense regressing and the United States is powering ahead.

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In terms of the role governments can play in enhancing productivity growth, I think there are really two areas. One is on the macro side. Governments have a strong role in providing a low and stable inflation environment. On that count, this government and the government before it have done a remarkably good job. Our inflation rate is among the lowest in the world. The other important role governments can play is in bringing fiscal stability into the country by creating an environment of confidence. I think the government has done that. We're now running surpluses. We're looking at lower debt-to-GDP ratios.

Where I think the government can do much more is in the areas on the micro side, in terms of the tax side and mainly the issue of tax treatment between different industries.

We hear a lot in the press lately about the massive brain drain from Canada to the United States, where people are going to greener pastures, higher incomes, and better employment opportunities. In actual fact, we at the Bank of Montreal looked at the immigration data between Canada and the U.S. over the last 100 years. We found that not only is there not a huge brain drain, but in fact during the 1990s the net migration from Canada to the U.S. has probably been at its lowest level in what may well be the history of our country, with the exception of the Vietnam era, when Americans were coming up to Canada. There are many reasons we may want to cut taxes, but stemming the brain drain that doesn't exist probably isn't one of them. That doesn't mean there isn't an exodus of people or a slight brain drain from Canada, but as I once heard somebody characterize it, it's more a trickle than a drain.

What are the things we're doing that we could probably do a little bit better? On the tax side, I think we found ourselves in a position where at very low income levels, say between $15,000 and $40,000, we have extremely high marginal tax rates, mainly because of many of the clawbacks we've instituted as we target tax relief to lower-income Canadians. That has a very significant negative impact on the ability and willingness of people to enter the labour market. I think that is something that is having a particular damaging impact on the ability of those people to enter the labour market.

We're seeing extremely high tax rates at high income levels, which at some stage will result in us being uncompetitive internationally. But as I said before, we're not seeing any evidence of that to date as flowing through and resulting in a massive exodus of Canadians at high income levels to the United States.

The most damaging thing we're doing as a country in terms of our productivity is probably on the corporate tax side, and not so much the level of corporate taxes, where I think they are somewhat high vis-à-vis the U.S., and that is a disincentive, but on the various different levels of corporate taxes across industries. Jack Mintz, when he did work for the Department of Finance, brought forward some very excellent work on the problems on the corporate tax side, which, much to my disappointment and that of many other people, was virtually ignored. There are some industries, for example the mining industry, where you're looking at effective corporate tax rates of 6%; in other service industries, 21%; and at the risk of sounding maybe a tad self-serving, deposit-taking institutions, 26%.

What we found is that those industries that we seem to be most worried about in the new economy, the service-based industries, we're taxing the heaviest, and the industries that we could say are maybe of the older economy, the resource-based industries, we're taxing the lightest. If we look at other taxes, in terms of employment insurance—and this, again, was noted in the Mintz report—because our employment insurance system is not experience-rated, we have huge subsidies for some industries and huge costs for other industries. When you add all these things together, the result is a very significant misallocation of resources across industries in our economy and much lower productivity growth than would otherwise be the case.

So where do we go from here? What do we think we should do in order to get productivity growth moving and get our standards of living up?

In one sense, of course, I think we would agree that taxes should be cut, but we would certainly not agree that taxes should be cut in massive amounts irrespective of the impact that has on the fiscal situation of our country. We still have relatively high debt burdens in Canada, and it's important that those debt burdens be brought down to something approaching other triple-A-rated countries. So that limits the magnitude of the types of tax cuts we could implement.

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I think rather what we want to do on the tax side is maybe start working on some of these misallocations we have in the corporate side, where some tax rates are unusually high, and use the limited room we have to lower the tax rates, at least in the industries where the corporate tax rates are the highest, and bring some equity.

I'm not naive enough to think we could implement massive tax reform where we're going to be raising tax rates on some of the lower-taxed industries. I think that in fact was one of the problems with the Mintz report, at least on the political side. But there I think is something we can start doing. We can start thinking about what any tax cut we implement on the personal side is going to do to the marginal tax rates of lower-income Canadians.

While we welcomed some of the tax cuts, many of the tax cuts we've had have actually worked to raise marginal tax rates, and that has been very negative. I think as we go forward in the next budget, you may want to look at addressing that issue.

In terms of employment insurance, again I've mentioned the massive subsidies conferred on some industries, the huge burden on others. As we lower EI premium rates, maybe we can start thinking about allocating EI premium rates, charging the rates differently across different industries, based on experience rating.

Lastly, we can probably start thinking about our capital gains tax rate. I know we have a relatively high capital gains tax rate compared to the U.S. At the same time, there seems to be much less venture capital in Canada than there is in the United States. I haven't done a lot of work to look at whether those two are linked, but I think it's certainly something people on this committee should start thinking about as we move toward the next budget and budgets beyond that.

Lastly, I think there are things we can think about, such as the interprovincial barriers to trade we still have in this country, as witnessed by the construction workers fiasco between the governments of Ontario and Quebec. Clearly, within a country those are things that limit the ability of our country to be as productive as possible.

To sum up, I think our view is that our country's productivity performance over the last ten years has been slightly better than that of the United States. We have done many good things on the macro side as a government: bringing inflation down; the free trade agreement was enormously positive; the sales tax reform with the GST, I would argue, was quite positive for productivity. We've done a lot of things relatively well as a country, but we still have a lot of challenges, and I think those challenges revolve largely around reform of the tax system and equilibrating some of the tinkering we've done over the last ten to fifteen years, which has resulted in a misallocation of resources across different industries.

Thank you very much.

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

Now we'll hear from Mr. Douglas Porter from Nesbitt Burns, senior economist and vice-president. Welcome.

Mr. Douglas Porter (Senior Economist and Vice-President, Nesbitt Burns): Thank you, Mr. Chairman.

I brought a set of charts I will try to talk around.

As an introductory comment, I'd like to say that strong productivity growth is crucial to the health of any economy at any time, and because of this we should not become bogged down in never-ending debate about the validity of recent productivity figures. Instead, we should stay focused on how to improve productivity going forward in any event. Thus, it's imperative for both policy-makers and business to constantly seek to strengthen productivity growth. But I would suggest that our productivity performance in recent years has in fact been disappointing.

While Statistics Canada's latest figures do suggest that productivity growth has been comparable to both U.S. levels in the 1990s and to Canada in the 1980s, that just isn't good enough. Given the massive industrial restructuring undertaken by Canada in the wake of the free trade agreement, and the fact that Canada began the decade with at least a 20% disadvantage on the productivity front when compared to the U.S., just keeping pace in the 1990s is simply an abject failure.

If you'd like to follow along, I'm turning to the first chart.

If anything, the productivity figures mask the massive deterioration in overall living standards since the start of the decade. This stark divergence can be shown both by nominal GDP per person, as on chart 1, which admittedly might be slightly exaggerated by the extreme decline in the exchange rate last year, and it can also be captured on chart 2 by disposable incomes per person.

Disposable income has deteriorated even more than GDP, due largely to the tax burden. You can see that after holding at around 80% of the U.S. level throughout the 1970s and 1980s, Canadian disposable income plunged to barely 50% of the U.S. level by the end of 1998. There are three primary reasons we can identify for this massive deterioration. One is that the numbers are somewhat exaggerated by the severe decline in the Canadian dollar. A second is the underperformance of the Canadian economy more generally in the 1990s. And third is the higher tax burden.

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Looked at in another way on the following chart, Canadian personal disposal incomes are now below those of the lowest of the 50 states. Again, some may say the figures are distorted by an unusually low exchange rate, but this measure does look at real international buying power.

You may well ask why there are so many comparisons to the U.S. Quite simply, we're more closely tied than ever to the U.S. economy, more dependent. After the free trade agreement came into effect, our trade links with the U.S. surged. Exports to the U.S. alone now account for almost a third of total GDP. Certainly the U.S. economy has many built-in advantages that we can't hope to replicate, including, for example, a huge market that offers tremendous economies of scale. But this makes it that much more important to get the things we can control, such as taxes, right.

There's no question that certain segments of the economy are thriving. Notably, those closely tied to U.S. trade or associated with the high-tech industry have been growing quite strongly in the past year. But in contrast, resource industries are stumbling. The troubles can be partly explained by the Asian crisis, but the weakness over the past year highlights just how vulnerable these sectors are to cyclical forces and to periodic setbacks. Certainly productivity and output growth has been satisfactory in a number of specific industries. But we are, as Rick indicated, trailing the U.S. in a few key industries, most notably electrical and electronic products. These are accounting for the lion's share of overall growth in the economy. Thus, overall growth in the economy over the past ten years has been unsatisfactory.

It is our view that a key factor behind the persistent underperformance in the 1990s has been our widening tax gap with the U.S. There are a number of ways to measure this. The chart I gave you shows the difference in personal taxes as a share of total income. You can see there has been a relentless increase in the gap between Canada and the U.S. since the 1980s. Yes, the U.S. taxes as a share of income have picked up in the last couple of years, but a lot of that is due to the inordinate capital gains they're making on equity market gains. This tax gap, we find, is closely related to the widening gap in unemployment rates vis-à-vis the U.S. Recall that Canada's unemployment rate was no higher than that of the U.S. as recently as the early 1980s, and now it's almost four percentage points higher. Hand in hand, the tax gap has widened over that same period by a nearly identical amount.

Besides relatively high personal taxes, as Rick Egelton mentioned, our corporate tax rates are arguably even higher by international standards and stand out even more so. With the recent proposed cuts in a number of countries, we'll actually be close to the very high end of the range in the OECD; and that especially applies for service companies.

Turning to the second to last chart, there has been a very strong link in the 1990s between low corporate tax rates and high labour productivity growth. We find this chart quite compelling. As Rick mentioned as well, our final major concern is the high level of capital gains taxes in Canada, which are now roughly double the U.S. level with the recent cuts in the U.S. We would suggest that there would be little, if any, fiscal cost to a sizeable reduction in capital gains tax rates toward U.S. levels. There would be a tremendous payback in helping to support entrepreneurs and encourage venture capital.

In fact, the recent U.S. experience has shown there is almost no impact on revenues from capital gains cuts. By cutting capital gains, it encourages turnover in financial markets and helps strengthen financial markets. Capital gains tax rate cuts would help encourage the use of options as compensation, especially in the high-tech industry, where it's critical in the U.S.

That's all I have, Mr. Chairman.

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

We'll now hear from a representative from Loewen Ondataatje McCutcheon Ltd., Ms. Maureen Farrow, head economist. Welcome.

Ms. Maureen Farrow (Head Economist, Loewen Ondataatje McCutcheon Ltd.): Good day. It's nice to be here with you all.

I think we've heard a lot of numbers. We've just seen a lot of numbers as well, so I'm not going to go through any numbers at all. I'm going to try to concentrate on answering some of your questions, which I thought were quite pertinent.

I think it is important to define productivity as we measure it, which is really the proxy for the standard of living: that we're only going to get an increase in the standard of living if the output per population is rising. We can sit here and argue about how we measure productivity, but basically we have not had a great decade behind us.

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I think it's very important for this committee to distinguish between the productivity debate, the high unemployment debate, and the tax debate. They are linked, but one is quite short term, and productivity is really a long-term concern that we should have as a country. It's not something you can fix quickly. So just cutting taxes will not give you the productivity increase tomorrow that you may want.

A lot of the problems we've had in terms of the drop in what Canadians term as their standard of living are because of the tax bite, which we've just been speaking about, and the fact that we've not created jobs as efficiently this decade and brought the unemployment rate down during this business cycle as we had hoped. There are many reasons for that. We have a lot of jobs we can't fill, because we don't have the right skills. So we have to be careful in distinguishing between high unemployment at this end of the business cycle and what I would call a long-term problem for most countries, which is the productivity issue.

On the productivity issue, I think you have to go back to what the drivers of underlying productivity are in a country. I would go back and say that historically, we know and we have tested that there are three prime drivers. One is a bit old-fashioned, and that is really the efficient use of the natural resources in a country. Of course we always, because we are great miners, foresters, and agricultural producers, tend to dwell on those as our natural resources. But I would push us to stretch that, just like Singapore has.

Singapore does not have natural resources, but it has a pool of capital. What Singapore chose to do was use the pool of capital as its natural resource, redefine natural resources, and then increase living standards through enormous productivity enhancements that they got out of that labour force. As you will see also, their corporate tax rates are one of the lowest on Doug's charts. So they have embraced in a comprehensive manner this new look at what I would call natural resources.

I think another one that you cannot argue about is capital formation and the accumulation of capital. Regarding the capital per worker, there is a very high correlation between the capital employed per worker and the productivity that you get out of that labour force. And I would urge us to do more work on this one, because I think it's one we have not concentrated enough on. If you are in an era of technological change, you need to have a very high level of capital employment per worker to get the best out of the technology absorption and diffusion that you need to do. That's at the very heart, I think, of some of the productivity issues as we go forward.

Another one—and I've already mentioned this, I suppose—is the progress of technology. Up until the industrial revolution of the early 19th century, there were hardly any productivity increases in the global economy. It wasn't until you started harnessing technology progress en masse that you really began to see massive changes in terms of the standard of living of all members of society. And that's what this committee is really here to discuss—all Canadians having a rising living standard.

Therefore, I think we should try to understand more how you harness the technology progress and the absorption of technology into the labour force in an efficient manner so we can increase output per person employed and the standard of living of the nation.

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I think there are some things we can do in connection with these things. I think first of all, I would urge this committee to.... Just as you wrestled the deficit under control and are now working on the debt, long-term productivity could be the issue that we should take into the millennium. What does it mean? How do we enhance it in Canada? And how do we join all governments, even down to municipal governments, as well as the business sector and Canadians to work toward this?

We have to develop policies to make more efficient use and development of all our resources, including the classic resources that I mentioned at the beginning, but more importantly, I think, land, infrastructure—and infrastructure today means technology and technology diffusion—and human capital. We need to raise the capital employed per employee through encouraging M and E expenditures by companies, and also, I expect, by dealing with the tax write-offs and the tax treatments of M and E.

Regarding human capital, why is it we have such a skill mismatch in this country, and in a lot of other countries as well, but particularly, I think, in this country right now? It's education and training. It's an attitude issue to both of those by all Canadians, and the need for workers and employees to take a hard look at what the skill sets need to be.

We've done a few things in terms of trying to advance technology pay-offs, and we need to go back and really work harder at that. We've worked at the R and D and innovation, and I expect we need more. We're going to hear more about that from some of the other colleagues at this table. It's a long-term plan, though; it's not a short-term one. And creating this overall Canadian business environment to embrace these things is what the priority of this committee should be.

I'm not saying we don't have an employment problem. We do. We need to get the unemployment rate down. We also have a tax problem and we need comprehensive tax reform. I've urged that a number of times at this committee. I do not believe tinkering at the edges will set us up for the next 25 years. I think we'll be still tinkering 25 years out, and discussing the tax implications of the productivity question.

With those comments, I think I should close and urge us to think in broad concepts around these issues.

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

We'll now hear from the Royal Bank of Canada, the senior vice-president and chief economist, John McCallum. Welcome.

Mr. John McCallum (Senior Vice-President and Chief Economist, Royal Bank of Canada): Thank you, Mr. Chair.

I'd like to make two fairly brief comments at the beginning, accepting your invitation to have interaction among the speakers here, and then one somewhat larger point.

I find myself kind of in between Rick Egelton and Doug Porter on where we stand. I think Rick is slightly complacent in saying we've done just fine. And while I wouldn't describe Doug as a scaremonger, I think his charts are, because those first three charts convert living standards by the current exchange rate, which means that if our currency declines 10% relative to the U.S. dollar, he says our living standards decline 10%, which is absolutely wrong. Just about every macro-economist knows you use the PPP. As a consequence, he gets the ridiculous conclusion that living standards are lower in Canada than in Mississippi. Now, has any committee member driven around Mississippi? It's terrible. I think you have to use a little common sense mixed in with your statistics.

The sad thing is that we're not doing very well. If you use proper measures, you still show real disposable income in Canada per person going down in the 1990s and going up in the U.S., and that is not a happy situation. So we do have a productivity problem. But exaggerating that through these statistics that show us being worse off than Mississippi I don't think does great good to the cause.

Rick, on the other hand, seems to think everything is fine. I think at the aggregate level, we have, at best, kept the 20% gap with the U.S., when free trade was supposed to close that gap. And I think in the manufacturing sector, if anything, the gap has widened since the free trade agreement, when it was supposed to go in the other direction.

So we do have a problem. It's not that we're going down the drain like Mississippi, but it's also not that everything is just fine. It's somewhere in between.

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Second, you have to understand this is a large, sprawling, messy subject. When the issue was inflation, we knew what lever to pull to get inflation down. When the problem was the deficit, we knew what had to be done—you either cut spending or raised taxes. It was simple. It may have been difficult to do, but the levers were clear.

In productivity, there is no consensus on a single lever we should pull to improve productivity. Some will emphasize reduced taxes; others will emphasize investments in anything under the sun from early child care, to research and development, to university research, to whatever. I don't think we have the knowledge to quantify the impact of each of these things. We should do more work on it, but I think we may be able to reach some consensus directionally on which are the more important levers we should pull. But it's a much tougher analytical problem than either inflation or the deficit.

My third and major point is in coming years, as the Canada-U.S. border comes down in many ways and we move toward continental, not to say global, integration, we in this country in the northern half of our continent are going to face uneasy tension between two competing forces. On the one hand, we all want Canada to remain, as they say in the jargon, a kinder, gentler society than our neighbour to the south. We value our safety net, our health care system, our greater egalitarianism. Indeed, it's worked quite well in the last 10 or 15 years, because we've suffered nowhere near the increase in inequality that has occurred in the United States. So most of us like this.

On the other hand, as the border comes down, if we have too much egalitarianism we are going to risk the departure of some of the best and brightest of our people, and some of the most productive of our corporations. So if we go too much on the egalitarian side and many of those best people and best corporations leave, we may be very equal but we'll get poorer and poorer.

So there has to be some balance between those two things, and it's going to become more and more difficult as the border becomes more and more invisible. I think everybody who acknowledges this trade-off will take a position somewhere along the trade-off.

In my particular case, just to give an example, I would not go along with a North American currency union using the U.S. dollar because I think we'd be on a slippery slope to ever greater integration and harmonization. Who do you think would harmonize with whom? We would harmonize with them. So some would argue for that, but I would not be in that boat.

On the other hand, I have not been among those leading the charge on tax cuts. If anything, you might say I'm a bit of a socialist by the standards of Bay Street, which may not mean very much. I believe that a good chunk of any future fiscal dividends should be directed toward lowering personal income tax in particular, although I agree with Rick that there are some bad things on the corporate side.

Let me give you a few reasons why. First, I think we have a once-in-a-lifetime opportunity, in the sense that even under conservative assumptions, if we look forward five to ten years, we are going to have fiscal dividends measured in the tens of billions of dollars. It will be possible, if you take a medium-term horizon, to have substantial reductions in taxes, substantial reductions in the debt, and no reductions in government spending, or even some increase in investments in selective areas. This is a once-in-a-lifetime opportunity, if one looks to the medium term, and this opportunity should be seized.

Secondly, I agree with Rick Egelton, John Helliwell, and Linda McQuaig that the brain drain today is not huge. In fact, Linda was the one who called it a brain trickle. But I also believe we should all be forward-looking. We should all anticipate changes happening in this continent. For a number of reasons, if it is not addressed, this brain drain that is relatively small today could quite quickly become much larger.

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First of all, Canadians have easier access to the United States under NAFTA than they did before. Second, United States corporations are scouring the world for skilled people. It was not because of some sudden attack of benevolence or altruism that a major U.S. bank in Chicago set up a training program in the ghetto. It was because they couldn't find people anywhere else. If you read the current week's issue of McLeans, you will see how sophisticated the campaigns of these major U.S. corporations are, to come to our universities and try, often with huge success, to lure away the best and brightest young Canadians.

The third reason why I think the brain drain could become more important is what one might call a generational shift. Here I will admit to you I'm indulging in amateur sociology, but when I was 17 years old, if someone said to me “United States”, it would have conjured up in my mind Vietnam and race riots. If someone says “United States” to my 17-year-old son today, and I haven't asked him this, protecting his privacy, but I would guess he might say words like “opportunity” or “cool”.

So over the years there has been a radical reduction in anti-Americanism. I wouldn't say there's a reduction in pro-Canadianism, but from a practical point of view as to where a person will choose to live, the two might come to much the same thing.

It's also true that you don't need too many people leaving, if they are among the best and the brightest, to cause great damage to the wealth and prosperity of this country. A handful of Bill Gateses moving south of the border can take a lot of potential wealth, jobs, and income out of this country.

The last thing I'll say about the brain drain is it is true that taxes are not the only reason why people leave. It is true it's partly the currency—it's going up these days, which is perhaps nice. It is also because there are higher pre-tax salaries in many industries in the United States, more opportunities and more excitement.

But governments have to focus on things governments control, and the Canadian governments have zero control over the nature of the opportunities and the pre-tax salaries in the United States. We have perhaps very modest control over our exchange rate. We have, hopefully, some significant control over the growth rate of our economy and the job opportunities created here. But the lever over which we have the greatest control is the level of taxation in this country. So even if it's not the only thing, and it's obviously not the only thing, it is what government controls most.

Finally, it's not just a question of attracting foreign direct investment. As the border comes down and it becomes more and more a question of cost where firms will choose to locate—not only foreign firms, but Canadian firms—and as, if I'm right in my sociological theory, our younger people become more open where they choose to live, depending on opportunities and so on, in terms of this contest between the kinder, gentler society versus the need to retain our best people and companies, we shouldn't tip all the way to the need to retain, but we have to tip a little.

It is important, over time, to move toward a reduction in our personal income tax, without in any way compromising our health care system or our social programs and so on.

Thank you very much.

The Chairman: Thank you very much, Mr. McCallum. I really enjoyed your sociological analysis, and your economy wasn't bad either.

Mr. John McCallum: I admitted it was amateur.

The Chairman: Now we'll hear from the Insurance Bureau of Canada, Mr. Paul Kovacs, vice-president of policy development and chief economist. Welcome.

Mr. Paul Kovacs (Vice-President of Policy Development and Chief Economist, Insurance Bureau of Canada): Thank you, Mr. Chair. I'm delighted to be here, and I'm really pleased that the committee is investing time to look into productivity. As Maureen touched on, this is the future of the country. These are the long-term issues. This is the right sort of thing for the committee to be dealing with. I'm delighted to participate today.

The main specific advice I want to share today is the importance of infrastructure, as a specific investment opportunity that leads to stronger productivity growth. But rather than starting with that, I want to go through some of the specific questions the chair circulated ahead of time. I thought they were excellent questions and should direct good discussion as we carry this forward.

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The first specific question on what productivity means has opened part of the debate about the exact term and what it references. I looked in the dictionary and read the literature before coming up, and there is a lot of ambiguity about exactly what productivity means. In the simplest of terms, it is production per worker. If production per worker is rising, then our standard of living is rising. Over the longer term, this is a very important concept.

So the lovely nuances economists will argue about—adjusting for capital, hours worked, and all those other nice academic exercises—can perhaps be helpful at times, but in the simplest of terms, productivity should be taken back to just production per worker. That's a very important concept to keep an eye on in the longer term.

Why is that important? Productivity growth in the last little while in this country has been about 1.5% per year, on average. That means the standard of living of Canadians doubles every two generations. That's progress, that's moving forward, but productivity growth used to be 3%.

Now, 3% doesn't sound a lot different from 1.5%, but with 3% sustained productivity growth our standard of living doubles every generation. That's a huge difference when we bring this back to the longer-term focus on what, in terms of a public policy issue, could be anywhere as important as having stronger sustained growth in our standard of living. So at that level it is enormously important. We are talking about the long-term prosperity of our nation.

How does it affect Canadians? This is the third question that was circulated ahead of time. The data showing the correlation between wages and various productivity measures are very tight. If your measure of productivity is improving, your measure of wages is improving. Canadians are wealthier; they're more prosperous. I don't think a lot more needs to be said.

What are the benefits? In the effort to compare countries like Canada, the United States and the other major countries to China, India and whatever country you might describe as lagging behind, the largest difference is a worker gets more done in a day here than they do in these other countries.

This is not meant to boast that Canadians are necessarily smarter or work longer, harder or whatever, but we do get more done in a day. It talks about the whole range of supports we have in place for ourselves—the equipment, the tools, the political stability—to explain why we can get more done in a day. But that's the heart of what the productivity discussion is about.

Productivity is a way of describing the differences between our society, along with others that are successful, and those that are far behind us. At this point in economic development, productivity is essential. It's one of the key aspects that makes Canada successful, relative to some of these other countries that aspire to what we have now. They would like to catch up to us.

What's the cost of failing to enhance productivity? Again, like some around the table with economic backgrounds, we like to play with the numbers a little bit. If you take the average Canadian family of about 40 years ago, using today's measures and even with adjustments for inflation and such, they would be considered poor today. We've had rising prosperity. We'd like to have it rise faster, but the improvements we've enjoyed just mean the average family is much better off than they used to be. This constant continuous growth is what the entire productivity debate should be about, and is about.

The key last question that was circulated, if I can spend more time getting behind it, is on what the government has done right and what challenges are still ahead. That's the core of what everybody is trying to bring, in terms of their counsel here today.

Many of the ideas I hear shared, as this discussion has been continuing and will continue with the help of this committee, I would describe as to some extent incremental. What has the government done right? We have addressed parts of the productivity problem, and people are giving counsel on how to do it maybe even a little bit better.

Examples of where we have addressed it—and maybe we could do a little bit better, but we have addressed it and done a good job in terms of public policy—would definitely include trade liberalization. Having free trade with the United States and other things to open up trade is a good thing, and this was a step forward in public policy over the last few decades. There have been several efforts to look at deregulation or improve the regulatory system to get rid of some of the red tape that holds us back. That's a good thing. We're not done. There's more to be done, but that's good, and incremental changes can help.

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Tax simplification, tax reduction, I think has been a strong theme today. That definitely is helpful. That makes the system more effective and efficient. Interprovincial trade, support for research, focus on training and education, and definitely elimination of the deficit—these are a number of different areas where we've done some things well. Maybe we're not done, maybe more can be done, but they've been parts of good public policy, and hopefully we can build on them.

The one I want to spend some time talking about, though, is one that I still think we need to focus on, a continuing challenge, and that's the whole infrastructure area.

If you look at the share of spending in Canada on public infrastructure, in the period where our productivity growth was very strong—the 1950s, the 1960s, and a number of other periods of our history—back when investments in infrastructure were high, productivity growth was strong. Over the last 40 or 50 years, we've had a regular steady reduction in investments in infrastructure. Efforts by a number of different parties to explain why are maybe not fully satisfying, but infrastructure has been very vulnerable. As governments have been tested, we've had to do something about deficits. It's very hard to find money for potholes and sewers when you're talking about those investments compared to some other spending challenges that we've had to address. We've had to make tough decisions to get finances under control, and infrastructure has been a victim many, many times over the years. So the share of spending on infrastructure has been going down and down and down, and it's far lower than it used to be.

There was an effort, led by this government, sharing the role with the provinces and the municipal governments together in a partnership, to put a real push back on infrastructure, and it was extremely effective. I would argue that some of the pick-up of the last few years in terms of productivity growth coming back again is a reflection that there was a serious effort to take a run at infrastructure. But there's much more to do. We've started, but we're still far behind in terms of keeping up the pace and level that other countries have chosen to do.

If you look at some of the data available about the average age of roads and sewers and storm sewers and most of the other public infrastructure, we're talking about systems that were put in place 20 or 30 years ago, on average. When you try to adjust for some of the newer communities and you look at some of the very, very old systems that are in those average numbers, we have systems in place that are 50 and 60 years old, designed at a time when the Canadian population and the Canadian economy were just a shadow of what we have today. Those systems just can't hold up under the pressures of what the public want, what they should be able to get, and what some other countries have been able to put in place.

So I would suggest to you that one of the important drags that we can address, which is definitely under the influence of governments, is to take a real run at public infrastructure. We have models that have worked recently that can be very, very effective. One narrow element of that, which we've brought today—it's a proposal that we circulate for others to look at in time—is that one aspect of public infrastructure and investment that I think is just a terrific investment opportunity is how Canadians can be better prepared for extreme events. We went through an ice storm last year. Before that, we went through flooding in the Red River Valley and the Saguenay River. There's enough evidence that we're been trying to compile from around the world that shows that relatively small early investments can save terrific amounts of public expenditures down the road if you target the right areas to make sure you're prepared for extreme events that come in the future.

One example, just to highlight, was the floodway put in place in Winnipeg to divert water around that city when flood levels start to rise. For $63 million, we saved several hundred million dollars of spending, easily a twenty-to-one savings for a small investment ahead of time by forward-looking provincial and federal governments. It led to major savings.

Our sense is that if we can put together an investment fund, shared municipally and provincially and federally, to target vulnerable communities and to help them put in place the right infrastructure to anticipate severe events, the savings to governments can be manyfold for the small investment that would be required.

My overall message today, in terms of the discussion, is that I think the committee's focus on productivity is extremely warranted. This is a very, very important public policy issue. As Maureen touched on it, I think the right way to address this issue is from the longer-term focus. We're talking about how to help Canadians enjoy a much more prosperous future.

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I think the shortcomings of the last little while are very serious. We've missed out on an awful lot of growth that could have come here. Some positive initiatives have been taking place in terms of trade liberalization and an attempt to look at regulatory systems and others. We can do better on those fronts, and I hope we will.

One of the key areas, which I don't think has been addressed in some of the recent discussions, is infrastructure. I think much more attention on the role that larger investments in infrastructure can play to accelerate productivity growth can lead to a much improved expectation in terms of what we can produce as workers each year, a higher standard of living for Canadians, and a much better future.

Thank you for the opportunity to participate.

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

We'll now hear from representatives from Genome Canada, Dr. Tsui. Welcome.

Dr. Lap-Chee Tsui (Co-Chair, Interim Board of Directors, Genome Canada): Thank you.

I'd like to thank the committee for letting me share this idea or perhaps a new way of thinking about productivity.

I'm not an economist or a sociologist. I'm just a scientist. In science, especially in universities, productivity refers to the number of papers, the number of students, and more recently, the number of patents you file.

But seriously, through the next five minutes or so I'd like to convince the committee that investment in Genome Canada—I will explain what it is—may be a solution to productivity through research and innovation.

We all know that biotechnology is one of the rising areas in industry, and it will probably affect the world economy over the next ten or twenty years. Genomics is the basic discipline that would drive all biotechnology. Investment in the fundamental genomic capability would position Canada to benefit from this revolution.

Of course, I understand that this committee may not be dealing with genomics every day, but genome refers to genes and chromosomes. The genes are blueprints that control all our body activities and functions. So having a blueprint of a body definitely will allow us to address health issues and protective issues much better in the future.

I'll use health to start, but genome is much wider than that, and I will elaborate later on. Genomics, the term we use, is just a study of the genes and chromosomes. I hope that through this discussion members would agree that investing in this basic infrastructure would give Canada a brighter future.

Genome Canada is a group of concerned scientists, academia, industry people, government labs, councils, and so on. We've had discussions throughout the past one and a half or two years to try to see how Canada can capture this area of imagination. Obviously, we have done some analysis and also, as shown in the handouts, we asked some of the investors to find out what would be the short-term and long-term benefits of investing in Genome Canada or in genome research. I'm not an economist, and I don't pretend to understand the chart.

We believe that an organized approach to developing genome science capabilities in Canada will support key research in various areas. As I said earlier, the human genome project attracted a lot of attention and a lot of imagination. It is the key area, at least in the current worldwide scene, to lead this particular form of biotechnology.

Because everyone agrees that health is a very important issue, understanding our blueprints and our genes would help us treat the disease, make a correct diagnosis, and even help with prevention.

As I said, the genomics field is not just health. It's not just human genome, but rather for genome technology the platform is actually quite wide. It straddles all research disciplines, including agriculture and agrifood, aquaculture, environmental industry, and forestry. And believe it or not, it's also applicable to mining and energy. So really it touches all disciplines in biotechnology research.

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Where does Canada stand in genome research? We had genome funding and organized activity some years ago under the name of CGATP, the Canadian Genome Analysis and Technology Program, but in 1997 the program was terminated. So there is no organized fashion to provide this infrastructure, which is so very important for all kinds of biotechnology research.

I heard earlier that Canada is not too much behind other industrialized countries, but I'm sorry to say that Canada is behind Korea, India, Pakistan, and China in genome research. They do have an infrastructure to support genetics research in their countries. So we must really look into that and support the notion that we must look at long-term prosperity and long-term perspectives rather than addressing some of the issues we talked about earlier.

We have been pushing genome research for the last while, and there is actually some funding coming to genomics through the biotechnology platform. There is some money going into programs, but we do not have an infrastructure for the whole country. The programs go to the government labs. But for the research institutes, the universities, and the hospitals in the country, there's none. Therefore, we are proposing genome centres. This idea is not new. Many other countries have already taken that approach, because genome centres offer efficiencies in scale and availability of research platforms that are fundamental to all genome sciences.

Although there are a number of technology platforms, as outlined in the handouts, they are too technological, and I don't want to get into that. But there is one thing that perhaps may touch your heart. For genome science we realize there is not just technology development, but also we need some controls and regulations. Therefore, it is very much into these so-called ethical, legal, social, cultural, and environmental issues. So we have this term GELS. GELS is some kind of technology in the molecular biology.

In our planning for the genome centres, I think there is no doubt that in Genome Canada we have a major commitment to provide a focus and a mechanism to study the social, legal, ethical, and environmental impacts of genome research in this country. In fact, Canada has provided worldwide leadership in these issues. A number of researchers in this area have been chairs of international committees and have led major discussions worldwide. We must develop and utilize their knowledge and skills in close conjunction with the development of their capabilities in genome science.

Genome centres will offer the locus and opportunity for crossover applications. We will be prepared to apply the same technology platform to other areas, as I mentioned earlier. Productivity and innovation is enhanced if the knowledge, skills, and technology developed in one domain are efficiently applied in other applicable domains. You have all heard about chip technology. This is now applied to genetic research in humans, but the same technology could be applied in agriculture, fisheries, forestry, and so on.

Genome centres will act as innovation incubators for spinoff businesses and small start-up companies by providing access to critical technologies, personnel, knowledge, and skill.

Earlier I heard that Canada does not have a serious brain drain problem, but I think it's just a matter of semantics. Brain drain or trickle is causing us to lose major resources from this country. I was in Rochester just yesterday. I was invited to give a talk. Unbeknown to me, they actually had an offer for me. They said “We have $15 million for you to start up a new research program in our university”. The question, then, is why am I still here? When one tries to decide whether to go to the United States or somewhere else, the decision is probably dependent on two factors: repulsion and attraction. That's a little science there.

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The Chairman: Well, it took a lot more than $15 million.

Dr. Lap-Chee Tsui: I'm not going to go into that, but I guess you all understand what it's all about. I think there is still a lot of attraction here. I think Canada has a future and moreover a lot of science. I think in the U.S. they respect scientists. They think science research is the driving technology, the driving force, of all innovations, and they actually respect science. Children talk about science in Canada. Children talk about maybe other things more than science.

The reason we survive here—I survive here because I get a lot of research money from the States. Canadian money does not go down to the States. That's the major difference, and that's why I still survive here in Canada. We have to prevent that from happening. For example, in the human genome research project, they specifically say that money for genome research is not going out of this country—that's the U.S. So we have no money from the U.S. for that.

I'm sure I'm taking much time in trying to explain some of the tough issues, but I think the time is good for Canada to capture some of the niches in genome sciences.

The ways to sequencing the human genome—you probably read in Time and in different newspapers that it's almost over. The sequence will be there in a few years. And what do we do? Getting the human genome sequence is not the end game. It's actually the beginning of developing innovations. Understanding the function of genes, understanding how they are involved in diseases, understanding how they control growth and disease resistance in plants, in livestock, and so on—these are the things people are talking about.

People talk about genetics research in agriculture and so on. This kind of work has been going on for quite some time, but through very primitive means. They cross two plants and see whether they can get a better one. Genome research will allow you to get a more controlled way to do these studies. I think you all realize that Canadians very much rely on crops and livestock. We'll have a much better future.

I also read in the newspaper this morning that diabetes is increasing in Cree Indians. There's an outburst of diabetes. The gene involving diabetes, we all know, has been there for the longest time. It is the environment that has changed, and therefore the environment and gene interaction caused this increase in diabetes. But we don't have all the diabetes genes yet. There are some genes we know. But of course the understanding of the basic principles behind diabetes will provide a cure, a treatment, for the disease. Therefore, we can improve the quality of life and also improve the health of the economy.

I think there is still quite a bit of genome research in this country, but it's all fragmented. There are granting councils supporting genome research. But what we need now is a coordinated approach.

So what I would like to try to bring to this committee is that we need a broad technology infrastructure for genome research, and obviously research needs money. I'm not here of course to ask for money at this time, but I'd like to bring to the attention of this committee that the genome is one area we should invest in.

Thank you very much.

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

We'll now hear from the Partnership Group in Science and Engineering, Dr. Howard Alper, and Mr. Denis St-Onge. Welcome.

Dr. Howard Alper (Chair and Vice-Rector, Research, Partnership Group in Science and Engineering): Thank you, Mr. Chair. I'm here with Denis St-Onge, who is emeritus professor at the University of Ottawa and incoming chair of PGSE. We really appreciate the opportunity to present our views on the issue of productivity.

I'll just mention as background that we're a cooperative association of 22 science and engineering societies and associations that work together and with government to ensure that Canada's R and D capacity and the subsequent industrial and intellectual outputs are developed to their fullest potential for maximum economic and social benefit to the country. Individuals employed in universities, the private sector, and government labs make up membership in PGSE. We have a number of programs, including the Bacon and Eggheads presentations held in the West Block about once a month when Parliament is in session. We have a science policy program held with Industry Canada. We had Congressman Vernon Ehlers last week, which was terrific, and we had meetings last year on investing in Canada's future.

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My remarks on productivity are being made in the context of research and innovation in Canada because these are pivotal to the development of a knowledge-based economy. As you know, discovery and development of new processes, as well as the improvement of existing methods for manufacture and production of goods by increased efficiency and reduction in costs can markedly improve our level of productivity. I wouldn't get hung up on the word “productivity”. As an alternate, I'd like us to consider “capacity building” and “capacity development” for this country.

Let me note how government can contribute to enhanced productivity in industry, in university, as well as in its own sector.

First, industry. Industry in Canada underinvests in research. The OECD, the Minister of Industry, and others have expressed concern regarding this issue. Corporate research and innovation leads to new products, product lines, and, as I noted, greater productivity in existing sectors. Possessing research in-house, in a company, is absolutely essential for managers and researchers to know where to go and how to get there in an innovative and competitive manner on a global basis. Outsourcing research can be a value to support work in the company, but it does not replace corporate research. So companies require creative, industrious researchers to attain their goals.

A major problem in Canada is recruitment and retention of excellent industrial scientists and engineers. The media reports, as you know, regularly on concerns, sometimes threats from different companies to move elsewhere unless decisive action is taken by government to address these issues.

We would recommend that consideration be given, amongst other matters, to reducing personal taxes for competitive take-home pay, creating new competitive tax incentive programs in various sectors, be it retirement and education savings plans, stock options, etc.

Third, allow cash contributions by foreign companies to be eligible for matching funds by the research granting councils in university-industry partnerships. Such contributions not only will result in job creation, but will stimulate foreign investment in industrial research and manufacturing in this country.

Finally, establish what is termed a new creative research initiatives program as tri-council—that is, NSERC, NRC, SSHRCC—to promote multidisciplinary collaboration at one centre. This is different from the well-known and excellent program, for which a significant budget increase was given this year, the NCE, the network centres of excellence. That's a wonderful program. But this is to enhance development at one centre, because paradoxically not only are networks important, but clusters are important, be it in Ottawa for the high-tech industry, in Saskatoon for the ag biotech, etc., and that is, we think, very important in terms of enhancing industrial research and innovation.

Second is university research. Recruitment and retention here is just as important as it is to other sectors, because our leaders of tomorrow, our young appointees, will be the trailblazers to new innovation, resulting in greater productivity. As a winning strategy towards these ends, we would recommend the establishment of, first, the Prime Minister's new investigator awards for new faculty appointees, which would infuse a significant amount of resources and give them a jump-start in their careers.

Second is the enhanced opportunities for tomorrow program for people who have been here three to six or seven years, who have demonstrated some leadership in the short time they've been researchers and who have outstanding future potential. This has two components, an offensive component to give a quantum leap in their capacity to build capacity for their research, and a defensive aspect, and that is to reduce the loss of your outstanding people to the United States and elsewhere. It's not the number of people we're losing that's important, it's the skill sets they have versus the skill sets of the individuals who are entering this country.

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Third is a rediscover Canada program to repatriate mid-career Canadian researchers who have made major contributions and who are presently working in other countries. As far as government labs are concerned, they play a pivotal role in assuring quality standards in working with industry to apply inventions for economic benefit in alliances with researchers in other countries—international S and T, and in specific cases, discovery research.

Researchers should also provide unbiased scientific information for policy formulation. Necessary government restructuring has in the last four years created unnecessary loss of focus, direction, and leadership concerning research in government labs. The time is now ripe for investment in research in government. However, care must be taken when making such investments to first identify priorities across government agencies and departments and then develop an action plan for implementation.

Finally, there are international issues, because they cover all three aspects. International cooperation in research is essential to ensure that Canadian scientists and engineers profit from strategic alliances with researchers in other countries. Such collaboration can add significantly to new discoveries and inventions, leading to new intellectual property and to spinoff companies. It will lead to training of a greater number of students and post-doctural fellows—highly qualified personnel—for a career in industry and other sectors, and ultimately enhance your productivity index.

So international cooperation in research is an important component for future investments in addition to those I described.

Thank you.

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

We'll now proceed to the question and answer session. Sorry, we're not going to proceed to questions, we're going to proceed right to Mr. Killeen.

Mr. Pierre Killeen (Senior Government Relations Officer, Association of Canadian Community Colleges): Thank you very much, Mr. Chairman.

We are here on behalf of the Association of Canadian Community Colleges. We bring together 175 publicly funded colleges, technical institutes, and CEGEPs. In many respects, we are the middle Canada around this table today. We're located in 900 communities throughout this country—the ten provinces and three territories of Canada.

We see enhancing the productivity of our knowledge-based workers and knowledge-based industries as the economic challenge of the 21st century. We also see the challenge for government being to try to find a way to engage Canadians in understanding productivity and accepting the productivity challenge. That's what we're here to talk to you about today.

In many respects, the focus of the debate on productivity to date has been on a very small segment of our labour force and a very small segment of the Canadian economy: our high-tech workers, engineers, doctors—our professionals. We would in a sense liken this to focusing on the canary in the coal mine. In many respects, it's time to focus on what is making that canary sing and how best we can help as a government, as a nation, to build programs and solutions to this very complex problem.

Traditionally, we've tended to view knowledge workers through a very industrial-economy looking-glass. We've seen them very much as engineers, doctors, financiers, and economists. We would argue that anyone who is employed, or even anyone who's not employed, is a knowledge worker. Electricians are required to interpret complex regulations in building codes. Automotive mechanics need to understand computers, how microchips work. Teachers are knowledge workers. Parents are knowledge workers. If we believe that the first three years of a child's life are critical to that child's social development and to the long-term health of our nation, clearly parenting is a knowledge-intensive occupation.

If we accept a broader definition of what a knowledge worker is, it would follow that the debate then becomes much more of a national project. It becomes a national exercise in how we can enhance the productivity of Canadians in general. We would argue that in many respects, our nation's approach to the science, technology, and innovation policies has suffered from the same narrow focus as has our focus on the productivity issue.

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However dependent our economic well-being is on the computer and information technology industries, the biotechnology industries, and the science industries, it's also dependent on the productivity of Canada's small and medium-sized enterprises. Small and medium-sized enterprises are where most of us are employed, and they generate most of the wealth in Canada.

With those two thoughts in mind, then, what is missing from a national productivity strategy? Or better yet, how do we as a society engage Canadians in a national productivity effort? We would respond in two ways to this question. The first is by making lifelong learning the centre of our human productivity agenda. The second would be by enhancing the innovative capacity of Canada's small and medium-sized enterprises.

I'll first address the issue of lifelong learning. We maintain that the way to enhance human productivity is through learning and training and that these activities ought to be the focus of government attempts to stimulate productivity. Understood in this light, the rallying call becomes “Let's get learning,” not “Let's get productive,” which most Canadians tend to equate with working harder for less money or being replaced or being downsized.

Canada is a world leader in providing access to learning and training activities. We are in many respects a learning society. However, this focus has very much been on our traditional education systems. In Canada, we very much view learning as an activity that is confined to the first 20 years of someone's life.

We have to understand that in a knowledge-based economy, the more knowledge you have the more you need in order to perform your job. Doctors are knowledge professionals. They are always learning at the same time as they are working. The two become inseparable in a knowledge-based economy, in a knowledge-based paradigm.

We see the integration of work into learning as one of the principal productivity challenges facing Canada. A recent study on adult learning and training in Canada looked at this issue. I guess the paradox of the knowledge-based economy is that the more knowledge you have, the more you get; the less you have, the less chance you have of getting any.

In Canada, 59% of workers earning $60,000 or more participated in some form of adult education and training, whereas only 5% of adult Canadians with less than eight years of education accessed any learning and training—this study is cited in our brief. With this in mind, with this knowledge, how does the federal government make lifelong learning the centrepiece of its productivity agenda? We have a couple of ideas or suggestions with respect to how we engage the broader populous in what we see to be the economic and social challenge of the 21st century.

Education and training must be placed at the centre of the federal government's decision-making process. Knowledge is our most precious economic resource, yet we do not have a knowledge minister. We must find a way to integrate learning and training into the workplace and, in particular, into the workplaces of our small and medium-sized enterprises. Well-educated professionals have access to executive MBA programs funded by industry. People who are working in small and medium-sized enterprises, who might be working on the shop floor, do not have any means of accessing education and training. That we see as the key challenge for us.

We must rethink our approach to student assistance, the financing of public education, and the tax treatment of education and training expenditures, particularly, again, of small and medium-sized enterprises. Tuition fees at some Ontario universities have gone up 70% in the last four years. How are young Canadians supposed to plan for the costs of education if the cost of this product or service is going up 70% every four years? What kind of message is that sending to young people?

Canada must continue to support the federal government activities linked to the promotion of lifelong learning. Human Resources Development Canada, Industry Canada, the Department of Foreign Affairs and International Trade, and the Canadian International Development Agency have made important contributions to lifelong learning in Canada. They have worked closely with educational institutions and with students.

Further, we must rethink our approach to the funding of basic education. In many respects, a K-12 education is free in Canada. We would argue that this is very much a function of an industrial economy approach to the value of learning and training. We now live in a world where post-secondary education is seen as the prerequisite to any gainful, meaningful, long-term employment. Given that, given the fact that a K-12 education is not what it's going to take to get someone a job, it's time to start rethinking what we consider to be the minimum amount of education that prepares an individual for the workforce.

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In the United States, President Clinton recently made the first two years of post-secondary education free through the tax system to lower-income Americans. Now is the time, at the dawn of the 21st century, for our governments to rethink the value of learning and to make a bold statement and make the first two years of post-secondary education free.

Finally, we have to develop a learning strategy that will allow us to benefit with the coming retirement boom. We see as a precious national resource the knowledge that is resident within the people who are approaching retirement. We simply cannot allow this knowledge and this information and the wealth to be generated from this to evaporate. We have to find a way to engage the upper end of the population pyramid in our learning and training activities. Mentorship is probably one of the most positive experiences a young person can have.

I will cut to the chase on what we need to do in terms of our science and technology and our innovation strategies, because we have quite a brain trust around the table and probably the last thing you want to do is hear from the community colleges and where we ought to be going.

In many respects, Canada's publicly funded innovation efforts have been focused principally on the stimulation of industry research through R and D tax cuts and on the discovery and commercial exploitation of knowledge produced at our government laboratories and at our universities. While both of these initiatives form part of a national innovation strategy, they are missing the mark when it comes to the innovation needs of Canada's small and medium-sized enterprises. There are three dimensions, we would argue, to the innovation process, yet we are focusing most of our efforts in innovation on one of those dimensions—that is, innovation at the discovery and exploitation of new knowledge.

Innovation is also about the continuous improvement of products, processes, and services, and it is also about the exploitation of existing knowledge in order to develop new products, new processes, and new services.

In our brief we have cited observations from the Conference Board of Canada and from Breaking Through Barriers, a 1994 report to ministers prepared by the small business and working committee, in support of our observations that our innovation efforts are not meeting the needs of one of Canada's most important sectors. However, we would submit that the experiences of Canada's colleges and institutes in applied research, on behalf of our partners and local business and industry, speak to this gap and speak to the need for government support in this area.

Colleges are unique institutions. They are mandated, in one sense, with fostering the economic development of their host communities. That role has been principally carried out through training on behalf of local small and medium-sized enterprises, local industry. What we seem to be seeing now is that increasingly the focus of colleges' partnerships with local business and enterprises is moving into applied research. We have people coming to us and asking, can we borrow your laboratories to test out our products, or would we be able to tap into the knowledge base that you have within your institution, or can we come and do some process development, some prototyping, within your four walls?

Such activities at our institutions occur on a fee-for-service basis. They're not funded by governments, nor do they receive any funding from our granting councils. In this sense, we would argue that we are unique in that we are responding to the demands of a particular sector of the Canadian economy, small and medium-sized enterprises.

The purpose of our research activities is to assist local enterprises with their research needs. It's not to publish in academic journals, nor is it to commercialize research that is resident within our four walls. It is basically that we are there to assist people coming to us.

Therefore, in light of the role that our institutions are occupying and the niche into which we seem to be moving, we'd like to make two concrete recommendations with respect to the orientation of the focus of Canada's innovation in science and technology policy: first, that federal funding programs in support of research adopt a more holistic approach to innovation and be broadened to include the technical and non-technical elements of the innovation process—product development, process development, prototyping, technology transfer and commercialization; and secondly, that the federal government establish a funding program in order to foster and enhance the development of applied research and product development capacity at Canada's colleges and institutes.

We very much appreciate the opportunity to appear before you today. Thank you.

The Chairman: Thank you very much, Mr. Killeen, and I'd also like to thank the Association of Canadian Community Colleges.

Now we'll proceed to the question and answer session. It's going to be a ten-minute round. Mr. Solberg.

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Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman, and thank you to all the presenters. I think the presentations were excellent.

I want to start with the issue of whether or not productivity itself is a problem. We've heard a little bit of debate about this, but I think there's probably a consensus that even if it's not as big a problem as some have suggested—even I've suggested—we can always do more to improve our productivity. And if we take that as a given, I'm wondering if there is some kind of a rough measurement we can all agree on to measure productivity. Is it output per capita or production per worker? Is there something like this? That's the first question I have. And obviously if there is, it would be good if we could agree on it, so then we could figure out how we're doing.

Secondly, what would be the most important element in the current context, in the Canada of today, when it comes to improving our productivity? Is it output per worker or what else? Is it education, more money on education? Do we have to do education differently? Is it taxes? Is it health care, which some people suggested yesterday, or is it infrastructure? There are probably many other things, regulations, all kinds of things.

I'll leave it at that for now, Mr. Chairman, and then I would like to ask a specific question.

The Chairman: Who would like to answer that question? Go ahead, Mr. McCallum.

Mr. John McCallum: There are all sorts of different ways of measuring productivity, but I think it was said—I forget by whom—that the best measure was output per person employed, rather than what they call “total factor productivity”. It's a lot simpler. I would agree with that. It's output per person employed—not per person, not per capita, but per person employed, or per hour of labour you could say. And then you could break it down into manufacturing or total economy. But I do think most would agree that output per person employed or output per hour of work is the best measure.

In terms of where we stand, I think the measurement issue is really difficult, and they keep revising the statistics, but I think everybody would agree—they can correct me if I'm wrong—that we definitely have a substantial lag behind the United States, maybe on the order of 20% for the total economy. There's less agreement as to whether that gap's been getting bigger or not. I think most would agree that it's been staying at about the same for GDP per person employed, 20%, and if anything getting bigger, getting worse, in manufacturing. So even if we don't agree it's getting worse—let's say it's the same, staying constant—there's still a 20% gap, and it's still very important to try to reduce that gap. Free trade was supposed to, but it didn't.

Finally, I'll be very fast on the most important element. This is where you won't get a consensus, because everyone, and this has happened around the table today, will point to his or her pet project as the cure for productivity. And this applies to the banks as well; Rick thinks you cut bank taxes and that will do it. And others have their own projects.

Whereas with deficits and with inflation we know what levers to pull to cure the problem, with productivity we don't. I think most of us would agree that education, taxes, research, etc., are all important, but I don't think, to tell you the truth, there's any consensus or way of determining the weight that applies to each in a way that would convince a skeptical person who had started with prior views.

Mr. Monte Solberg: But in the Canada of today, knowing where we are, knowing what our tax load is, how much we spend on health care and all that kind of thing.... In your presentation you touched mostly on taxes, so you're saying today probably the biggest emphasis would be on taxes.

Mr. John McCallum: My personal belief is, for the reasons I gave, that the income tax burden is a major element, and I would put a lot of weight on that. But if someone else says it's infrastructure, someone else says it's education, someone else says it's health, I cannot prove to the satisfaction of that person that his or her favourite element is wrong and mine is right. I don't think we've been able as economists to achieve that, which is sad, because in other areas, like deficit or inflation, we do know more precisely what to do.

• 1700

Mr. Rick Egelton: I would agree with what John said, with one caveat in terms of the measure: an economist, of course, will always measure. I would agree that output per hour worked is the easiest and something we can agree on, but conceptually I don't think it is the best measure. I think conceptually trend factor productivity is the best measure, because then you're looking at capital and that type of thing employed. The problem with that measure, of course, is it can be revised dramatically from year to year and it's difficult to make international comparisons.

In any event, I think most economists would agree that you have this large gap, as John said, and the gap has either stayed roughly constant over the last ten years, widened a little, or narrowed a little, but it hasn't changed much. In terms of what we would do to improve productivity in the Canada of today, it's difficult making international comparisons, but when you do on the basis of education and health we seem to be spending a fair bit compared to other countries. If there are problems in education and health vis-à-vis other countries, it would seem to me the place to look is not to put more money, given the fact we're spending more money than most people, but maybe at the way we're allocating the resources in those areas. And we have, as I indicated earlier, and as Maureen alluded to, the need for tax reform.

We are doing some incredible things on the tax side that are really distorting the way resources are allocated. In my judgment, I think this would be the most efficient thing we could do to generate the biggest bang for the buck.

Mr. Monte Solberg: I'm sorry, would capital gains be one of them?

Mr. Rick Egelton: That would be capital gains, perhaps EI reform, where we have massive implicit subsidies from one industry to the other, different corporate tax rates that vary wildly from industry to industry—those types of things. We have a GST rate where the base isn't broad enough. It's not harmonized. There are politically difficult reasons for these, and these are the reasons they exist today, but I think these are areas we can move in if there were agreement, and in a very cost-effective way improve our productivity growth.

The Chairman: We have three more people who want to speak. We have Mr. Kovacs, followed by Monsieur St-Onge, and then we'll go to Ms. Farrow.

Mr. Paul Kovacs: If I can reiterate, I fully agree that the idea of the proper measure is output per worker or person employed. I do think there are a number of areas where there is agreement, such as that the size of the gap has been roughly stable for a while, and there is a gap and we should do better, and that we should have been able to narrow but we have not narrowed the gap with the United States.

There's a key area where I would disagree with some of what I've heard today in terms of specific actions, and I will try to clarify where I think some of the nuances might be found to determine an agreement here. I think the right thing to do to deal with productivity when you take this very long-term focus that productivity is how over the long term you're going to move ahead, as I said, is a focus on infrastructure. I think consistent with that would be a focus on research and development, a focus on training and education. Those would be similar long-term appropriate investments. But they would be quite different from shorter-term issues. Our taxes are much too high, and we should do something about that, but that isn't a long-term productivity issue.

If I pick up on taxes, because it was a key part of our debate today, I think there's a big difference between tax lowering and the cluster of issues that would be tax fairness or tax interference or whatever. Anything that makes a fairer tax system takes away distortions. I think Rick tried very carefully to describe a number of the specifics there. When you try to say taxes are too high, and ask if that causes brain drain, and we were struggling to find out if it did, it's much harder to make the links from a lower tax system to productivity. It's very easy politically to talk about the advantage to lower taxes, but it's not a productivity story; it's a different story about why lower taxes are beneficial. But a fairer, simpler, cleaner tax system is a productivity story, absolutely, and leads to higher welfare over the longer term.

So I think there are some areas of agreement within the economics profession, if I can try. The things that get rid of distortions, things that make people more capable of production—I would suggest education, learning, infrastructure, all of these things empower Canadians to do more, and those are the areas where you have the investment.

I have a last thought on health care. I'm not certain how you make the link to productivity from health care. I know how you make the political argument for health care, and I wasn't here for that debate, but health care doesn't sound like productivity; it sounds like a different political debate, in my opinion.

Mr. Monte Solberg: It was an issue raised by a government member yesterday.

The Chairman: Monsieur St-Onge.

• 1705

Mr. Denis A. St-Onge (President, Royal Canadian Geographical Society): Yes, thank you, Mr. Chairman.

I think that in this debate we have to distinguish between two fundamental principles. We have to agree on what is an objective and what are the means to get to that objective. Surely we can agree that the objective globally is to improve the quality of life for Canadians. That is surely the overall objective, regardless of how we define productivity. We should, I hope, agree also—and there are numerous examples across the world of this—that where the population is better educated, the quality of life is improved as well. Therefore, the overall objective in this context of improving the quality of life should be to improve the quality of education of the Canadian population.

If we agree on this, then the means to do this I will leave to others—I'm not an economist—whether it's tax reductions, tax restructuring, whatever. But in a debate like this, it's important to distinguish objective and process or means to get there.

The knowledge-based economy, which we surely all agree we are moving into, whether we like it or not and however we define it.... The high-tech sector in Ottawa is surely a prime example of this knowledge-based economy, and that's where all the demands come from. That is where we should put our emphasis. That is what we have to push, because that is what we are going to be living with in the next century and it's what is going to improve the quality of life for Canadians.

Thank you.

The Chairman: Thank you.

Ms. Farrow.

Ms. Maureen Farrow: I would say, in answer to the question, yes, as I said at the beginning, I do agree that it's output per worker, and I think you need to keep it very simple if you're going to engage Canadians. The lesson we learned about the deficit debate was that we have to keep it simple and clear, and that clarity will eventually embrace all Canadians into joining in. So I would urge that we do that.

If I had to pick just one thing to do, I would come back to the correlation that I think is very persuasive when you look at it, and that is that countries with more capital employed per worker tend to be more productive. Over long periods, that strong correlation between that labour productivity, as we call it, the output per worker, and the capital employed per person seems to mean that you can exploit the benefits of technological change because you're employing that capital in all dimensions, whether it's human training or the machinery and equipment they're using, and you are therefore able to absorb it. If you look at the countries that have made these decisions, you will see that they have very high productivity increases on a consistent basis.

That's where I would concentrate, and I expect you use tax breaks and tax changes to facilitate some of that.

Mr. Monte Solberg: Right. So lower taxes...for instance, capital gains would be good for your—

Ms. Maureen Farrow: It could be capital gains; it could be faster write-offs of capital equipment. There's a lot of things you would look at, and there's lots of lessons we can look at around the world where they've done this.

The Chairman: Thank you, Ms. Farrow, and thank you, Mr. Solberg.

We have a number of members who would like to ask questions, so keep your questions brief and we'll get everybody in. We'll go to Mr. Pillitteri, followed by Ms. Leung, then Mr. Szabo. Then we'll go to Mr. Brison and perhaps Mr. Epp.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chairman. I apologize for not hearing a lot of the basis for the course...I've been for many years listening to economists.

I don't know if I was hearing something different when I came in here, but, Mr. Egelton, did you make a remark that different industries should be charging different unemployment insurance rates? Do you think that as a society we should start looking at different sectors of the economy where individuals pay into the employment insurance fund and never collect it? Do you think they're going to be subsidizing the ones who constantly collect it, and you call that fair in Canada?

• 1710

Mr. Rick Egelton: The way the system works right now is that you could be in an industry, for example, where people are working short periods of time, then being laid off, and there is an EI payment made to those workers; and there is another industry where there are very few lay-offs. So if you look across those industries, you could have an industry where the employment records would be very stable; people are paying into it and they're very seldom receiving benefits.

What the system amounts to, in a sense—the way it works now, where everybody pays the same regardless of their industry—is a very substantial wage subsidy for certain industries. In some industries the subsidy, according to the Mintz report, is as high as 17% of wages. That's a subsidy, and in another industry there's a net cost. I'm just saying that's very inefficient. Why would you want to subsidize one industry over another industry? Why wouldn't you want to equilibrate it and give everybody a level playing field?

What you end up doing in that kind of environment is inadvertently putting more resources in one sector than in another. It's interesting to note that precisely the industries that everybody around the table seems concerned about, the high-tech industries and the knowledge-growth industries, are the ones that are paying the most and subsidizing the other industries.

Mr. Gary Pillitteri: Mr. Egelton, if you were sitting on this side of the table for very long, I just wonder how, as a politician, you could sell that in other parts of Canada.

Mr. Rick Egelton: And that's why I'm happy I'm sitting right here.

Mr. Gary Pillitteri: I was wondering how you could come up with that argument.

Thank you.

The Chairman: Thank you, Mr. Pillitteri.

Ms. Leung.

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

I enjoyed all your presentations. There's a lot of brains there.

I am interested in your definition of the measurement of productivity. It's output per person employed. Now, we talk about quantitative. What about qualitative? We talk about quality of life, that R and D will improve lives or find a cure for disease, etc., and you've also discussed education. Knowledge-based innovation—I think we all know this government has done a lot for the innovation part of the program. Last year, in 1988, we set up the Canada Foundation for Innovation with $800 million. This year, 1999, the budget is $200 million.

Anyway, to come back to the question, I'm interested in the genome program. In Vancouver they have a centre of excellence too. Of course they all lobby us. We know that. We don't mind. But we like to see good work. Now, I'd like someone to answer me on how—you really puzzle me—you measure the qualitative. We're talking about tax dollars, etc. I'd like to hear that.

Dr. Lap-Chee Tsui: May I attempt to address this question? The question of a genome centre was mentioned.

Of course, a quantitative measurement would be a direct reflection of qualitative measurements. I can give you an example of just a number of years ago. In 1996, a quarter of the disease genes cloned in the world were cloned in Canada. The reason, I submit, is that we have a very good infrastructure for research, for medical delivery, and therefore we are very organized. But as time goes on, the easy disease genes are getting cloned and we don't have the infrastructure to compete with the rest of the world to conquer the more difficult problems. Major pharmaceutical companies are dumping hundreds of millions of dollars into research in the United States, and the federal government there also has a similar amount, so how do we compare?

I'm talking about research support, a quantitative term, and then translating to qualitative terms. I think we're talking about the quality of life, health economics and so on. I think how much quality research we could produce in a country would be one way to measure productivity.

The Chairman: Thank you, Ms. Leung.

Ms. Farrow, are you making a comment on that?

Ms. Maureen Farrow: I think it's a legitimate question to ask, because as economists we're asking what is the definition of productivity and we're trying to narrow it down. But the reason we're narrowing it down is because we're actually arguing that this equates to a rising standard of living.

• 1715

Now, what we all around this table in Canada would want to define as a rising standard of living would embrace not just the fact that we're fully employed—which I think would be a very important part of defining standard of living, that we are fully employed and that we are fiscally stable and we have flexibility—but also that we would have the right kinds of health and education systems and the quality of life that you are talking about. What I think you have to step back and say is that if we don't have a productivity strategy where we are going to see a rise in that living standard, we will see an erosion of the quality of life that you were talking about.

I think actually, John, you mentioned that in your opening remarks to some extent.

The Chairman: Mr. McCallum, and then we'll go to questions with Mr. Szabo—and to Mr. Kovacs as well.

Mr. John McCallum: I think I'll pass. I think Maureen covered what I was going to say.

The Chairman: Okay. Mr. Kovacs.

Mr. Paul Kovacs: The United Nations publishes the human development index every year, and it pulls together a number of different measures—life expectancy, a variety of measures of the quality of life as well as economic measures—and Canada has scored very well in that, I think first every time it has come out.

In an analysis of that index, looking at quality as well as economic measures of how satisfying life is in this country, there's a high correlation between productivity and that measure, but not a perfect correlation. We've discussed how the American productivity is higher than the Canadian productivity, but on a number of other measures, most of us much prefer to live in Canada than the United States because of the many things that make Canada such a wonderful country.

While there's a high correlation between productivity and other qualitative measures, whether it's that one or others, it's not perfect and there are some measures around.... But that's a bolder measurement exercise, and those exercises usually take many things and blend them together. What I understood we were asked today was what's a specific measure of productivity, which we tried to share, but there are some of these broad measures that bring other indexes together into one overall statistical measure.

The Chairman: Thank you.

Dr. Alper.

Dr. Howard Alper: Very briefly in response to your point, as I noted vis-à-vis the so-called brain drain—and not to look just at numbers but at the skill sets of people—your points were all taken vis-à-vis productivity. I'm reminded of the change in the U.K. from the early 1980s to a year ago, where in terms of productivity measures it used to be one of the lowest in Europe and now it's one of the highest, if the not the highest, in Europe.

Accompanying that increase in productivity, from a research and innovation point of view—because I don't think there's a panacea or a one-capsule solution—I would say the consequences of that change are not simply in numbers, in quantity. The significance and impact of the research that has accrued, the impact from a basic point of view, the impact on the economy, which you can measure in terms of new products, in terms of improving processes, has been profound indeed in the U.K.

So I think there are measures, and I think in defining productivity and so on one should look at the methodological approaches in the U.K., in Japan and other countries, which are quite different from that in the U.S., in fact.

The Chairman: Thank you.

Mr. Szabo.

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

Back in 1994 the finance minister first addressed the finance committee, and he had the saying that good fiscal policy makes good social policy, good social policy makes good fiscal policy, and that they're inextricably linked. I know from most of the members I hear from that there's a lot of frustration that the linkages to quality of life issues and the social element of quality of life issues as opposed to simply the economics...we probably would like to see more sensitivity to that.

This idea of principally comparing Canada to the U.S. without identifying some of the attitudinal and cultural and social priorities, things like attitudes towards education, training and retraining, health care, early retirement, social security, etc.... When Mr. McCallum was talking about the attitude of children towards the U.S. and how it has changed and how now it's the land of opportunity, he missed one glaring characteristic of the U.S. that you cannot deny, and that is that the U.S. has to be the most litigious society on the face of the earth, and that their fastest-growing industry is building jails. These are quality of life issues as well. So we can't be selective in our statistics. I would like a more comprehensive study.

• 1720

Maybe it really comes down to issues like the gap between the rich and the poor, and maybe the measure of productivity should be reduced by the amount of human roadkill that is consequential to having high economic productivity. So I would ask you whether or not our productivity discussions and maybe our measures should in fact be tempered by the parallel social preparedness of our society to be able to cope with change in the 21st century.

Mr. John McCallum: Let me just say that we were asked to talk about productivity, which is a fairly narrow economic subject. I am not saying that should be the only objective or even the most important objective.

I came across two independent examples of nurses who left Canada, from cardiac surgery in this country, and they went to the U.S., with much higher pay, and both came back, because in the U.S. whether you got the surgery depended only on whether you had the money. Perfectly healthy people would be thrown out to die if they didn't have the money. They couldn't stand that, and they came back here. I thought that was a wonderful illustration of the importance of our health care system.

I'm not advocating at all that we adopt a U.S. way of life, and I would not want to move to the United States myself. But having said that, I'm saying there is this trade-off. With the border becoming less important, with attitudes changing, if the pendulum swings too far in the direction of a huge tax gap between Canadians and Americans—and tax gaps matter, they're not by any means the only factor, but neither are they unimportant—if the pendulum swings toward massively higher taxes on higher-income people in Canada compared with the U.S., we will pay a price gradually over time in terms of companies and people leaving this country, and that will then hurt our economy, hurt our standard of living. So you have to balance those two things.

I believe, because of the looming fiscal dividends, we can do both. We can preserve what we like in terms of our social safety net and our kinder society, and we can have a significant reduction in income tax.

I'm not saying cut the social safety net, become like the U.S. I'm saying that because of these fiscal dividends we have this once-in-a-lifetime opportunity to preserve those things that Canadians value, but to also move toward a significantly lower tax regime.

The Chairman: Ms. Farrow.

Ms. Maureen Farrow: I would look at it and agree with what John has said, but why are we discussing productivity today? We're getting late in this business cycle, and we're talking about it because we have 7.8% unemployment in this country. That's a major problem for us, particularly when we look at the U.S. and various other countries where there is a healthier employment scene.

If we had full employment, or at least a percentage of that unemployment rate, we'd all feel happier as Canadians. You would have better revenue streams, and we could be talking more about tax cuts, raising the social benefits, and so on.

So I will come back and say that why I think the output per employee is important is that this is one of the measures we have of how well we're doing in this world to have reached full employment, because if we have a very productive labour force, we will attract jobs here, and jobs mean full employment. The jobs won't be going south of the border; they'll be coming here, because we also have this better quality of life, as well, to go along with it.

It's always very tempting to deviate, and I think, as a nation, the press have got hung up with productivity and really talking about the unemployment problem. They are linked, but long-term productivity will help us no end in maintaining our quality of life and enjoying full employment and all the benefits that come from that.

The Chairman: Thank you, Ms. Farrow.

I want to give a question to Mr. Limoges.

• 1725

Mr. Rick Limoges (Windsor—St. Clair, Lib.): Thank you.

I've been listening intently to all these things that have been presented to us today, and it seems there's some agreement that we should be looking, in terms of productivity, at output per person employed or per worker. The simplicity of that statement belies its complexity.

The reason we're looking at productivity, as noted earlier, is because our true objective as a government is to improve the standard of living. Some could argue, for example, that it's very difficult to measure output. With the different measures we're looking at, we have a graph here that totally ignores the short-term exchange rate fluctuations or inflation rate differentials between Canada and the U.S., and makes a statement about standard of living that is like jumping to a conclusion I can't imagine.

Then we have another statement about increasing the capital in order to improve productivity, yet that could affect our employment rate negatively. As a government, we need to be able to figure out what we can do and whether we should even be talking about productivity. I've heard people say productivity is a very important concept that we should be discussing, but should we really be discussing productivity if we want to look at improvements to the standard of living?

Some people might say my output should go down if I want to improve my standard of living, because I can work half-days and golf the rest of the time. What should we be measuring? Is there a way we can all agree that what we're measuring will be a determining factor for what we're trying to achieve?

The Chairman: Mr. Egelton.

Mr. Rick Egelton: I think we would all agree that what we're measuring is very difficult to measure, but I wouldn't conclude that means we shouldn't worry about it. I think we would all agree that over the long term, the only way you can sustain any kind of meaningful increase in living standards is to raise the productivity of Canadian workers.

I would caution against saying that the productivity level in Canada is 16.34% below that of the U.S., because we don't know how much it is below. We know it is below, and that gap has been there for a long time. It's useful to measure it and talk about how we can improve that gap.

We also know as a country and a government, although we perhaps can't measure it precisely, the things we're doing that inhibit productivity growth. Even if we can't measure it, we know we're doing a number of things that limit our ability to improve our living standards. Those are the types of things we should focus on and address.

I remember a number of years of ago, every government policy was supposed to go through an environmental assessment: Is this environmentally friendly, or is this not environmentally friendly? Maybe when we put down a budget or other measure, it's time to think about how friendly it is to productivity growth. We may not be able to measure it, but we can look at the measure and say “This particular tax change is going to hurt productivity growth. Do we really want to do that?” Maybe that's the type of mindset we should carry forward with this in the future.

The Chairman: Mr. McCallum.

Mr. John McCallum: I have two points. Living standards are not always determined by productivity. Take productivity, not output per person employed. Let's call it output per hour of work. Then it would take care of your person who wants to play golf in the afternoon.

Other things affect living standards. One is the proportion of the population that has jobs. In the 1990s, Canadians' living standards declined in absolute terms for the first time in many decades. It wasn't because our productivity performance got worse. It was mainly because we had fewer people employed relative to the population, because our recession was so severe.

It also depended on the fact that we had a terms-of-trade shock. The prices of the things we produced, like commodities, went up slower than the prices of the things we consumed. So you can decompose the living standards effect into the effect coming from productivity, the employment percentage of the population employed, and the terms of trade. If you're talking about after tax, there could be a tax impact as well.

• 1730

The decline in living standards in the 1990s had nothing to do with productivity, but had to do mainly with employment rate. If you compare the golden years of the 1950s and 1960s with the 1980s and 1990s, the whole world suffered a huge decline in productivity growth. That's why our living standards have been rising less rapidly.

Second, on what the government should do, if we could have some consensus on what the most important levers influencing productivity are, it would make some sense for the policies to all go through this productivity lens, as was originally suggested within the Liberal government.

There is so little consensus that the risk is that everybody around this table will have their own pet project and wrap it up in a productivity blanket. You're going to be told 101 different things you should do to raise productivity, in support of all our various projects. We may be right, and we may be wrong. It's such a broad amorphous thing, you won't necessarily know whether any particular project is pro- or anti-productivity. You have to be a bit cautious, but the best solution would be if you could come to some consensus in general terms about what's good for productivity and then go for it.

The Chairman: The bell is ringing that tells us we have to go to vote. We have 15 minutes to do that. We will take some questions from Mr. Brison, Mr. Epp, Ms. Redman, and Mr. Discepola. So we have four questioners and 15 minutes. Go ahead. Let's be productive here.

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

I was going to ask Mr. Tsui about cloning more Conservatives for Parliament Hill. That could potentially improve the productivity here. But why mess with perfection?

On the brain drain issue, I know Mr. McCallum was saying it's not really a personal tax issue, but I would argue it could still be very much a tax issue, and if not a personal income tax issue specifically, then a corporate tax issue.

On the personal tax issue side, you mentioned the Maclean's article. I believe it said some graduates in business are starting at $72,000 per year, at the top marginal tax rate. If they choose to stay in Canada, they will be taxed at a higher marginal tax rate than someone making $400,000 in the U.S. So I would argue there is still a large problem on the personal tax side.

You said the salaries U.S. corporations are paying is an issue, the pre-tax earnings, and the fact that the compensation trends in the U.S. are going toward not just salaries but stock options and that side of things. The corporate tax structures, and particularly our treatment of capital gains, may be a significant factor in the brain drain, or brain trickle, if you will. But in terms of those bright, talented, cream-of-the-crop young Canadians who are choosing to go the U.S., our propensity in general to tax capital and income on capital in Canada may be playing a role in the brain drain that we don't really talk about a whole lot. I think we should be focusing on it a little more.

I would appreciate your feedback and feedback from any of you on the degree to which our corporate and capital gains tax structures may be playing a larger role than we think in the brain drain issue.

The Chairman: Go ahead, Mr. McCallum.

Mr. John McCallum: I was saying the biggest problem was on the personal tax side, and Rick was putting more emphasis on the corporate side. I don't disagree with Rick that the corporate side also has some problems—they both do—but in terms of brain drain, I was putting more emphasis on the personal side.

I keep coming back to this trade-off between egalitarianism and productivity, brain drain or company drain, whatever you want to call it. Certainly for some high-end individuals getting these big salaries in the U.S. with big stock options, that could be a factor. But from a political point of view, whether you want to go for lower capital gains tax, which definitely benefits those better off more, it's a political trade-off possibly between economic efficiency and political opposition.

The Chairman: Dr. Alper.

• 1735

Dr. Howard Alper: Thank you. I'd just like to add a personal comment.

Yesterday I was in the United States, at their number-three or number-four company. Their stock has gone up 45% since January 1. It's blue chip. I was speaking to some of the young researchers who were doing technology assessment of one of their major programs, including a number of Canadians who were working there. That was quite telling. The issues to them are the starting salary, the personal tax structure, the stock options—they're phenomenal—and the signing bonuses, like basketball or football players. So yes, there are other issues besides the ones you noted. But I think in developing a strategy on how to attack this problem, one has to look at it in terms of both an offensive mode, how to really make a difference by infusing money into particular research and innovation, or any sector, and a defensive mode; that is, what do you do, in a tax sense and others, to minimize your loss?

I want to introduce the term “brain circulation”. We talk about brain drain a lot. It's important to have circulation. It's important to have people coming into the country, as well as those leaving, who would add value to this country. This has been true historically. Some of them will stay here as immigrants and make a great contribution to this country, and some will leave. So all those figures impact on the issue of brain drain as well, but I think those are the two components. Tax is important. I'm convinced of it, not just by yesterday's experience, but by talking to heads of pharmaceutical companies, SMEs, the IT sector, you name it, as well as these others.

Ms. Maureen Farrow: It should be comprehensive tax reform, I'll just say that. I do think you have to look at the whole of the tax system, and that involves the provinces and the municipal levels.

The Chairman: Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): I want to know from probably one or two of you exactly what the effect is of lowering taxes on productivity. Several of you mentioned it, and we've heard it from others. How precisely does lowering taxes improve productivity if productivity is measured as output per person employed?

The Chairman: Go ahead, Mr. Porter.

Mr. Douglas Porter: Yes, I think there are a number of channels through which it works. First and most importantly is that at the margin, it helps encourage entrepreneurism in venture capital. That's a supply-side argument. Another argument is just the fact that it helps the economy operate at a higher level. If people have more money to spend, it helps to generate growth. And if an economy operates closer to full capacity, then its productivity is higher. A number of studies have shown that. If an economy is at a low point in the cycle or far away from capacity, then productivity or output per worker is much lower than when it operates at very close to capacity, which could be generated by tax cuts. So there's both a supply side and a side that just generates growth in general.

Mr. Ken Epp: Okay.

The Chairman: Dr. Tsui.

Dr. Lap-Chee Tsui: I think perhaps I'll comment on that too. I think some of the measurements we talk about are quantitative measurements. Tonnes of wheat or the number of cars you produce, of course you measure. But I want to bring it back to the quality issue, which is that the amount of intellectual property produced is also a measurement of productivity. But how do you measure that? The yardstick will come later, perhaps.

Then coming to the tax point of view, I don't think as researchers, as scientists, a lot of us are thinking about tax. We're thinking about the research opportunities. I thought, perhaps, in the corporate world you would compare taxes and so on, but then the brains—the top researchers argue.... Of course there are brains in economics too, but then I think in some technologies.... I'm sorry I put it that way; I may have put it the wrong way. I apologize. But I think in terms of driving the technology of a country, the brains actually are the basic scientists.

The Chairman: Thank you.

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Mr. Ken Epp: I want to ask Mr. Egelton a specific question. He complained about the 26% tax rate for banks, which I think the public generally wouldn't believe. But let's say that it's a given. How would reducing the tax rates for banks improve our productivity in this country by the definitions that you people are using for productivity?

Mr. Rick Egelton: I probably shouldn't have used the banks. The point I was trying to make is that we have very differential tax rates between industries. We have some industries taxed at 20%, others at 6%, and others at 18%. What that does is it forces investment capital into the country in sectors not based on the returns they can get, but based in part on differential tax treatment. And that's not what you would want to do in order to allocate resources in your economy in the most efficient manner possible.

What you'd want is for the tax structure to be constant across all industries. Then capital would flow in the industries based on investment opportunities, not based on differential tax treatment.

The Chairman: Ms. Farrow.

Ms. Maureen Farrow: What I would argue is that—and I'm not going to defend the banks here—lower tax rates within corporations leave more capital to be employed per worker, which has a very strong correlation with long-term productivity gains.

The Chairman: Thank you, Mr. Epp. We have other questioners here.

Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you very much. I'll be as quick as I can.

Earlier this year, Newsweek talked about the gap between the rich and the poor in the United States, and notwithstanding all the wonderful things that happen in Canada, one of the things we keep hearing about is the fact that our highest income-tax bracket kicks in at a relatively low level.

I'm wondering if we're looking at the politics of greed versus the politics of envy. Yesterday we had a panel that created a lot of interesting discussion, and one of the things that came out was the perception that Canadians aren't really hard-working, that we're a bit laid back. One of the other things this Newsweek article went on to say was that the Americans really reward the rich. I think of the major newspapers that publish all the highest earners, and there's almost an implicit feeling among Canadians, and certainly in the article, that this isn't a good thing.

I guess I'm getting back to Mr. McCallum's armchair psychology. I'm wondering if anyone would like to comment on that aspect of the Canadian tax system.

Mr. John McCallum: Well, since you mentioned my name, I've heard it said that Americans are motivated by greed and Canadians by envy. I'm not a sociologist, but that may well be true. But what I'm suggesting is that I think our social safety net, which helped us avoid the big increase in inequalities that the U.S. experienced, is extremely important, through the tax and transfer system, in helping lower-income people or people who lose their jobs.

We could lower income tax at the bottom and at the top without reducing any social programs because of these fiscal dividends, but you'd still have the spectacle of higher-end Canadians taking more income home and paying less tax. Now, if that makes other Canadians so envious that politically it's difficult to do, that might be political reality, but I think it would exact an economic price on the long-term future of the country.

The Chairman: I'm going to give Mr. Discepola a final question. We have only two minutes.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): All right, I'll be very brief and I'll probably go directly to the question.

I was going to borrow from a leaf of Mr. Epp and his mathematics teaching. If you measure productivity by production per worker, output per employee, or employee hours, some of the measures that you're proposing would benefit productivity I can't see, because it obviously means you're either going to have to produce more in fewer hours or with fewer employees, or get more out of the same number of employees. And that's the whole debate.

What I want to focus on is please take off your mantras, take off that blanket that Mr. McCallum mentioned, and tell me in two words or less, each one of you, what you would do as your priority to improve the standard of living of all Canadians, not just those who are working. What's the priority?

I'll start with Mr. Denis St-Onge.

[Translation]

Mr. Denis St-Onge: I would invest more money in education in order to improve the knowledge of Canadians.

Mr. Howard Alper: I agree with that.

[English]

Mr. Pierre Killeen: I would make learning a national project.

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Mr. Paul Kovacs: My focus is on infrastructure and investments in infrastructure. I have no problems talking with colleagues and saying if you can get more done in a day you can take home more on your wages and salaries. I think it's a good link you can make in terms of selling the story.

Mr. Rick Egelton: I would put in place significant tax reform in order to level the tax playing field.

Dr. Lap-Chee Tsui: What can I say? I think I would obviously support science and research. I think that would be the foundation for productivity through innovation and research.

Ms. Maureen Farrow: I would raise the capital employed per person, because then they're going to have the tools to do the job.

Mr. Nick Discepola: [Inaudible—Editor].

Ms. Maureen Farrow: No, that's not true. That is absolutely not true.

Mr. Nick Discepola: They have to do more to produce more, so if you buy a computer—

Ms. Maureen Farrow: They have a faster computer, which allows them to do more.

Mr. Nick Discepola: Right.

Ms. Maureen Farrow: And they will enjoy it more, and we'll be more productive as a society.

Mr. Nick Discepola: So you're producing more with the same number of employees, or doing more in less time.

Ms. Maureen Farrow: No, we're going to create more jobs as well. More people will be employed.

Mr. John McCallum: Over the next five to seven years I'd bring down personal income tax rates for rich and poor alike.

The Chairman: Mr. Porter.

Mr. Douglas Porter: I would also cut personal taxes across the board. You would retain more top talent, and you'd let the economy operate closer to full potential, which benefits absolutely everybody.

Mr. Nick Discepola: Thank you, Mr. Chairman.

The Chairman: Before you leave, I'd like to thank you very much on behalf of the committee. We do have to go and vote.

But I want to just ask one simple question: How many of you believe you have to generate wealth before you can redistribute it?

Mr. Monte Solberg: I believe that.

Mr. Douglas Porter: I believe that.

The Chairman: Thank you.

The meeting is adjourned.