CANADIAN CENTRE FOR POLICY ALTERNATIVES
SOCIAL PLANNING COUNCIL OF METROPOLITAN TORONTO
ALLIANCE OF CANADIAN CINEMA, TELEVISION AND RADIO ARTISTS
CONTENTS
Monday 29 July 1991
1991-92 Budget
Canadian Centre for Policy Alternatives
Afternoon sitting
Social Planning Council of Metropolitan Toronto
Alliance of Canadian Cinema, Television and Radio Artists
Nomura Canada Inc
Adjournment
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
Chair: Wiseman, Jim (Durham West NDP)
Vice-Chair: Sutherland, Kimble (Oxford NDP)
Christopherson, David (Hamilton Centre NDP)
Hansen, Ron (Lincoln NDP)
Jamison, Norm (Norfolk NDP)
Kwinter, Monte (Wilson Heights L)
Phillips, Gerry (Scarborough-Agincourt L)
Sterling, Norman W. (Carleton PC)
Stockwell, Chris (Etobicoke West PC)
Sullivan, Barbara (Halton Centre L)
Ward, Brad (Brantford NDP)
Ward, Margery (Don Mills NDP)
Substitution: Cunningham, Dianne (London North PC) for Mr Stockwell
Clerk: Decker, Todd
Staff:
Anderson, Anne, Research Officer, Legislative Research Service
Rampersad, David, Research Officer, Legislative Research Service
The committee met at 1006 in room 230.
1991-92 BUDGET
Consideration of the 1991-92 provincial budget.
CANADIAN CENTRE FOR POLICY ALTERNATIVES
The Chair: I see a quorum here this morning and I would like to begin this morning's session. I would like to introduce Mr Mel Watkins, professor at the University of Toronto. The agreed-to procedure for this morning is that Mr Watkins will present, and then whatever time is left in the hour will be divided equally among the three parties for questioning. Welcome to the committee, Mr Watkins.
Mr Watkins: I am delighted to be able to accept the invitation to appear. Let me extend apologies from Duncan Cameron, who is not here with me this morning. He is unable to be here, but I am sure he can appear before your committee and would be delighted to do so when it comes to Ottawa.
I would like, if I might, to give you a statement this morning on the 1991-92 Ontario budget that has been signed by 59 economists from across Canada. It is being issued under the auspices of the Canadian Centre for Policy Alternatives. With your permission, I would just like to read this into the record, and then we would be delighted to try to answer any questions you might have.
As economists, we support the major elements of the recent Ontario budget and reject the view that the degree of fiscal stimulus is excessive or likely to create significant long-term economic problems.
Ontario Treasurer Floyd Laughren has rightly noted that he had a choice, to fight the deficit or to fight the recession. He made the correct choice.
It is difficult to exaggerate the scale and seriousness of the current Ontario recession. Driven by plant closures and major layoffs in the manufacturing sector and by a sharp downturn in the construction sector, total employment fell by 260,000 between February 1990 and February 1991, and the unemployment rate increased from 5.3% to 9.5% over that same period. We should just note that the present unemployment rate is 10.2%. By both measures, this recession is comparable to that of 1981-82. Output losses are expected to be only slightly less than those of 1981-82, even if the Ontario economy begins to grow from midyear.
I should again just add here that the forecast at best will be a weak recovery in the economy. There is even a front-page story in the weekend Financial Post, which on these matters must be believed, saying that economists now fear that this recovery is hollow and that there will be another downturn before we are into a stable recovery. That is based basically on what American economists are saying is possible in the US case. That could then affect us in Canada, obviously.
As a direct result of very significant job losses combined with recent changes to the federal unemployment insurance program, tens of thousands of Ontario residents have been forced to turn to social assistance programs. Case loads have approximately doubled in most major urban centres, including Metropolitan Toronto. Almost one quarter of the total budget expenditure increase for 1991-92 is for social assistance. The recession has had a more indirect impact in other areas of spending.
The recession has also seriously depressed budgetary revenues. Indeed, even after the modest tax increases imposed in the budget, total tax revenues will decline for the first time in the modern fiscal history of the province. That is a sign of how serious the downturn is.
The third major factor in the fiscal equation has been reduced growth of transfers from the federal government for established programs and Canada assistance plan payments. Federal transfers to Ontario in 1991-92 will be $1.6 billion lower than previously committed. In effect, the federal government has shifted an important part of its deficit problem on to the provinces, with Ontario being forced to bear a particularly large share of the burden, despite being the province hardest hit by the current downturn.
Over half, some $5 billion, of the $9.7-billion Ontario deficit is due to these factors, namely, recession-driven changes in revenues and spending and reductions in federal transfers. Another $3 billion of the deficit is due to increased spending to maintain the level of existing services, primarily health and education.
The truly discretionary expenditure increase in the Ontario budget is a modest $1.5 billion. It is directed towards social assistance reform, a wage protection fund, pay equity adjustments, increased support for research and development and technological innovation, and other areas where commitments were made by the present government.
Those who insist that the Ontario government should have a much smaller deficit are calling for cuts in services, most importantly, health, education and social assistance programs, or for sharp increases in personal or corporate taxes. Most economists accept that significant tax increases in a recession and in the wake of major federal tax increases, particularly the GST, would have been counterproductive. The debate then is one over the desirability of spending cuts.
As individuals, we believe the Ontario government was right to maintain and even make modest improvements in services to people. We place value upon provision for the victims of recession and upon the maintenance of an adequate level of public services for our fellow citizens.
As economists, we note that the proposed alternative of spending cuts would have significantly cut employment and output at a time when the private sector is in a steep decline. Some macroeconomic models suggest that measures to restrain the increase in the deficit to $3 billion, that being where it was for the last fiscal year, would have cost the economy in excess of 70,000 jobs. All of the major models of the Canadian economy, including those of the Conference Board of Canada and Informetrica, show that restraint by the federal and most provincial governments will slow economic recovery. Spending cuts in areas such as education and public infrastructure would also have come at the cost of reduced potential for future growth. Public investment is one important element in productivity growth in the private sector.
In our view, the increase in the Ontario deficit is quite manageable. The deficit for 1991-92 is 3.4% of provincial gross domestic product or GDP, considerably smaller than recent federal government deficits, smaller than a recent Alberta government deficit in 1987, and smaller than a Conservative Saskatchewan government deficit in 1986. The deficit will decline in Ontario in absolute terms and even more as a share of provincial GDP after 1991-92. Most important, Ontario has a small accumulated public debt, so the cost of debt servicing is not expected to rise above 12% of revenues. Despite the recent downgrading, Ontario is able to borrow from capital markets on excellent terms and there is no good economic reason not to borrow to maintain important services under current conditions.
It has been argued by some economists that it is unwise to borrow since debt servicing costs will ultimately reduce the fiscal flexibility of the government, as has happened at the federal level. There is, to be sure, a limit to the extent to which debt should be assumed, but there is no reason to believe that the fiscal projections in the Ontario budget are seriously flawed. As growth resumes, revenues will increase and some elements of spending will fall, moving provincial finances gradually closer to balance.
It has also been argued that the increased government borrowing will delay private sector recovery by forcing up or slowing the fall of interest rates. Such concerns are unfounded, even for those who hold to the view that Canadian interest rates are determined by balances in domestic as opposed to international financial markets. Demands on credit markets by Canadian private borrowers -- households and businesses -- are currently low and personal saving rates are on the increase. Short-term interest rates have continued to decline since the Ontario budget was released, and it is in the capacity of the Bank of Canada to permit further declines, given the current level of US interest rates. These would allow the value of the Canadian dollar to fall, thus promoting the recovery of export industries.
It is important that the real issues at stake in the economic debate over the Ontario budget be clarified. In essence, the federal government has determined that the macroeconomic priority of the country should be to achieve a zero inflation objective through tight monetary and fiscal policy. The result has been an unnecessarily severe recession -- the Conference Board of Canada, not a radical group, itself calls it a made-in-Canada recession -- double-digit unemployment and the destruction of a significant part of our national productive capacity. We do not believe that the future benefits of these policies will outweigh the high current costs.
The Ontario government has effectively determined to partially offset federal fiscal and monetary restraint through a looser fiscal policy than might otherwise have been contemplated. They have also embraced a view of the so-called competitiveness issue which stresses the importance of public investment and the need to maintain and improve social standards.
In this context, it is scarcely surprising that the federal government should have chosen to launch an almost unprecedented attack upon the budgetary policies of Ontario. But this attack, and the support for it voiced by some economists, should not be taken by the public as evidence that the Ontario budget is misguided in terms of economic principles. To the contrary, the Ontario approach is much to be preferred, and is the one that should be pursued in concert by both levels of government.
The Chair: Thank you, Mr Watkins. We have approximately 45 minutes left, which will allow each party 15 minutes for questioning.
Mr Jamison: I would like to thank you for your presentation. We have heard from various people that the recession basically is over. I would like your view on that and in what term you see the recovery, if in fact we do not double dip into another recession period.
Mr Watkins: We can hope that the recession is over, but it is too soon to say. The data for the second quarter on the whole suggest that we may have moved into a recovery phase. As I said already, there is now some concern being expressed by some economists that we may have had a kind of false start here. Certainly if we are in a recovery phase, it is a very weak recovery we are looking at. Much of the increase in employment that has been created in absolute terms, not in relative terms, is in fact in part-time jobs, and indeed a number of these jobs were actually created by the federal government for census-taking purposes, and that is a one-shot event. So we are not at all certain. In terms of unemployment, there is no reason to believe we are in anything but continuing serious trouble.
The recession we have here in Canada is unusual in the sense that it is one of the very few times we have had a recession start in Canada before it started in the United States. This is not something we should feel happy about. It means the federal government had such horrible macroeconomic policies that it actually managed to push our economy into a recession before the American economy was pushed into a recession. But the reason why this then is such a serious downturn is that once the American economy itself went into a recession -- which had nothing to do with us; it would have happened anyway -- we were then dragged down further. The debate now about what kind of recovery we are going to have and when is basically that we are not yet certain that the American economy, which went into a recession later, has come out of it yet. If it has not come out and does not come out, it is very hard to see the Canadian economy staying out of a recession or having anything like a satisfactory recovery.
I think this point is actually very important in judging the budget, because one of the problems we have as economists is that the information we deal with is often dated before we get around to dealing with it. Even our so-called leading indicators are issued two months late. So one of the problems you have if you are managing fiscal policy is you say we should stimulate the economy, but how do I know by the time I bring these measures in the economy will not already be pulling into a recovery phase? That is a very real issue.
In this case, unfortunately that is not going to be a problem because we are not yet clearly out of this recession, and if we are out of it in a technical sense, we are not out of it in terms of unemployment, and if we are out of it even in a technical sense, it is going to be very slow. The case for fiscal stimulus of the modest nature that is found in this budget is a compelling case, and each day that goes by makes it a more compelling case.
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The Chair: I am going to continue with the questioning of the government party, and then we will move to the Liberals, who have indicated they would like to be next.
Ms M. Ward: Looking through your summary and listening to your comments, I think I could summarize it by saying it is a good budget for bad times, and that is what we have been hearing from other people also. I was just reading what the clerk gave us here this morning, some independent submissions and persons saying that as much as they do not like deficits, they see that the alternative at this time would have been much more devastating for Ontario. Would you agree with that summary, and would you like to expand on that?
Mr Watkins: I agree certainly in the sense that there is no virtue in deficits and there is no virtue in adding to debt burdens. As citizens or as those of us who are economists, we can all agree on that. The question is, what would the alternative be? What we are saying here, and others have said it, is that this government came into office and discovered there was already a deficit. We were already clearly in a significant recession.
If the government had chosen to just hold the deficit where it then was, which was in the order of $3 billion for the last fiscal year, then the best kind of macroeconomic models available to any of us, including the Treasury, would be that about 70,000 more jobs would have been lost than have actually been lost since that time. There have been about 250,000 jobs lost. If we had held a balance in the budget at the $3-billion deficit, we would have created 70,000 more unemployed people. We are talking now about an unemployment rate in Ontario which is double-digit for the first time in a very long time indeed.
We are looking at an unusual case where Ontario is the hardest hit of any province by this recession, so for any government to have worsened the recession would be unconscionable. This budget is about cushioning the effects and making a modest attempt to aid a recovery, but only a modest attempt. I would agree with you it is a good budget for bad times. It is the best we can do in times that are really quite bad.
Ms M. Ward: There is a further factor aside from the jobs that also would have been lost. If you were looking at cuts in social services, it would have a further impact on reducing benefits and services for people already unemployed.
Mr Watkins: In the short term it would have adversely affected people already being adversely affected and I think we then also have to worry about the long term. It is very hard for me as an economist to imagine cutbacks in health spending or cutbacks in education -- perhaps I have a bias in this regard. It is hard for me to believe that those in and of themselves do not have bad long-term effects as well. If the workforce is not healthy and well educated, what are your long-term prospects? I do not mean you cannot deliver public services more efficiently -- that is not a valid issue -- but just across-the-board cutbacks are likely to have not only bad short-term effects; they are likely to have bad long-term effects.
Mr Sutherland: It was interesting in your presentation that you used the terminology that in effect the federal government has shifted an important part of its deficit problem on to the provinces. I am not sure the people of this province have a full understanding of that in terms of the fact that what we are seeing is that the federal government in some ways, by passing on that deficit problem, is trying to make the other people -- in this case I think the provinces -- look like the bad people for running up deficits while it is showing restraint.
I just want to expand upon that in terms of the federal government's role in the recession overall. We heard last week, I think very well, actually, the impact of the free trade agreement. We have heard some comments about high interest rates and there seems to be an ongoing debate about where interest rates should be, and particularly the differential with the American one.
Some have said that our rates cannot go down that much more, that we have to keep that high differential. Do you think there is room for some easing, and that in the long term that will probably be the best solution for economic recovery?
Mr Watkins: I think many economists are very unhappy with the macroeconomic policy which the federal government has been pursuing recently where we have had -- the whole world has been plagued by very high rates of interest, but in the Canadian case we have actually chosen to create an unprecedented differential between American real rates and Canadian real rates and there is no doubt that is one reason why private sector investment is running relatively low at the present time.
I would have thought the Bank of Canada could afford to ease up a bit on interest rates. We would then expect that the Canadian dollar would go down. Why is the governor of the Bank of Canada so obsessed with the value of the Canadian dollar? Basically, because they have this zero inflation objective in mind and if they let the Canadian dollar go down then the price of imported goods, which is about 30% of what we are consuming, will go up and that will tend to have some inflationary effects. We can all agree on that. The present government is so obsessed with inflation that it will not permit the Canadian dollar to fall at all, even though there are all kinds of activities in Canada which simply cannot be competitive at an 87-cent dollar, which would certainly be competitive at say, an 80-cent dollar. I would say, as many economists have said in the past year or two, let interest rates go down. All that is going to happen is that the Canadian dollar will go down. But since it is a good thing to have the Canadian dollar go down, that should be seen as a benefit rather than a cost of these kinds of policies.
Mr Sutherland: If I may just do a follow-up, in some ways you are suggesting that if interest rates were to go down somewhat, that would lower the Canadian dollar. That in itself would help stimulate economic recovery and I suppose, in the long term, that would reduce the provincial deficit.
Mr Watkins: Yes, that would indeed stimulate recovery because it would make our exports more competitive than they presently are and it would make our domestic production more competitive against imports than it presently is. It is sort of counterproductive to rip the federal government any more, given its present standing in the polls, but it is hard to imagine a set of economic policies worse than the present federal government has chosen to pursue. Even with a wise and sensible federal government, this provincial government would have found it had a problem. There has been a downturn in the United States; there is going to be a downturn in Canada. There would have been a recession, but it would have been nothing like as serious as the present recession is. It is likely, you see, that one of the horrible ironies of this is that provincial government policy is not sufficient actually to negate the bad effects of federal government policy, but I do not see how any Ontario government has any alternative but to do whatever it can to alleviate and cushion the bad effects, even though they are substantially caused by federal government policy itself.
Mr B. Ward: Some people have said these are the worst economic times since the so-called Dirty Thirties. During the 1930s governments attempted to balance their budgets and they failed, as a result we had a 10-year depression. Can you comment on why those policies failed in the 1930s and why it is important for governments during these economic times to stimulate the economy within their ability?
Mr Watkins: We are thinking about the history of economics actually, because there is a kind of real deja vu involved here, and we went through all of this in the 1930s. There was a great debate among economists as to whether you should balance budgets, whether you should cut government spending, or whether you should increase it. Out of the terrible Depression of the 1930s came the very important economic innovations of Lord John Maynard Keynes and so-called Keynesian economics, and also out of it came the American New Deal, the last progressive government the United States has had, which was committed to trying to bring the economy out of the Great Depression of the 1930s, actually more so than any Canadian government was.
It would be generally agreed by historians, I am sure, that what finally ended that horrible Depression of the 1930s was the Second World War itself, a terrible way to solve a problem. But those governments which had said they could not spend their way out of the Depression promptly proceeded to spend their way out of the Depression by spending on the war. We are not literally in the 1930s yet, but we have governments that are perfectly capable of putting us there and we certainly are having a serious problem of slow growth, of low productivity growth and so on. These have not been good times and far too many governments have simply regressed to these kinds of Calvin Coolidge-Herbert Hoover types of policies. I think all we can say is they ain't going to work. They are not going to work.
The complaint against Keynesian policy, these stimulative policies, by and large is that they spill out too much into other parts, that if any one government pursues it in any one area, the benefits do not remain sufficiently within that area. That is true. When the Ontario government stimulates, other provinces and American states will benefit from this. We will not get all the benefits here in Ontario.
The answer to that, of course, is that we ought to have national and international co-operation. In my view, Keynesian policies would remain viable if there were international co-operation. When the leaders of the G-7 countries get together, and if they had progressive political leaders rather than what they presently mostly have, it might be possible to talk about international policies which would be of a stimulative nature, and then I think what the Ontario government is doing we could well do more of than is presently being done. But it is hard to do that much when all other governments are failing to do it.
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Mr Phillips: On the economic principles you talk about here, I understand your view on this year's budget, but down the road what is your feeling in terms of balancing and surpluses? I think the budget calls for fairly good economic growth in the next five years. What should we be looking at in terms of deficits over the next five or six years?
Mr Watkins: On these fiscal matters I would be something of a conservative. This is a rather hypothetical abstract we are putting, but if you can define something called a business cycle of good times and bad times, these policies ought to aim for balanced budgets over the cycles. If there are deeper structural problems, you cannot, in my view, solve them by this kind of fiscal stimulus.
I guess one of the implications of what I am saying is that the previous government should have run surpluses, but I admit it was under a lot of pressure, including probably pressure from the opposition, not to do that. I accept that point, but in terms of fiscal balance, we would have been better off if there had been surpluses run by the previous government in the growth period of the late 1980s, and then when this downturn came, we could have afforded more of a deficit than we presently have.
I would think that this government ideally, with a four- to five-year mandate, ought to aim to balance its budget over that period.
Mr Phillips: So you would have severe negative comments about this budget then, because I do not think it ever gets in the next 10 years within six or seven --
Mr Watkins: What I would look for is policies other than fiscal stimulus to try and get the economy moving. That is what I would look for. In other words, I would argue that the problem with Keynesian policies is not that they are too much, as the conservative mind alleges, but that they are too little.
Mr Phillips: I am surprised your document does not reflect those concerns, because this budget calls for substantial deficits for ever.
Mr Watkins: No, it would not call for them for ever. I would have to check the numbers, but if you got unemployment down to 3% or 4% in this province, I am sure you would have a balanced budget. The problem is that we are looking at continuing high levels of unemployment. That is the problem. All I would say is that I would not deal with those simply by fiscal stimulus.
Mr Phillips: I think I understand what he said and I am surprised your document does not reflect those concerns.
Mrs Sullivan: I want to really follow very closely, Mr Watkins, on the remarks you have just made and made in relation to a previous questioner relating to government investment as a stimulus. You have referred to that on one page, I think page 3.
I noted that in this particular budget the stimulus came really through short-term job creation policies, projects that were already on the table at the municipal level for short-term investment in, say, sewerage and capital works programs where the investment and indeed the job creation would be over in a very short period of time. Where we have seen a major change is that the long-term investment, either through the technology fund or through significant longer-term stimulus in the new areas of our economy which have to be developed in order to have a competitive economy has been completely ignored.
As you talk about reducing unemployment over the longer term to the 3% level where deficits will not be a problem, it seems to me that what this budget has failed to do is to create the stimulus over the longer term that is going to be absolutely vital to create that kind of a new competitive economy. I would like you to comment on that.
Mr Watkins: I would certainly agree with the first part of what you are saying. As I understand it, when this government came in it discovered there was an existing shelf of public works projects, and it is to the credit of the Treasurer and the credit of the last government that should be so. It would then make sense for any government to draw from that shelf quickly.
Again, the problem when a recession starts is that you do not know how deep it is going to go. You do not know how long it is going to last. You have to worry. There are lots of cases that economists could tell you about where governments stimulate the economy and by the time the spending actually takes place the economy is no longer in a recession. That is the case with having these projects on the shelf, and starting out with short-term jobs is a compelling case. That is in fact what you should be doing.
On the longer-term problem, I guess I read this budget as being very encouraging in what it says about how to deal with deeper problems about creating a competitive economy here in Ontario.
Mrs Sullivan: But there is no action in it. Where do you see the action?
Mr Watkins: What I would have thought is that you have had a long period of inaction in this province, which you have had, and that it is not going to be easy for a government to come in and quickly deal with long-term solutions.
This government, it seems to me, has a four- to five-year mandate. As to the statements that are included in the budget papers, the appendix on competitiveness, I would say, as an economist, is a very good statement indeed, the best I have seen issued by any government in North America, so I would say, give this government a chance to give effect to these policy statements. I am quite optimistic about what this government will do in the long run, on the basis of that statement, which was tabled as part of the budget statement. I can think of no precedent for any budget document that has included that kind of assertion about the root causes of difficulties in the Canadian economy and how to deal with them over the long term.
Mrs Sullivan: I think it is one thing to have a statement, but it is another thing to have the action within the context of the budget that in fact starts to move on that statement. Indeed, the technological --
Mr Watkins: I would presume the future budgets will help us in this regard. This is only the first budget.
Mrs Sullivan: But you concur that there is nothing in this budget to assist us over the longer term.
Mr Watkins: No, I would not go that far. There is some additional spending on R and D. There are measures in the area of pay equity. There are policies announced and contained in this budget that I think will be helpful in terms of growth.
Mr Kwinter: Mr Watkins, I have a few questions. I notice that in your opening remarks you listed all the economists who were supporting this budget. I also notice with some interest that every single one of them is at a university, which is kind of an insulated environment. You do not list one single economist who is out in the real world. How many would you think would be on the other side and think this budget is a bit of a disaster?
Mr Watkins: Let me just say first that you are substantially right about where we come from. Although you say absolutely none, we list the name of Andrew Jackson, who is the senior economist of the Canadian Labour Congress, and in my view the trade union movement is part of the real world.
I actually have a real problem, frankly, with the view that universities are not part of the real world. I have spent my life there. What is unreal about it? I would have thought that we could build a case, frankly, that those of us who teach at universities and have tenure can afford to be honest and can afford to state what our views are and can afford to put forward objective analysis. So I offer no apologies at all for putting out a statement signed by university professors. I frankly think that we are all experts -- we are all economists -- and our view should be taken seriously, as seriously as anyone else's views. We are not better than other people, but we are certainly not worse.
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Mr Kwinter: I am not suggesting you are worse. I am also not suggesting you are any better.
Let me give you give you three quotes:
"Ontario is throwing caution to the wind by tripling its debt" -- Larry Atkinson, chief economist at the Bank of Montreal.
"I think what worries us is the fact that the deficit is expected to remain high over the next several years. We are already in a province that is widely viewed by members of the business community as a high-cost setting" -- Don McIvor, chief economist at Sun Life Assurance.
"We are facing an awful lot of borrowing over the next few years, and this certainly won't help us to get interest rates down very quickly" -- Ted Carmichael, senior economist at Burns Fry Ltd.
The point I am making is that in any debate you can rally your supporters, and on the other side they can rally their supporters. My concern is that when looking at this, the uninformed say, "Wow, look at all these university types who think this is a great budget," when out in the real world -- and when I say the real world, it includes economists and includes academics or labour economists, whatever it is -- there is absolutely a difference of opinion. There is a difference of opinion out there, and there are people who think this budget is a bad budget.
I am not in any way saying you are not entitled to your views. I just feel that to list these people to try to bolster your argument gives a bit of a distorted view. I would have been a little happier if half of them had been academics and half of them had been business people, people who are out in international trade and financial circles, people of that kind.
Mr Watkins: With the greatest of respect, I think you are naïve in imagining that the chief economist of any bank in Canada would sign a statement supporting this kind of budget. That goes back to my point about the freedom that exists for those of us who work at universities. I can assure you that some of the names you have listed were very critical of the last government. I know some of these economists as economists, and they thought the last government was spending too much -- I am sure you have all heard that said -- and was failing to run surpluses during the good times.
Of course there are different points of view about economics. It is a social science; that is true. So what is logic for putting forward this statement? We are not trying to say we represent the totality of the spectrum of opinion. We do not. I think our concern was that the media was creating an impression, because of the extraordinary power of the business community in that area, that there were really no economists who were in support of this kind of budget policy, that somehow this was beyond the realm of the feasible and the sensible. A group of us got together and said: "There are a lot of economists in Canada who think this is, if anything, a modest and a very sensible budget. Why don't we issue a statement that says that?" That is all we are doing and we are not pretending to do anything other than that.
I would not have thought it was worth my while to try to get the chief economist of one of the banks in Canada to sign such a statement. I think that is an unrealistic notion of who pays the salaries of these people and of what the neo-conservative mind is like.
Mr Kwinter: Mr Watkins, I would like to get your comments and your explanation as an economist on something. On page 3 of your presentation, you say: "Short-term interest rates have continued to decline since the Ontario budget was released, and it is in the capacity of the Bank of Canada to permit further declines, given the current level of US interest rates. These would further allow the value of the Canadian dollar to fall, thus promoting the recovery of export industries."
When I read this, I get the impression that you are implying that as interest rates have come down, the value of the Canadian dollar has come down, and that if the Bank of Canada would only accelerate the decrease in interest rates, this would, as you say, "further allow the value of the Canadian dollar to fall." In fact, interest rates have come down and, if anything, the Canadian dollar has gone up. It is at its highest level. This morning it was at 87.3. It has certainly not come down one bit other than a very marginal decrease over a flurry about the so-called scandal in Ottawa. There does not seem to be a correlation even though economists have maintained that if the interest rates came down, the value of the dollar would come down. Because of the high interest rates, it is supporting the high value of the dollar. Could you explain that?
Mr Watkins: I think the answer to this puzzle is that what is at issue is relative real rates of interest. Canadian interest rates have fallen, but so have American rates and so have rates in other countries. What is at issue here in terms of determining the effect on the value of the Canadian dollar is the real differential, the differential between Canada and the rest of the world and not simply Canada and the United States. That differential has not narrowed, so as our rates have fallen, American rates have fallen too. There has been no narrowing of the real differential.
I can assure you, if you follow the business press, including the recent issue around the charges laid by Mr Kealey, that the Bank of Canada has moved very briskly to shore up the Canadian dollar by saying it will raise interest rates if the Canadian dollar begins to fall. So the correlation here is compelling and literally perfect, not only in some long-run macro sense, but given the mindset of the current governor of the Bank of Canada.
All we are saying here is, take a chance. Let the interest rate differential narrow. It is at an unprecedented level historically in recent years. We have not traditionally maintained this kind of real differential between American and Canadian rates. What will happen is that the Canadian dollar will begin to fall. Let it fall. The good effects are that you will get more jobs in the export industries and in import-competing industries. What are the bad effects? It will have an inflationary effect, that is true, but economics being the dismal science it is, you sometimes have to make choices. The present government and the bank are obsessed with this zero inflation view, and the reason they will not let the Canadian dollar fall is because a fall would have some effect on increasing inflation rates. I would disagree with that.
Mrs Cunningham: I apologize, Professor Watkins. I read it but did not hear you deliver it. I have heard your statements in response to the Liberal questions. My colleague Mr Sterling has given me some questions and I have some of my own from listening to you.
First of all, I am interested in your group, the Canadian Centre for Policy Alternatives. This is a group of professors or university employees from across Canada? Is that the makeup of the group you represent? I am just curious to know what this group is.
Mr Watkins: Yes. Most of the members of the centre would be faculty members at universities.
Mrs Cunningham: And it is based in Ottawa?
Mr Watkins: Yes, it is.
Mrs Cunningham: With the purpose of giving advice to the public sector, or giving advice to private enterprise?
Mr Watkins: Anybody who will listen, I am sure.
Mrs Cunningham: Anybody who listens.
Mr Watkins: It is a research institute. There are many of these now in Canada. I do not wish to deceive you; this research institute tends to consist of people who are more progressive in their politics.
Mrs Cunningham: Like myself -- Progressive Conservative.
Mr Watkins: I do not know whether any of our institutional members are in the business community. I certainly know that there are a number of trade unions that are institutional supporters of this group.
Mrs Cunningham: But you are self-employed. You are not paid by the university, or a university.
Mr Watkins: In my case?
Mrs Cunningham: Yes.
Mr Watkins: I am a professor at the University of Toronto.
Mrs Cunningham: Okay. I am sorry; I thought that is what you were. So certain professors are associated with this.
Mr Watkins: Yes. We pay $25 a year. We are members of this centre and we write things and they publish our research and so on.
Mrs Cunningham: So there may be a paid staff.
Mr Watkins: I think there is one person.
Mrs Cunningham: All right. I am associated in some ways with the University of Western Ontario and the business school and I certainly know some economists there who would not share your view, but you are not surprised to hear that.
Mr Watkins: I am not surprised to hear that, no.
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Mrs Cunningham: In the public hearings we have already had, certainly our party, and in our travels around the province and in certain other hearings at this Legislative Building, there were a number of representatives from the business community who were very much opposed to the budget. I am wondering how, given what I have heard so far, you could take strong opposition or not support them in some way with your statements -- or would you support them in some way? I am talking about their concerns.
Mr Watkins: I think one always takes business concerns seriously because business is very powerful in our society. I do not doubt that business attitudes and business confidence matter, and it is very hard for us as economists to factor into the models we work with.
I guess my own view as an economist is -- I do not want to just repeat myself here -- that these high interest rates, the differential with the United States, the high Canadian dollar, raising a tax like the GST in the midst of a recession, are the basic determinants of the difficulties we are now having, so I do not necessarily see that I have to give a lot of weight to something called business confidence. I do not deny that in a world where private businesses make decisions and make investment decisions, if they are all unhappy you could have a problem. You have to listen to what is being said. I do not deny that at all.
The other problem I have, though, is that we all, as well as being experts, often grind idealogical axes, I am sure. Perhaps I have on occasion, but certainly the business community is very fond of doing that. What is going on here is really a debate about the size of government and about the kinds of spending the government ought to engage in.
Why is the business community so nervous about an NDP government? Well, because they fear that government might actually worry about the fate of a lot of people. If they spend more or do not cut spending, they may have to tax more. I do not want to go too far down this road, but the Ontario tax system is a very unfair system. Once you start talking about reform of the system in any direction that involves fairness, it may well mean that well-to-do people or business people will pay more taxes.
We see that every day in the US. The obsession of the US on the right wing is that under no circumstances will they ever pay another penny of tax. That is the neo-conservative mind. The reason they are so nervous about any kind of deficit is because somebody might actually decide to deal with the deficit by increasing taxes in a way that would require those people to pay some taxes. The notion of a minimum corporate tax truly frightens them.
That is the problem. I think the deficit is a real issue, but it has also become a whole code language for the business community, a whole way in which it pursues other goals. They really want to downscale the size of government in the long run. They are not basically dealing with the short-term problem. They properly sense that NDP governments are not as pro-business as Conservative governments or Liberal governments.
Mrs Cunningham: Let's talk about downsizing government. I myself worked in the government before I let my name stand for election in London, and I also had a private business that did government audits of three of the different ministries. I can assure you that the audit branches of those ministries have advised government of the inefficiencies. A lot of it relates to new programs without changing old programs that may have been relevant at some time and to people not working at the level of expectation some of us would expect. Of course, universities have been criticized for that too -- you and I know that -- but I will say that they have been given some very specific recommendations in their audit reports as to how they can be more efficient. It does not always mean downsizing and it does not always mean spending more money.
Mr Watkins: No, I can agree.
Mrs Cunningham: I would appreciate your comments on those two straightforward recommendations by government employees as well as private sector people like myself.
Mr Watkins: I have an impression, with the greatest of respect, that this province was governed for 42 years by the Conservative Party.
Mrs Cunningham: You are quite right.
Mr Watkins: How come so much inefficiency exists in the public sector then?
Mrs Cunningham: I would say that the Conservative Party, during its period of time, was guilty of what I am describing. So were the Liberals, and the NDP has not done anything about it. I am not here, certainly as a parent, to talk about the past. I let my name stand because I wanted to do something about the future so that Ontario could remain competitive.
Mr Watkins: Fair enough, although if there are problems --
Mrs Cunningham: I do not like that response. I do not think that is a particularly professional response.
Mr Watkins: If there are problems --
Mrs Cunningham: I am looking for solutions.
Mr Watkins: Well, we cannot find a solution --
Mrs Cunningham: That is why you are here, to help us and this government with solutions.
Mr Watkins: All right. We need a diagnosis too, do we not? I do not go to a doctor and just ask him to tell me what to do without giving me a diagnosis. I am saying, if the public sector is inefficient, how did it get to be inefficient?
Mrs Cunningham: Your response on what we do about it is what I am looking for today.
Mr Watkins: I would have hoped that we now have a government which will try to improve on the efficiency with which public services are delivered. I might say, I dissociate myself from any comment that suggests that universities are somehow being inefficient.
Mrs Cunningham: I did not say that. I said they are being accused of being inefficient, and that is not new. It was sort of an aside remark.
Mr Watkins: I just want to dissociate myself, though.
Mrs Cunningham: It is certainly something that this government is dealing with through its standing committee on public accounts. I had to sit there and listen to it. We are looking for solutions today.
Let me ask you another question. You talked about a 3% unemployment rate. I would like you to describe, since you are an economist, when this province enjoyed a 3% unemployment rate. Do you think that is something we can achieve in the next four or five years, and if so, how?
Mr Watkins: We have had a persistent problem of high levels of unemployment for something like two decades, throughout the 1970s and the 1980s. To go back to a 3% level would be literally to go back to the 1960s. Apparently there is something profoundly malfunctioning in our present economies. I think that is what we know. There are some very serious structural problems. I would not anticipate that we could move easily or quickly to those kinds of low levels of unemployment. I certainly grant that.
I think this is why Keynesian economics of the stimulative type are now in trouble. There are two responses when that happens. One is to say that government should do less -- that is the neo-conservative solution -- and become more efficient and so on. The other is to say that actually the private sector is the source of the problem and governments are going to have to do more rather than less. That is what this great debate is about.
Basically, the neo-conservatives have been running things now for 10, 15, 20 years, and yet things are not improving. Unless they start to improve soon, I suspect that what the Ontario electorate has done will happen more generally. The public is going to start looking for more activist governments. Perhaps I am just engaging in some wishful thinking here.
My argument would be simply that it is quite a severe crisis. It is not the 1930s, but there has been a persistent crisis of slow growth and inadequate productivity. It is quite complicated. The present Ontario government is the first government in my lifetime which seems to understand that this is a problem, and may therefore try to do something about it.
Mrs Cunningham: I am wondering if you would agree with the observation we have heard many times, and that is the excessive government spending, certainly given the criticism of the former government during what was described by economists as good economic times. I am now talking about 1985 to 1990. I do not know if you would agree with that, but I would like you to comment on it. That government was certainly viewed by some as being excessive in its spending during the good times. Do you have any comment on that?
Mr Watkins: I think I said already that certainly there would be economists who would have wished that the previous Liberal government had run surpluses.
Mr Phillips: It did. We know that.
Mr Watkins: In economics we are interested in what is true at the margin -- larger surpluses then, so that we could have cushioned this. I am not necessarily saying I would press that very hard. I am not convinced myself that the major problem we face is excessive government spending; let's put it that way.
Certainly in some short-run sense to slash government spending, as the federal government is doing, just pushes the problems down on to lower levels of government. It does not solve anything. It is all a kind of scam they are engaged in. The public is not being deceived by it. I would have thought that is one reason the present federal government is so unpopular, that it is seen as avoiding problems rather than solving problems, and worsening economic issues.
I have no problem with someone saying -- I would guess no one in this government has -- that you should deliver public services as efficiently as you can. I do not have a problem with that.
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Mrs Cunningham: I see us moving in the same direction as the federal government found itself in some five or ten years ago, and that was an excessive deficit. Their challenge is, of course, not to increase it. Given the size of it in Canada today, they increase it exactly by the amount of the interest payments they have to pay on that particular debt. I should have used the word "debt" instead of "deficit."
In Ontario, all of us -- I believe the government members themselves, in talking individually to them, and certainly the ministers -- are very concerned about the direction this province seems to be going in, and yet they have not found a solution. That is why we are having these hearings, to get some solutions. It is all right to say the federal government is passing the buck down to the provincial government. At the same time, the provincial government has been accused of passing the debt down to the municipalities, and the municipalities therefore to the taxpayers. But we are looking for solutions today. It is fine to say they are slashing spending federally, but they are certainly keeping the -- the deficit is growing by interest payments on the debt, almost exactly, which means if they did not have the debt, they would probably be balancing their budget.
What kind of solution should this government be looking for so that it does not become so large in the next five years that we have yet another crisis?
Mr Watkins: I think you are overstating. I do not know what numbers you are relying on to --
Mrs Cunningham: Basically government budget --
Mr Watkins: Let us just look at this for a moment. Probably the best measure for the burden of the debt would be the percentage of government revenues consumed by interest on that debt. The number here at the moment in Ontario is 11.6% or 12%, let us say, rounding. The forecast in the budget documents -- I think every economist I know regards those growth forecasts as on the conservative side. Unlike many federal estimates we have had in recent years, these are likely to stand up, and they show that ratio will fall slightly over the next three or four years, let us say to 11%. What is the present federal number, 34%? Now that is a huge difference. I want to underline this point: The present policies of this government will not get us into the fiscal trap that has been created at the federal level. I am appalled at what has happened at the federal level. I agree with you on that --
Mrs Cunningham: It was inherited, of course.
Mr Watkins: -- but this is not happening in Ontario. This is not in the cards in Ontario.
Now on the other question, what do I say? I say this is a good budget. It speaks to the short term and it indicates the government, as I read it, is thinking very seriously about long-term matters as well. We have no evidence of any kind of industrial policy at the federal level. You combine the short term and the long term and we have a federal government which is backed up in both areas. This present government here in Ontario, it seems to me, has a good short-term policy and is working towards a good long-term policy.
Mrs Cunningham: And that is why we have the great concern about industry and business leaving Ontario.
Mr Watkins: I hear the grinding of ideological axes.
Mrs Cunningham: We see the numbers. In my own southwest Ontario, unfortunately, I sit here saying that I today represent some 20 more companies which are locating businesses elsewhere, and not in Ontario; not all south of the border, but not in Ontario. It is not a joke when people come into my office and tell me after the fact that they have done it.
Mr Watkins: I agree with you that no job loss --
Mrs Cunningham: These are small business people, and about three or four major companies for Ontario; big tax dollars there.
Mr Watkins: All I can tell you is that if you look at the studies done on competitiveness put out by quite conservative bodies, they show that the Ontario economy is, and remains, highly competitive, and that is a fact.
Mrs Cunningham: I would like you to at least leave them with the clerk, or titles of them that we can read, because unfortunately we are reading the other stuff. The Premier's Council, certainly in the last four years, has made the same recommendations year after year, that we were not competitive, that we are not training our young people for a competitive environment. As an educator, I happen to agree with that.
Mr Watkins: On the training issue, these studies show that Ontario, in terms of public spending -- and this then reflects on past government favourably -- ranks very well in terms of public sector spending in this area. We rank very well in Ontario and in Canada in public sector spending on research and development. The basic problem is the failure of the private sector. We rank very low in terms of private sector R&D, in part because of high levels of foreign ownership. We rank very low, one of the lowest in the Organization for Economic Co-operation and Development countries, in terms of what the private sector does in the training area. The private sector in this province is much more a part of the problem, substantially a part of the problem.
Mrs Cunningham: I would agree with you.
The Chair: Mrs Cunningham, your time is well up.
Mrs Cunningham: Yes, it is up, well up. Sorry; I was not certain of the time frame. Thank you very much. We could pursue this argument elsewhere.
The Chair: Thank you, Mr Watkins, for coming this morning. This committee will be adjourned until 2:30 this afternoon.
The committee recessed at 1107.
AFTERNOON SITTING
The committee met at 1432.
SOCIAL PLANNING COUNCIL OF METROPOLITAN TORONTO
The Chair: I think I would like to begin this afternoon. We are reasonably on time and I see a quorum.
I would like to begin by introducing the Social Planning Council of Metropolitan Toronto, Fern Stimpson, board member, and if you could introduce who you have brought along to the committee, we would like to begin. The way we will do this is that we have half an hour. You will make your presentation and whatever time is left over will be evenly divided among the three parties to ask questions for that half-hour.
Mr Phillips: Mr Chairman, I am sorry, before we begin, I do not know whether we have had an opportunity to table a report that our caucus did on the budget. If we have not done that, I would like to do that, just sort of interrupt and take a half a second. I think it may be of interest to the committee members. I am sure they will all get a copy of it. Perhaps I could do that, just to table our report.
The Chair: If you could do it quickly.
Mr Phillips: I have just done it.
The Chair: Thank you. If that is all it entails, then that is wonderful. Now if you could begin, please.
Ms Stimpson: I would like to introduce Tom Baker, who is with me this afternoon. He is a staff member with the Social Planning Council of Metropolitan Toronto and is responsible for the research that has gone into our submission.
The Social Planning Council of Metropolitan Toronto is extremely pleased to have the opportunity to present our views on the provincial budget. Basically, we believe that the budget was a very positive action by the provincial government.
The Social Planning Council of Metropolitan Toronto, just to give you a bit of background, has been part of Toronto's social history for more than 50 years. Rather than focusing on narrow, service planning issues, the council's reform and advocacy efforts now emphasize the need for policy which integrates both economic and social issues.
Through collaboration with its various committees, the council is more committed than ever to a social development framework which is based on social and economic equity and community empowerment, the roots of a healthy community. We believe that by choosing to fight the recession rather than the provincial deficit, the provincial government enhanced social and economic equity in the province of Ontario.
The council, in its work within six theme areas, which are housing, employment, income security, social justice, families and neighbourhood and community services, strives to implement its mission through a set of interrelated strategies -- the pursuit of access and equity, empowerment and healthy communities -- and it uses functions of social research and policy analysis, community education, community advocacy and innovative services development in pursuit of these strategies.
In 1990, there were approximately 397 members of the council. Its membership is composed of 276 individuals and 121 organizations with two delegates each. The council is supported by its two major funders, the United Way of Greater Toronto and the municipality of Metropolitan Toronto. We greatly appreciate their commitment.
By refusing to jump on the cutback bandwagon, the provincial government has not shifted its responsibilities to already financially constrained municipalities and federated charities. What the provincial government's budget has done is to seek middle ground. For example, the Treasurer acknowledged the difficulty in Ontario's workforce in giving an immediate $7.50 an hour wage floor, but at the same time, he did not cut back Ontario's social safety net.
The total provincial debt is estimated now at about $58 billion. Let's see what actually erasing this debt would mean.
"The budget was a confidence builder," says chief economist and vice-president of the Conference Board of Canada, James Frank. Reducing the deficit "would have led to a significant delay in the recovery and contributed to further increases in unemployment, bankruptcies and lost output. I believe most people in Ontario, including many business people, have had enough of the recession and the weak housing starts, sluggish automobile sales, dropping employment and increasing bankruptcies."
Spending on new programs only added $640 million to the $9.7-billion deficit. Health, education, social assistance and more capital spending accounts for most of it.
"Had measures been taken to hold the line on operating expenditures, which rose by $5.2 billion, or on capital expenditures, which rose by $1 billion, we could easily have ended up with a much longer recession," says Frank.
"I think it's a move in the right direction to do something for a province that has been particularly hard done by in recent years," says Informetrica president Mike McCracken.
"The government's anti-recession program will create up to 14,000 jobs in 1990 and 1991 through projects to maintain and improve public facilities like schools, hospitals, colleges and universities," says Ontario Treasurer Floyd Laughren. "As a result of additional funding from school boards, hospitals, municipalities who are sharing in the projects, total spending will amount to $940 million, $700 million of which is from the province.
"The 1991 budget reflects a political choice to fight the recession this year and allow the deficit to increase as a result. By choosing not to cut back in funding for schools, colleges and universities, hospitals, municipalities and social services, there are 70,000 more people with jobs in Ontario than there would have been with a zero deficit."
Cuts in spending would only mean less service, more local property taxes and a longer recession. If the government had not increased spending commitments, the deficit would still be more than $7 billion.
"In order to keep the deficit at last year's level, $3 billion, we would have had to cut more than $6 billion in public funding," says Ontario Treasurer Floyd Laughren. "The magnitude of these cuts is staggering. We could have flat-lined the major transfer payments and saved $1.3 billion in the process, but what would that have meant to our major transfer recipients? Enrolment in colleges and universities would have been cut by 25,000. Almost 5,000 or 10% of hospital beds would have been closed. Without additional funds for municipalities and school boards, either property taxes would have increased by about 4.2% over 1990 levels or 6,000 classrooms would have closed and public health operations would have been slashed by 33%. We also could have eliminated all new spending initiatives, discontinued the home care programs for seniors and the disabled, discontinued the legal aid program, eliminated the winter maintenance program for provincial highways, eliminated the technology fund, slashed welfare rates by 10%, dropped the Ontario drug benefit for both seniors and social assistance recipients."
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Health care costs make up about 32% of the provincial budget. If 32% of the provincial debt was taken from provincial ridings equally, each riding would have had to absorb a $143-million cut. In the case of Peterborough, for example, that means closing the city's hospital.
What about Metropolitan Toronto? Social service costs make up 19% of the provincial budget. If we took 19% of the provincial debt from provincial ridings equally, Metro ridings would have had to absorb a $2.5-billion cut. That would have meant closing all of the region's homes for the aged and possibly throwing developmentally challenged people out on the streets. Workshops for the disabled might have been shut. It still would not have been enough money to get by. In the midst of Ontario's worst recession since the 1930s, more than half of the new $215 million for social assistance this year will go to maintain the current system and address increased case loads.
The federal government's transfer payment cuts to Ontario of $3.6 billion have left the Treasurer with little room to move. We have been monitoring closely in order to ensure the government's commitment to fairness and to ensure that it is not sacrificed to expediency.
In the spring of 1991, Canada remained mired in a year-long recession, a result of deliberate government policies intended to eradicate inflation. Although current analysis suggests that the recession technically may have ended by May 1991, the high proportion of permanent plant closures make it doubtful that the economy will enjoy a strong recovery. The Toronto region, with its heavier dependence on manufacturing, has suffered more than other parts of the country in this recession, unlike the recession of 1981-82, which was driven more by increased global competition in the resource industries.
Let's compare the last two recessions and how they came about and manifested themselves in the Toronto area and the relative prospects for recovery.
A recession is defined, in narrow economic terms, as two or more successive quarters of economic contraction. In simple terms, it means that the value of what we produce is less, so the economic pie that is shared is getting smaller. Canada entered a recession early in the second quarter of 1990 and by the first quarter of 1991 had suffered a 2.8% decline in the gross domestic product.
However, for most people a recession is best understood in terms of unemployment. From a low of 7.5% in the late 1980s, official unemployment rose to over 8% in the third quarter of 1990, over 9% in the fourth quarter and over 10% in the early part of 1991, a seasonally adjusted number.
This recession follows a prolonged period of growth after the recession of 1981-82, which has been called the worst economic downturn since the Great Depression of the 1930s. It took national unemployment rates eight years to come down to approximately 7.5%, the pre-recession rate, from a peak of nearly 12% in the fall and winter of 1982-83. Official unemployment declined by creating record numbers of part-time jobs, increasing the polarization of earnings and proliferating erratic patterns of working hours. Other indicators, such as the GDP, which fell by 6.6%, and corporate profits, which fell by 40%, were restored by early 1983, in less than 18 months. This shows that there are several definitions of when a recession is over.
The federal government has played a critical role in both recessions. In late 1980 the Bank of Canada began to raise interest rates, reasoning that we needed to match high American interest rate policy to prevent capital flowing to the US. In tandem with an improvement in natural resource commodity exports, the Canadian interest rate differential over the Federal Reserve rate in the US narrowed considerably, thus contributing to the decline in our dollar, a key factor in the sustained period of post-recessionary economic growth enjoyed in central Canada.
By the spring of 1988, the Bank of Canada began to raise interest rates again. This was necessary, according to the minutes of the board of directors of the Bank of Canada, to prevent an outbreak of inflation before it began. In fact, inflation had been stable at around 4% since 1984. Particularly worrisome to the bank was evidence of upward pressures on domestic costs of production, especially wages. By mid-1990, our interest rates were continuing to climb but American interest rates were declining, leading to the "made in Canada" label associated with this particular recession. The growing divergence in interest rates resulted in higher exchange rates, making Canadian exports more expensive in our principal export market, the United States.
Rising interest rates also slow the domestic economy by increasing the cost of financing productive investments, as compared to investing in financial assets such as bonds. Slowdowns in economic growth created greater tension over shares of the gross domestic product both in the early and the late 1980s. By the late 1980s, sustained economic growth had led to a relatively tighter labour market, at least in some parts of the country, which in turn led to workers' ability to maintain wage and salary levels. In the context of a shrinking economic pie, this meant that wages took a larger share of the national income. In this regard, the federal budget of February 1990 noted that "rising labour costs and weakening demand are squeezing profit margins."
While the 1981-82 recession had broad national repercussions, both the recovery and the current recession have been highly centralized in southern Ontario. The gap between national unemployment rates and unemployment rates in the Toronto area, the Metro labour market, widened over the course of the 1980s as the recovery was disproportionately centred in the Toronto region. Almost half the new jobs created in Canada between 1983 and 1989 were located in Ontario, with more than 20% created in the Toronto region alone. Unemployment rates in Quebec and Ontario returned to pre-recessionary levels by 1986 and continued to drop, but many parts of the country remained at stubbornly high levels, even in mid-1990 when the national rate began to rise again.
The current recession has been led by the free fall of the manufacturing sector, concentrated primarily in southern Ontario. Recent data show that unemployment has risen much more quickly in the Toronto area than in the rest of the country, with the result that the gap between the Toronto unemployment rate and the national unemployment rate has narrowed considerably. As expected, this recession has been much harder on the local labour market than the last one when, over the course of 18 months, the Toronto census metropolitan area lost 113,000 jobs. Thus far into this recession we have lost 178,000 jobs, with 104,000 lost over the course of the first quarter of 1991 alone. Whereas the continuing erosion of jobs was expected as the manufacturing sector restructures continentally, it is the precipitous nature of this decline which was unexpected. The Ontario government has reported that, among firms with more than 50 employees, "65% of layoffs in 1990 were the result of permanent plant closures, in contrast to the previous recession when 24% of layoffs were permanent."
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The restrictions on unemployment insurance and Bill C-69, the so-called cap on CAP, the Canada assistance plan, have weakened the programs which automatically sustain people and the economy in an economic downturn. The impact of the recent UI changes has been to push people from the unemployment insurance system on to the local social assistance case load, harkening back to the system of municipal relief which was prevalent at the turn of the century. Federal projections indicate that in Metropolitan Toronto alone 127,000 people will exhaust their UI benefits over the next 12-month period. The municipality has conservatively estimated that 60,000 of these exhaustees will end up on welfare unless massive job creation occurs in the near future.
Bill C-69, although not yet implemented due to a challenge before the Supreme Court of Canada, seeks to restrict the amount of money to Ontario, Alberta and British Columbia for social assistance, forcing the provinces to either increasingly fund the program themselves or cut back. Bill C-69, if it becomes law, combined with the $2.5 billion in cuts in federal established programs financing, will cost Ontario approximately $3.6 billion in 1991-92. Because the cost of general welfare assistance is further cost-shared with the municipalities and because the welfare case load is the first to grow in a recession, these budgetary pressures translate to harder times and tougher decisions in all municipalities.
Under general welfare, 20% of costs are paid by Metropolitan Toronto. Family benefits allowances are financed by the province under a cost-sharing agreement with the federal government. The combined costs of general welfare assistance payments by the federal, provincial and the regional governments will be about $830 million for Metro Toronto in 1991. Metro Toronto will spend about $167 million on welfare payments in 1991.
In a recession, a poor-relief welfare policy can mean property tax increases on a comparatively narrow revenue base. It compounds the problem of access by endangering service in other areas like roads, recreation and safety.
Access is the key organizational and client issue in human service planning. Organizational access means the participation of clients in the design, planning, implementation and delivery of services as volunteers, staff or service agency board members. Client access means the securing of needed services, not only their availability.
The political impact of the recession in Metropolitan Toronto can be summarized as a reduction in access to the labour market, to housing, to child care, to transit and to welfare. These are key areas for which Metro Toronto has considerable responsibility.
There are 7,500 people on the waiting list for subsidized child care spaces in Metro. One quarter of the unsubsidized child care centre spaces are vacant due to affordability problems. The SPC has called for a continuum of child care services, including workplace-based and after-school child care programs to provide more flexibility for Metro families.
Only 18% of social assistance recipients have access to assisted housing, but basement apartments, one vehicle for increasing the supply of affordable rental housing, are illegal in Rosedale, Forest Hill, Scarborough, North York and Etobicoke. The waiting list for Metro's subsidized rental units has skyrocketed. For instance, the queue for Metropolitan Toronto Housing Authority units has reached a 15-year high of 12,310. While rental vacancies are up, mostly because condominium units are being put up for rent because owners cannot sell them, many condominium units will be taken off the rental market as the home ownership market recovers.
Few areas impact on access more directly than the transit area. Securing work, health and social services is intimately bound up with transportation. "In the absence of major improvements in suburban public transit systems or integration of those systems with the Toronto Transit Commission's (TTC), the number of suburban commuters into Metro will add further to Metro's road congestion," says an SPC Social Infopac. "Metro is increasingly characterized as a transit-efficient and intensified inner city surrounded by a fast-growing and car-dependent suburban ring, what a local transit planner has characterized as Vienna surrounded by Phoenix." The recession has also produced cuts on several public transit routes.
There were more than 134,700 people on general welfare assistance in Metro Toronto in June 1991. Between March 1990 and March 1991 the Metro welfare roll increased 90%, from 68,369 to 129,441. In March 1981 there were 40,599 claimants. This represents a staggering 219% increase in the number of people without access to employment in just a 10-year period.
In March 1991, 113,360 people in Metro received family benefits allowances. In total, in March 1991, 242,801 people were receiving general welfare or family benefits in Metro. Approximately 10% of Metro's population now relies on family benefits or welfare. Children under the age of 18 make up 40% of all social assistance recipients.
When you factor in a further 175,290 regular -- that is, not sickness, disability or maternity -- UI claimants in the month of March, more than 400,000 people in Metropolitan Toronto -- one in five of the entire population -- are being marginalized by this period of profound economic restructuring. That is why the provincial budget has to fight the recession and not the deficit.
Given the human costs of recession and the uneven distribution of gains from a market-driven recovery as experienced in the 1980s, it is worth asking how a planned economic recovery program like that in the provincial budget will improve the picture.
Until recently, the accepted vehicles for public policy to offset a recession were countercyclical mechanisms such as government expenditures on direct job creation programs and subsidies for failing private industries. Governments did not intervene strategically to decide what kind of focus the economy would have, so that ultimately the market shaped the direction and the strength of economic recovery. But given the degree of permanent job loss and the related decimation of our productive base during the last 18 months, can this approach be sustained? The evidence suggests not, and that governments are challenged as never before to provide public leadership for the rebuilding of our industrial base.
Let's look at some of the elements of an industrial strategy which are designed to achieve a more balanced recovery in which more people share in the gains. A meaningful industrial strategy must target the manufacturing sector, due to its ability to spin off jobs in other economic sectors when new jobs are created there. Public policy levers available to governments should not be conceived as strictly economic or social, but as a combination of both. For example, public policies on land use, including housing, child care, transit, and job training and adjustment can shape the economic viability of individual communities.
One of the public policy levers available for an industrial strategy is construction intensification. This policy replaces low tax-yield properties within the existing urban envelope with higher density developments. This is done through mainstreaming -- mixing retail and residential buildings above stores -- and making basement apartments. Such an approach would increase the stock of affordable housing while providing Metro with money to invest in an infrastructural improvement. This would put money in consumers' pockets, create jobs in manufacturing industries and preserve the neighbourhood character of the city.
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Spending on infrastructure can also be directed towards hard or soft service investments. For example, there is considerable evidence that there is a direct relationship between productivity growth and public spending. Public spending includes not only expenditures to maintain or to build roads and sewers, but also social services such as health, education, research and development programs.
Renewed concerns about competing in a global economy have frequently focused on the need to cut social spending, but we need to have a skilled workforce in order to compete. The role of public policy is to advance a skills development strategy which is co-ordinated with labour adjustment needs in a period of economic restructuring. Furthermore, it is only through the mechanism of public policy that we can integrate training programs with an industrial strategy. This could be both through general upgrading needs as well as specific sectoral needs for a strategically focused economy. In other words, we have to be clear about what kinds of jobs we are training for and what kind of society we are building.
Child care is usually seen strictly as a social policy issue. Yet a child care system designed to be accessible in terms of appropriateness and affordability could play a key role in enhancing the economic wellbeing of families and reducing reliance on social assistance.
Clearly, people policies can make an important contribution to achieving and sustaining economic prosperity. Rather than seeing social policies as the source of labour market rigidities which impede economic adjustments, we maintain that they can play a critical role in enhancing worker security and easing labour market adjustment in periods of rapid economic change. That is why we support the provincial budget.
The political alternative is rapidly emerging in public policy debates at all levels. To the extent the social wage, that portion of income workers forgo in exchange for securing needed human services like transit, child care, waste removal and welfare assistance, is eroded, the more likely it will become that conflict will sharpen in broader areas of economic and social concern, particularly in tax administration, employment and general economic development, as well as national unity.
At the Social Planning Council we have often repeated that access, equity and partnership are the three key strategies for attaining sustainable economic prosperity. I would like to thank you for the opportunity to appear here this afternoon and for your attention. If time permits, we would happily field questions.
The Chair: We have very few minutes. I think we have enough time for one question per party. We can begin with Mr Kwinter.
Mr Kwinter: Restricting myself to one question is very difficult. I was curious to see that you quoted extensively from James Frank, the chief economist and vice-president of the Conference Board of Canada. You started with, "The budget was a confidence-builder," which I assume you endorse and think it is. Having said that, I should tell you that upon hearing that the Conference Board of Canada supported the NDP budget, Brian Gray, vice-president of the Canadian Federation of Independent Business, is quoted as saying: "I don't know where he's living. He must be living on Mars if he can say that this budget inspires confidence."
In the next line, it talks about the recovery. Again, I have a quote: "I am rather taken aback by this analysis. I really don't think the Ontario budget has anything to do with the recovery." This is George Savage, chief economist of Montreal Trust.
The reason I am saying that is that the catch phrase being used by the government and the Treasurer is that they chose to fight the recession rather than the deficit, as if those are the only two alternatives: You either fight the deficit or you fight the recession.
I submit, and I would like to get your comment, that they chose not to fight the recession; they chose to minimize the impact of the recession by providing money to certain groups. But there is not one single new program that is going to create one new job or do anything to get the economy going. They have put a lot of money into lessening the impact on people who are being impacted by the recession. I would suggest that what it should be saying is, "We chose to relieve some of the problems caused by the recession." But they are not fighting it, because they are not doing anything. If this continues, next year they are going to have to put more money in and more money in, on a declining revenue base, because there is no confidence in what is happening. Do you have any comments on that?
Mr Baker: I think there are a number of areas in which the provincial budget was not simply engaged in a set of countercyclical measures but did begin to introduce elements that a successful industrial strategy would require. Among those would be the impetus the housing industry is receiving. There is a commitment to construct a number of units, which I think will stimulate economic activity in the housing sector, which is a lead sector and provides a lot of backward and forward linkages for other economic sectors in the durable goods manufacturing area.
Mr Sterling: You use a $3.6-billion drop in federal subsidies. Just looking over Floyd's own budget paper, it shows that it goes from $5.8 billion to $5.4 billion. I add that up to be $400,000, not $3.6 billion. But that is not my question, because the $3.6 billion is a never-never figure and does not take into consideration the transfer of tax points which has been in place for about four or five years as well. So it is really dishonest to deal with that in isolation.
Could you explain better for me, "There is considerable evidence that there is a direct relationship between productivity growth and public spending." Is that inversely proportional or proportional?
Mr Baker: As you have asked, I will be glad to tell you that that is a direct proportional relationship that exists between public sector expenditure on infrastructure and productivity growth rates. That evidence has been accumulated from a number of different sources including the United States and members of the European Community as well. I noted that even the Ontario budget paper E cites some of those studies in that direct relationship existing between public sector expenditure increases and productivity growth increases.
Mr Sterling: Do you really believe that?
Mr Baker: I think in fact that a fundamental requirement to developing a sustainable, prosperous economy is to see infrastructural spending more broadly than simply as a Band-Aid on different economic, cyclical items and to look at the positive contribution and the multiplier effect that government spending can have. I will not spend a lot of time on this, but I can recall that the interstate system of the United States, when it declined over a 10-year period in the 1980s, had a significant impact on productivity growth rates in the United States.
The Chair: Sorry, we are really out of time and have to move on.
Mr Sterling: But does increasing provincial civil service salaries by 10% increase productivity?
The Chair: Sorry, I am going to have to move on to the government question.
Ms M. Ward: I would like to thank you for your excellent presentation. I think you gave us a very good background on causes and effects, the implications and the effects we would have seen if we had cut services and so on, and some good recommendations. One thing I would like you to comment on is what the situation is like out there right now in people terms. What are the social costs of this recession?
Mr Baker: We have itemized a number of those, but the human faces on those types of statistics are important to recall too. It means that to the extent we had turned our backs on the disadvantaged in the last budget, we would have been ignoring the crisis that is happening in Ontario in terms of, for example, to take one instance, the homeless that exist in Metro Toronto alone, estimated at anywhere between 10,000 and over 25,000, half of those under the age of 18. There are 4,000 shelter beds available to address that need. If the budget had not instituted a set of measures which were aimed -- for example the $215 million in new program spending in Community and Social Services -- I think it would have just been a disaster there, and that is just to take one case.
Ms M. Ward: With implications for years to come, possibly.
The Chair: I am sorry, we are out of time. Thank you very much for your presentation this afternoon. If there are other questions, I think the members could get in touch with you privately.
Mr Baker: Please do.
The Chair: Our next presentation this afternoon is ACTRA, Meg Hogarth, president, and Neil Dainard, Toronto performers branch council. There are more copies of the presentation coming.
Mrs Sullivan: The last presenters gave a very interesting presentation and I think we all would have appreciated a little more time to question them. I wonder if we could ask the presenters if they could attempt to compress the presentation, so that we do have more time for questioning towards the end.
The Chair: I think that would be fair enough.
Ms Hogarth: I appreciate your comments. I think as performers we know exactly what it means: cut time.
Mr Christopherson: If that is done, is there a mechanism whereby the full context of a submission can be included in the Hansard, even if it is not fully read? Is there a mechanism for that?
The Chair: I believe the submission is given to the Hansard reporters and it is included in its entirety, even if it is not spoken? No, only what is spoken is included in Hansard.
Mr Christopherson: So you can lose things you do not say.
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ALLIANCE OF CANADIAN CINEMA, TELEVISION AND RADIO ARTISTS
Ms Hogarth: Thank you very much. Good afternoon to you, Mr Wiseman, and members of the committee. We are delighted to be here, I am Meg Hogarth. I am the national president of the Alliance of Canadian Cinema, Television and Radio Artists, ACTRA. I am a Toronto performer. With me today is Neil Dainard. Neil is a member of the Toronto performers branch council, and you probably recognize Neil from the popular CTV series ENG.
ACTRA is an alliance of guilds which represents performers, writers and broadcast journalists working in the English-language recorded media right across Canada. We negotiate agreements. We do this with engagers in broadcasting, in independent production, commercials and film, and these agreements set the minimum rates and basic working conditions for our members. As well, we advocate public policies designed to create strong Canadian broadcasting and film industries. We do so not only to provide work opportunities for our members in Canada, but also to provide Canadians with genuine programming choices.
I understand that you have a very full agenda, so I am going to cut to the chase here and try to be as brief as possible. I have four basic points I would like to make today. First, the film and television industry is a vital part of this province in many ways. Second, like all elements of the cultural industries, that vitality is dependent on public policy and funding at three levels of government. Third, the Ministry of Culture and Communications' contributions to the industry in the 1991-92 budget is in our vision admirable but, fourth, the Ministry of Culture and Communications deserves an even bigger share of the province's expenditures.
The film and television industry is, as I have said, a vital part of this province in more ways than one. Too often the arts are seen as a kind of frill of elites spending enormous sums of money on activities which have a very limited appeal to a small number of people. The arts are characterized as a frill or something that the Legislature has to justify spending money on. Our particular art -- film, television and radio -- could not be more accessible. Almost everyone in Ontario has a television set and if they cannot find a baby-sitter to manage an outing to the movies, then the local video store will provide them with something they can watch at home. What is more, we could not produce the films and TV programs we do without the support of writers, technicians, costume designers, makeup artists, the whole infrastructure of all the artistic activity.
Mr Dainard: In Canada we talk about culture. South of the border they talk about the business. At ACTRA, we think we are leaders when it comes to the defence of creative expression and its contribution to our sense of nationhood. But we know full well that what we do is a business. Our business is as a producer, employer and significant contributor to the province's economy.
You can probably see that we are not here to preach today. If anything, we would like to leave you with a sense of pride in the film and television activities that are going on in this province, and if we are lucky, we might secure your commitment to further support them in years to come.
A recent study by the Ontario Film Development Corp, the OFDC, showed that in 1989 the industry employed 35,000 people in Ontario and contributed $5.4 billion to the economy. Those numbers are the reason that 6,500 ACTRA members, or 65% of our national membership, choose to live in this province and work in this province. The benefits to viewers in Canada and abroad are enormous.
We would love to be in a position to say that our industry is self-financing, but it is not. The very proof of the impact of the Ontario industry was determined through a provincially funded study. Another study commissioned by ACTRA but supported by both the federal government and Ontario determined that our industry's profitability and success is dependent on public policy and funding at three levels of government. It is dependent on public policies like Canadian content rules, it is dependent on regulations like increasing the commitments of Canadian broadcasters to Canadian programming and it is dependent on government spending through direct funding, investment and tax incentives, federally through Telefilm Canada and provincially through measures like the OFDC's Ontario film development program. Even the municipal governments are involved through promotional offices like the Toronto film office and liaison with the police to keep traffic flowing around the areas we are shooting our films in.
That brings us to our third point, praise for the Ministry of Culture and Communications' contributions to the industry in the 1991-92 budget. Particular to our interest was the minister's announcement of $31 million for the film and television industry, and within that the $15.4 million this year for the film investment program called OFIP, administered by the OFDC.
Without OFIP, the program that I work on, ENG, would have had a more difficult time getting off the ground and continuing on into what is now its third year, and so would innumerable other projects, such as a new TV series called Counterstrike which is currently in production, projects like David Cronenberg's new film based on the William Burroughs novel of the same name, Naked Lunch, and projects which have complex financing with both public and private capital.
Ms Hogarth: Finally, we would like to put to you the case for increased funding from MCC for next year. That ministry's share of this province's expenditures dropped between 1989 and 1991 by 0.08%. That does not sound like a whole lot, but it is significant. It amounts to $38 million. We are not alone in suggesting that MCC's share of the provincial pie should be at least 1% of the province's expenditures.
Our industry is vital to the province. It contributes to the financial wellbeing of the economy. But the riches of a society are not calculated or evaluated in its credit rating. The arts of a society are the true reflection, and we at ACTRA work in an area whose product is accessible to everyone. Our business is reliant on a fragile arts infrastructure and on government policies and funding at the three levels of government. Without support from this Legislature, our contribution would be a lot less.
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Mr Dainard: There are probably many other topics which we could discuss with you. We could explain how attractive our industry is to an increasingly environmentally aware society; we could talk about how the visibility of our industry gives Ontario an international profile; or we could discuss how the products of our business -- films, TV, radio, commercials -- reflect Ontarians to each other, equally and without prejudice. But perhaps it is time for you to get some air time and we welcome the opportunity to answer your questions.
The Chair: Thank you. We have approximately five minutes for each party and we will begin with the Progressive Conservative Party.
Mrs Cunningham: This is not the first time we have heard from your group. I can remember hearing from your association during the discussions on the lotteries and the lack of direct funding to the arts and to culture, so it is interesting once again to hear from you.
I am wondering if you can give us some idea of this 1%, when you first heard about it or when it was a guideline perhaps for the government of Ontario. Give us a little bit of a history on that one.
Ms Hogarth: The history is Canadian history. It was actually the Liberal government in the province of Quebec that initially made that proposal. It has not been able to completely follow through on it, but that was certainly the goal of that particular government.
You know, when we are talking about television, we are talking about something very germane. We are talking about children who spend more hours in front of a TV set than they spend in school. It is a powerful, powerful social force. It is not just a force for arts. I mean, you have only to sit and watch television with a kid. When the commercials come on, what do they do? They watch. There it is, even the commercials are telling our society what we think about each other and what we think about ourselves as Canadians, and Ontario has the leadership at the moment in film and television production.
Mrs Cunningham: Okay. My second question relates basically to what you have just said. I can remember, as a school board trustee from London many years ago, being part of the commission that looked at the effect of television on children. At that time we encouraged the government of the day to put money into the educational television series, and I am wondering if you have any influence or impact on the programming or any co-ordinated working relationship in the co-ordination of the programming for children that is a part of the education budget of Ontario with the work that you do.
Ms Hogarth: Many of our members are employed as writers and as performers on TVOntario and we negotiate contracts with TVOntario which, frankly, are more favourable contracts than we would negotiate with independent producers, partly because it is an educational medium. It is a medium that provides a good base of work, particularly for new writers and young performers, the Polka Dot Door and those kinds of programs. I think we would like to see a far more actively creative role being played by TVOntario, but that, like everything else, costs bucks.
Mrs Cunningham: I guess the third one has to do with what you said about the advertising. Do you do any consultation with the ministry of consumer affairs?
Ms Hogarth: Yes, we do. We do at different levels. I am talking about we, elected actors, who also have met over the years with various governments. When various governments have been in power, we have met with that ministry to urge various ministries to produce videos that use professional talent. I have also met with them frequently myself on behalf of the women's committees of ACTRA in an effort to improve the presence of women, both in voice-over work and in their representation of women. Of course, we are fighting that battle at the moment at the CRTC over the sexual stereotyping issue.
Mrs Cunningham: I just wanted to conclude by saying I am especially appreciative of your remarks with regard to your role as it affects our nationhood. I congratulate you for the positive influence you have had, not only in young people but I think everyone.
Ms Hogarth: Thank you. Our thanks to those of the rest of you who make the decisions that in part help us do what we do.
Mr Jamison: Thank you for a very good presentation, I think it was very informative. We talked about the benefits of the arts to the economy, for example, the stimulus that can be created there. You also talked about national unity and how our own participation in the arts adds to that. I wonder if you could expand on that.
Mr Dainard: I do not know if I will answer the way you wish perhaps, but I am a bit of an example of an experiment in nationhood in that I was one of the first actors to go and study at the National Theatre School of Canada. That was a great experiment in co-lingualism, and I feel that I am part of the national fabric of this culture in that I have been a pioneer for 30 years trying to get theatre growing, and my roots are as much in Quebec as they are here, because I trained with French actors and actresses. I think there are many of us spread across this country who went to the National Theatre School who feel the same way, and I think everywhere we work we tend to promote co-lingualism and the brotherhood of working in this culture.
Ms Hogarth: Last year in Ontario there were several productions of French plays. I think specifically of Michel Tremblay's La Maison Suspendue. Lilies was another. There were many productions that were mounted in Ontario in English of French-language plays that make, I think, a real statement about Ontario's openness to a multicultural environment.
Mr Dainard: I urge you all to see Le Cirque du Soleil as a great example of that -- no language necessary.
The Chair: Further questions?
Mr Christopherson: Yes, I wanted to pick up on something said by Mrs Cunningham regarding the nationhood issue and the importance of the OFIP, the Ontario film investment program, and the $15 million. I can remember doing the pre-budget consultation on behalf of the Treasurer and meeting with a group of your representatives talking about that, and the message came through so clearly for us that this was just something at this time in our history we could not afford to be turning our back on. Like you, I am very pleased that both the Treasurer and the minister responsible were able to find the money and ensure that we did not drop this most important ball in the middle of play.
The question I would like to ask you is regarding that part of the arts that you represent. Perhaps you could give us a couple of illustrations of what impact this recession has had on your people and on your industry.
Ms Hogarth: It has had an enormous impact. Most performers, at least a large majority of our membership, certainly in Ontario, earn a base income through doing commercial work, because commercials pay residuals over time, and our commercial income in the past year, which we see as a direct result of free trade, is down $18 million. That translates into a lot of hardship for a lot of actors. As well, production generally is down.
But I would like to refer specifically to OFIP, because many other provinces have a film investment program of one kind or another, but OFIP to me is very distinctively stronger in that it makes a very strong case for Canadian programming. ENG, for instance, would never have got off the ground, and it certainly would not be going into its third year without OFIP, and ENG is a show which is honourably Canadian. It is not trying to disguise itself as coming from another country or being set in another city. This is a real Canadian show that has a tremendous following in the States. When some of our members were down in Los Angeles trying to encourage American producers to come up and use Ontario as a location, everybody wanted to meet anybody who had been in ENG. You know, anybody who was just attending the forum wanted to meet the ENG people.
For instance, if OFIP had not come through when it had, and it was absolutely vital at that time, one of the most reputable Canadian independent producers, Atlantis Films, would have taken a production called Maniac Mansion, which had shot for a year here, to Edmonton. Why? Because he would not have had to pay certain kinds of taxes in order to shoot in Edmonton, and although film and television budgets look as if they are huge, they frequently fly or fail on a very small percentage of the budget. So the fact that OFIP came through when it did meant that Maniac Mansion stayed in Ontario, and that is work for Ontario residents, writers and performers, but it is also for the people who cater the food on the shoot, the makeup artists, the people to drive the trucks and the electricians who do the lights. It is work for many, many thousands of people.
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Mrs Sullivan: I have been quite interested in your presentation today, and I think we might ask our research people if they would table with members of the committee some of the studies on the economic impacts of the arts, and there are some very good ones in Ontario that might be of interest. I was quite taken, actually, by the positive approach to this budget because in fact I do not see much positive in this budget for the arts. I see a capital spending which has decreased substantially over the previous year and I also see operating dollars which as a proportion of the total budget are in fact stable or virtually in decline. Similarly, on the film development projects, programs, there is not an increase. You are still working within a stable budget which, given the inflation rate, is a decline. I am quite taken aback by your positive approach to this budget when in fact your industry has been hurt by it.
I know that many people who belong to your organization perform not only in film, television and radio but also in live theatre. We have seen a decision of the current government to decline to participate in the Opera Ballet House, which would have provided a venue that would have been very useful for a sector of performing artists but also for people who are associated with other sides of performing arts. I am thinking of lighting people, musicians and so on who are also involved in film and television and the kinds of work you two are both involved in. There would also have been a spinoff and in fact new places.
I wonder if you could comment, first of all, on the declining share of proportion of commitment to the arts and, second, on the opera ballet centre and the impact you think that has had.
Ms Hogarth: I would be glad to. It is true. As I said, it represents a $38-million decrease for us just maintaining where we are at, but the economy as a whole is even more devastating to our industry at the moment. As I tried to explain, to get OFIP at this moment, when literally it was ending and there was no commitment -- this was something the Liberal government had put in place. It was a two-year commitment and there was no commitment beyond that, so the fact that this budget has made that commitment for another two years is literally a lifesaver. That is where the enthusiasm comes from. But also in my remarks, which I noted you paid close attention to, I was making the case for an improved commitment come the future, come next year. Yes, sure, thanks very much, this has been great, we do not want to be hopelessly greedy, but we do want our share to increase, to improve.
Mr Dainard: As for the Opera Ballet House, some of my colleagues may break my ankles in a couple of weeks, but I think that for 30 years this country, provincially and federally, has contributed to the arts in a major way in terms of buildings. They have really outdone themselves in terms of the number of buildings. When I trained in the 1960s there was no theatre for me to go to. By the time I graduated there were dozens of places, and a decade later you cannot count them. I do not think that is wrong. I think it is time now that we turn to looking at people, and in the arts -- I am one of the fortunate ones. I am working, and I have always worked, but my colleagues struggle at the poverty line and it is time they got some benefit, so opera ballet people, forgive me.
Mrs Sullivan: Where do you see that coming? How do you see that coming?
Mr Dainard: If you are saving millions of dollars by not pouring concrete, I think you have a few dollars to contribute to productions, and sending yet another flagship production to Europe to brag about culture in this country, which happens a lot, to go into other projects with a few dollars.
Ms Hogarth: There is a project being put together right now on stage. It is called Up Front. It is going to be in the latter part of September. There are going to be 11 productions from across this country, including a production from the Inuit people in the north. They are going to run for a couple of weeks in downtown Toronto.
I do not know what the total budget for this particular venture is, but it is not a huge budget. It is an incredible opportunity for people in Ontario to be able to go and see plays from every region in this country, and they are using a whole bunch of different venues, different theatres. In fact, I gather some of it is actually going to be taking place on the street.
So I am with Neil on the one that puts the money in the people and in the ideas rather than putting the money in the buildings. Money in the buildings is great when you are in times of growth and times of great prosperity. Of course, perhaps our colleagues in the building industry would say to us, "The heck with you, let's start building those buildings." But I do think there are ways.
One of the other reasons I am making a strong case for Up Front is that I have a 20-year-old who has a summer job there. Originally his attitude was, "$5.50 an hour, you have got to be kidding." I mean, this is a boy going into third-year university. He feels he needs to earn more money than that to get himself off the ground for his next year in university. But most of his friends do not have summer jobs and these kids are going to have to go to school and pay their way next year, so it is tough times everywhere.
The Chair: Thank you very much for your presentation. The time is up.
Ms Hogarth: Thank you. We enjoyed meeting you all and we thank you very much for this and we will be back next year for more.
Mr B. Ward: That is a great show, ENG.
Ms Hogarth: Is it not a great show? And all-Canadian, Canadian scripts, Canadian writers, everything.
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NOMURA CANADA INC
The Chair: Our next presentation is a return engagement of Mr Leo De Bever from Nomura Canada Inc. Thank you for returning to the committee. The Thursday we had you booked became, as I predicted, a special day for the Liberal Party and we are grateful for your indulgence in returning. So if you could begin, it will be on the same format as the previous two presentations.
Mr De Bever: You asked me here to comment on the first NDP budget. I have some serious reservations about this budget, not so much for what it proposes during the current recession, but because of the deteriorating long-term fiscal position it projects between 1992 and 1995. I think that with the projected expenditure profile it will be very difficult to keep the deficit from rising faster than indicated in the budget without further increasing taxes.
The Treasurer has indicated that he is expecting any criticisms to be accompanied by suggestions on how to do things differently. Given the mood of the province about tax increases, one suggestion might be to see if more cannot be done with the same amount of money. That may seem like a trite suggestion, but I think in many ways it is not clear that money alone is the problem here.
Another suggestion would be that I think there should be more advice not from just economists but also financial analysts about what needs to be done. I understand that some people before this committee have testified in favour of the budget, and I do not expect everyone to agree with me, but generally speaking I find the budget expresses very strong views about what is fair from the standpoint of income distribution, but it pays very little attention to the consequences of specific policies for the viability of the Ontario economy and Ontario enterprises.
There is a strong belief in the business community that this government is hearing but not listening. The budget expresses the need for a partnership between labour, government and business, but the aftermath of the budget shows that this is just not happening.
The people of Ontario elected the NDP government and as such you have the right for four or five years to produce your agenda, but the priorities on that agenda are somewhat different than they would be otherwise and I am not sure that the policies set out in the budget will have the intended results.
The budget's goals of efficiency, prosperity and equity are hard to disagree with in principle but difficult to implement in practice. For instance, the budget makes the point that the business idea of productivity growth is cutting costs and goes on to argue that the focus should instead be on raising productivity. It is really not a point to disagree with, except that there is a problem of timing. Business cannot afford to wait for productivity growth to catch up with wages, payroll taxes, minimum wage laws, plus pay and employment equity provisions.
In that context, I want to draw your attention to the graphs I included with my text that show the development of the distribution of GDP since 1947. These are Canadian numbers. The Ontario numbers would look very similar. The graphs dispel the notion implicit in parts of the budget that the income distribution in Canada and in Ontario has somehow been shifting away from the ordinary worker towards business interests.
You see the first graph on the first page indicating, in fact, that over time the share of wages and GDP has been rising, and that during the period of the early 1980s when we enjoyed our fastest employment growth the share actually fell, and that over the last few years the share of wages and GDP has again been rising to where now it is close to its historical high. The graph below indicates that the reverse has been happening to profits, and right now the share of the profits and GDP is at its lowest level during the period these numbers have been collected.
The recession has hurt a lot of people, but not all of these people are workers; a lot of these people are small business operators and to a large part they are going to have to give direction to the future creation of income for the whole economy.
In terms of specific comments on the budget, I share the budget's positive assessment of Ontario's economic potential. I do not think anybody disagrees that overall we have a good quality of life and that we have a high level of education for our labour force. If it is true that we are going to have substantive immigration during the 1990s, as I expect, Ontario should get a good share of these additional immigrants and that will boost the local economy.
But my problem is with the course of policy which accentuates some of Ontario's negatives. Ontario's competitive position has deteriorated significantly over the last business cycle. Wage growth has increased 1% to 2% faster for a number of years than in the United States, eroding the wage advantage we enjoyed coming out of the last recession. Excessive public and private growth has driven up operating costs in urban areas, which is the industrial heartland of Ontario. Payroll taxes and property levies have aggravated the competitiveness problem. Finally, Canada's large need for foreign financing has saddled us with high interest rates and a strong currency.
The solution to these problems has to involve reduction in unit labour costs, even if this means lower real wages for a while. It also will require a serious attempt to reduce the impact of government levies on the cost of doing business.
There is no real sense in which business tax can substitute for personal taxes. One often hears the argument that business somehow is not carrying its share. The facts are that business will move to where costs are lowest and individuals will only tolerate high taxes if there are compensating factors. The fact is that Ontario with or without free trade is competing for tax base and talent with other provinces and with a number of US jurisdictions.
Even if all goes well, prospects for manufacturing employment, which tend to be the focus of a lot of discussions in the press, are limited in any case. In 1982, I provided a 10-year forecast indicating that prospects for employment growth in Canada's manufacturing sector would be minimal between 1982 and 1991. It turns out that was a correct assessment, and I believe that it will again be for the next 10 years. The basic reason is that productivity growth in manufacturing is roughly the same as the growth in demand for manufactured products. Hence, output expands but employment does not.
The only way to remain competitive in that environment is to have an enormous machinery and equipment boom to rationalize our industry for a North American market. This will preserve production but not manufacturing jobs. However, such a boom can only materialize if business can be convinced to spend more money here. I am concerned that without stronger signals from government that all will be well, investment may be considerably lower than it would have been.
I am turning to revenue and expenditure projections. If it is true, as the budget indicates, that the automatic stabilizers -- meaning the income support programs -- are the main reason why the budget deficit rises as quickly as it does, it ought to be true as well that the recovery of the economy should reduce the cost of income support programs quickly. That is not happening in the budget. Instead, government current expenditures rise at the rate of nominal gross domestic product during the entire period.
The justification for accelerated capital spending in the budget is in part the need to stimulate an economy in recession, but if that is true, it is not clear why deficit-financed investment continues throughout the recovery. I have some concern -- more than some concern -- that the impact of anti-recession spending will be largest when the economy is already recovering, which I expect to be happening later on this year.
The budget argues that the treatment of capital spending in previous budgets is inappropriate and that therefore things are not as bad as they look. Now, I agree that we should not treat true capital spending as current cost. However, the new treatment of capital outlays is not correct either. It proposes to write off new capital spending over a 20-year period. There is nothing wrong with that, but this severely understates the social cost of public sector capital already in place. A better solution would be the one using the national accounts, and that is to calibrate deficit targets by including in current spending estimates of capital consumption allowances on the stock of public sector capital. In other words, you are including only the amount of capital that you consume in projecting your deficit. I suggest this would show a far less flattering picture than is implicit in the current budget.
There is a lot of reference to debt-to-GDP ratios and comparisons with other levels of government. I think most economists would agree that over an entire business cycle, economic policies should try to keep the debt-to-GDP ratio from rising and, if possible, to reduce it. That may imply rising debt-to-GDP ratios during a downturn, but fiscal prudence demands that the cyclical deterioration be corrected as the economy recovers. The budget, in fact, projects that the debt-to-GDP ratio will rise from 15% to 21% by 1995.
Now, if we assume that the next business downturn will be somewhere around 1996 or 1997 and that it will result in the same kind of cyclical deterioration as in 1991, and if you follow the same kind of philosophy that is implicit in the budget, the ratio of debt to GDP could easily reach 30% by the year 2000, which to me seems very unattractive. You have to take into account that this is only true if interest rates stay as low as projected in the budget -- I take it those numbers were taken from federal sources -- and those interest rates will only stay as low if the current policy, which is not particularly popular in Ontario, of trying to drive inflation down succeeds.
In a number of places the budget points out that finance ratios, like debt to GDP, compare favourably with the same figures at the federal level. Unfortunately, that is not an appropriate comparison, because federal and provincial governments draw from the same tax base and there is no particular merit in indicating that the province is not doing things as poorly as the feds.
There is also a contention that Ontario will not fall into the federal trap of having to pay 30% of revenues in interest charges, and I agree that the province is not in immediate danger of doing that, but let's just go back and see how the feds got there. They got there because in the 1970s it was decided that we could and should spend more money on a variety of transfer programs to individuals, to business and to the provinces, and it turned out that it proved to be very difficult to contain that kind of spending once it was in place, because those who benefit tend to be more organized than those who oppose. Yet at some point we must decide on the level of spending we can afford.
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For example, the Ontario budget complains about federal attempts to restrain transfers to the provinces. The facts are that transfers to the provinces make up about one third of the federal deficit and they are a legitimate area of restraint when resources in general are not sufficient to follow through on commitments made in earlier years; commitments, to my way of thinking, made without proper regard for the long-term cost of those promises. That unfortunately is the case not just in the official numbers that are being projected in the budget but in a whole host of other programs that are in the pension sphere, where contingent liabilities, to my way of thinking, are not properly accounted for.
Any attempt to blame federal policy for Ontario's predicament is largely misplaced. Because of our large foreign debt and the need to place a lot more every year over the next few years, Canada has lost control over some aspects of monetary policy. Those who agree that we could devalue the dollar and lower interest rates to get us out of the current problems ignore the reality of international capital markets.
Part of the reason the Canadian dollar has remained high is that foreign borrowers are extremely sensitive to currency fluctuations. I was in Tokyo a few weeks ago. There is a report published by the Canadian embassy indicating that Japanese investors alone hold something like $45 billion of Canadian debt. In my visits to some of those bond holders, I find that the most sensitive variable in their evaluation is the currency. So a response like we saw last week to what initially was a very minor event in the currency market is likely to be repeated, because I do not think the Bank of Canada feels that with the amount of foreign debt we have been floating, particularly fixed-income foreign debt, it really has the ability to gradually move currency in either direction.
Foreigners like Canadian bonds right now because they have a higher yield, they are a close approximation of US dollar debt and they perceive Canada to have a limited currency risk. If any of those factors disappear, we may have a serious problem on our hands. In fact, without a stable currency and yield premium, foreigners have little reason to favour Canada or Ontario over Australia, Denmark or any other part of the world.
The budget makes the point that improving human capital formation and improving government efficiency in delivery of health and education are good long-term objectives, but the strategy for achieving these objectives, I think, needs clarification. It does not explain how the budget aims to achieve its goals with the spending programs that are being proposed and whether all this will occur in time to generate the productivity increases that are going to allow business to pay the wages that are being suggested.
The principal weakness I see in the health and education system is that there are few incentives for superior performance and few ways of measuring whether the resources committed to this function are having the intended effect. There is a study out by the C. D. Howe Institute which I recommend highly. It is called Big Spenders: Provincial Government Finances in Canada, by Irene Ip. It deals in part with this issue and makes a number of recommendations, most of which have to do with putting efficiency and incentives in the right place.
One way to induce efficiency is to have resource allocation respond to scarcity as signalled by prices. I know that is anathema to some members of the NDP government, but I think experience in socialist and capitalist mixed economies has shown that any goods or service that are being offered at below cost are likely to be overconsumed unless there is some incentive provided to prevent that.
The budget argues that workers have seen their standard of living decline, so it is not fair that they be asked to rein in wage demands in the name of productivity. However, there is no guarantee anywhere that says we have a right to a constantly rising standard of living. If there is one message that is coming through in the statistics of the 1980s, it is that growth overall, despite quite strong employment creation, has not been strong enough to provide that constantly increasing standard of living. Real income can only rise when real output per worker increases or when an economy is lucky enough to produce goods and services that rise in price relative to the goods it consumes.
I think Ontario has some problems in that area. We are a small, open economy; our business cycle is driven to a significant extent by international trade, so we do not really control our rate of growth very narrowly, and by accident of geography we are very closely linked economically with one market, the industrial economy of the United States. Whereas many of our industries were geographically isolated until the 1970s, we now face competition from the Far East and even from some developing countries. The blunt fact is that we are just not keeping up in productivity internationally. We are losing on price in industries like auto production.
The final point I would like to raise is, granted that we are in some trouble, is it really ethically justifiable that one of the richest economies in the world should borrow to finance its government over a prolonged period of time?
Again, I want to make some distinction between, say, the last year and maybe the next little while, when we still have repercussions from recession. I think the government should recognize that since we enjoy one of the highest standards of living, there has to be a point where we have to recognize that while one can always wish prosperity to be higher and more evenly shared, that is not in itself justification to go and borrow to make that possible.
It is very hard to make the case that our needs are so pressing that they require us to compete internationally for savings of other countries that could be going instead to finance private and public needs for capital in eastern Europe, Latin America or the less developed countries. I find it ethically objectionable that as a province we are borrowing instead of lending, and I would have thought that such sentiments would be even stronger in the NDP government.
I conclude that once we are on a deficit track of $8 billion to 10 billion, as the budget projects, it may be very difficult to get back quickly to a balanced budget or a surplus, as I think we should, over the next four or five years. I also feel that the repercussions of the deficit projected to 1994-95 are far more serious than is implicit in the budget documents and that the GDP numbers' increase is far more serious than is being indicated.
The budget outlines some goals that we can all agree with, but the strategy to achieve them, to my mind, is not made clear. I think the main point to be made is that in a world of limited resources, this budget does not address tough choices among competing needs and does not confront the question of what is reasonable, not just for wage earners but also for their employers.
I think the first order of business for the Treasurer should be to build some bridges to the business sector. Without that, Ontario's economic recovery could be a lot weaker than it needs to be.
The Chair: Thank you. We have about 12 minutes per party, beginning with the NDP. Mr Sutherland.
Mr Sutherland: If I could just go over your graphs here for a minute, I was having a little trouble reading them. The first one, wages to GDP?
Mr De Bever: Right. This is total labour compensation relative to --
Mr Sutherland: Okay. So the squiggly line going up is the wages, and you are running on a base GDP.
Mr De Bever: No, no. This is a proportion: out of every dollar of GDP, what proportion is going to wages. So what you see is, between 1947 and 1976, that proportion rose from 48% to 57%. You see that right after the last recession, in 1983, when the proportion was low, we had very sizeable employment creation, because of that in part -- we had a comparative wage advantage -- and that advantage has been eroded over the last few years. In part, that is a cyclical phenomenon. Wages tend to be rising as a proportion of GDP during business downturns, but I think it also reflects a reduction in competitiveness.
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Mr Sutherland: In your presentation you have talked about different issues. You have talked about some productivity issues, you have talked about their impact, you have talked about the provincial perspective. You point out that we are in an international trade market, but while we are international, we seem heavily influenced by our neighbours to the south. The fact that we are in an international trade market and have to deal with that reality also indicates, though, that we do not have jurisdiction over all the factors influencing Ontario. I did not see much comment in terms of federal policies' impact. You did discuss interest rates and the dollar a little, and they certainly have an impact on manufacturing.
In pre-budget consultation we heard from different people indicating that there was some room to move on interest rates, not actual interest rates but differential between ours and the US. I would like you to comment on that and maybe on some of the other federal policies that have had a significant impact in the eroding of our manufacturing base and, for that matter, the provincial government tax base.
Mr De Bever: On your first point about interest rates and the differential with the US, that differential has come down dramatically over the last year. Unfortunately, our economy has the tendency to be inflation-prone. Initially, the monetary policy of the Bank of Canada was instituted because of a perceived problem in Ontario. We do not have that problem any more, at least the problem is not nearly as significant as it used to be, but now we have it elsewhere.
So the problem is that we seem to have a very difficult time keeping inflation under control and, as a result, particularly given the fairly loose fiscal stance at the federal and provincial levels, it has been very difficult to bring interest rates down.
Will they come down further? My sense is that they will. However, I feel, partially because of the large amount of fixed-income debt we have floated over the last 10 years, that we have lost the ability to bring interest rates down suddenly.
We have had two exchange crises now over the last two or three years, and in each case they were brought about by movements in interest rates that were fairly small. I suggest that the reason for that is that foreign investors, the moment there seems to be any trouble with Canada and its exchange rates, start selling the dollar. That, in turn, makes it very difficult afterwards to keep inflation down in the long run and to keep interest rates down in the long run.
You talked about other policies responsible for Ontario's predicament. I presume you were referring in part to free trade and its impact on employment. When free trade was negotiated, most projections, including some I made, felt there was going to be an adjustment period of two or three years during which something like 70,000 or 75,000 jobs would be lost. We have lost many more jobs than that over the last year or so. However, if you look at the US, it has lost a very significant part of its industrial base as well and for many of the same reasons. The fact is that North America as a whole, and that includes us, just has not been very competitive internationally. Again, I think the future is not in the industrial base.
Are there any other policies you were referring to?
Mr Sutherland: No, that is fine. I think it is important to note, though, that promises and commitments were made by the federal government in the last election that if you support free trade, yes, there will be adjustment but adjustment programs will be in place. I think it needs to be noted for the record that many people are still waiting to see where those adjustment programs are coming and where the federal government's commitment is to dealing with the restructuring as a result of the free trade agreement.
Mr De Bever: That may be fair comment, but let me also add that whether you like or do not like this particular agreement, I think we had better come to the realization that whether it is with Mexico or the US, free trade is an inescapable fact of life, and the focus ought to shift on how we deal with it rather than on how we oppose it or limit it.
Mr Jamison: Listening to you I heard, of course, the word "productivity." You made special reference to a graph about wages and how wages on that basis had increased. I find that puzzling, but productivity is not just wages. Productivity is, for example, building an infrastructure that will equate and promote business, and I think our government has put forward a multibillion-dollar plan to do that.
Research and innovation: The Ontario technology fund will provide $131 million for research and development and technology diffusion. That also has a great deal to do with productivity and competitiveness. That includes $81 million for programs to support leading-edge research in such areas as robotics and telecommunications via technology. We have also instituted a $57-million program called the manufacturing recovery program to help viable businesses through this short period of time.
Number one, I would like to understand your definition of productivity. Secondary to that, I got the indication that we simply were not doing enough for business, and the question to you is: How much is enough?
Mr De Bever: A lot of businessmen would not say that you have to do more for business in terms of spending money. In fact, a lot would argue that you probably should spend less, pull back from trying to get in business ventures altogether. I think the best strategy for the government to promote business is to facilitate the environment in which business takes place, that is, to keep taxes reasonable, to have delivery of services required for business be reasonable; otherwise, let them make their own mistakes. In fact, it is very easy to come up with 10 projects where the government got involved and got its nose bloodied because it made the wrong decision. It is very much harder to come up with a list of 10 projects where the government did get involved and we have a stellar project we can refer to and say, "This is what government should be doing."
On the high-tech thing, if you think you are going to promote productivity through high tech, forget it. High-tech basic research is not where you are going to get your productivity. If you are going to put any money in that area, get it into the quick dissemination of the application of high tech. The production of high tech itself is a very minor ingredient both from an employment and an output point of view.
On your first question about what my definition of productivity is, what I was trying to show with this graph is not that this represents productivity but that any perception that somehow labour has not shared or wages have not shared in prosperity in the last 10 years is just misplaced. The true definition of productivity in fact shows that productivity relative to the United States has improved in Ontario relative to the United States over the last five years. I think the gap between us and the United States in real productivity output, real output per worker, is only about 5% versus about 10% or 12% about 10 years ago.
What has not changed and what has changed against us to our detriment is that the wages we pay out, the unit labour cost, has increased faster than the prices we are selling our products at. I think that is a problem, because that implies that declining productivity you see on the second graph on the first page.
Mr Jamison: I would just like to clarify something. Technology that has come in to manufacturers has reduced the labour force very significantly in many cases, but it has also caused a combination of skills within the workplace. The workforce has dropped, yet the wage level has gone up in compensation for the multiskilled or multicrafted kind of work going on within the new technologically advanced plant. Your graph does not take that into consideration specifically and that is why I think it really does not reflect the productivity of those types of plants compared to what they were 10 years ago, making widgets or whatever.
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Mr De Bever: Ultimately, you can only pay out in salaries and profits what you earn from your exports or from your production. The plain fact is that we paid out more than we are earning. As a result, you have a 5% share of profits in GDP whereas a more normal level would be double, so I am flagging that as a significant structural problem.
Mr Sutherland: Picking up on that productivity level, I had concerns about what you said, that wages seem to be the only way. For example, one of the manufacturing plants in my riding has made significant productivity gains through several things. It did an environmental analysis on the amount it was putting out, reduced its garbage by 80% and found that in some of its operations, including the painting, by making certain adjustments it cut its costs that way. When we look at energy efficiency, co-generation, another plant is making great strides that way. Also, this plant that has realized savings by cutting down its garbage output by 80%, a unionized plant, has gone from the more traditional assembly line production to a workstation production and found it is producing more units per hour. In other words, there are many ways in which Ontario business can improve productivity without necessarily cutting wages.
Mr De Bever: I have no objection to that. In fact, many economists would suggest that a lot more negotiations should be based not on hourly wages but on a "fair share" of the revenue being generated by production. I have no problem with that. All I am flagging to you is that in the aggregate, that is not happening. Some people may deserve a gargantuan wage increase based on a gargantuan raise in productivity. No economist would quarrel with that. The problem is that in the aggregate, wages have increased faster than the underlying productivity and the prices of the outputs that are being produced.
Mr Sutherland: In some cases, it may be that some of our management techniques and production techniques need to be changed or altered to become more efficient and have better productivity.
Mr De Bever: That is right.
Mr Kwinter: I would like to pursue this productivity. Mr Jamison referred to the fact that productivity is not just labour cost. I will give you an example of something I came up with last week. General Motors has four engine plants in North America. They have one in St Catharines, two in the United States and one in Monterey, Mexico. They are identical plants, identical in the sense that they are clones of each other. They are built and designed exactly the same way, but the most productive plant they have is in Monterey. It has something to do with the labour cost but not all, because there is more to it than just labour. The fact is that at the end of the day, the executives at General Motors look at those four plants and say, "We get all these engines which are identical engines and we get more out of that plant per unit cost than we do anywhere else." That is what they talk about, productivity, and that is where we have to compete.
That is our biggest problem. When someone closes down a plant, and it may be profitable, they are under constraint. They are under pressure because of the global economy, and they say: "This facility is more productive. We are getting more bang for our buck out of this facility than we are out of that facility." Unfortunately, what has been happening too often -- I am not blaming anybody; it is just sort of the work environment -- is that too many workers think they are entitled to increases just for being alive -- "I got an increase last year. How come I didn't get an increase this year?" -- and it is not tied to their productivity. That is where we are losing our competitiveness, so we have to decide on two things. Either we have to get better able to produce to warrant greater salaries or we have to cut back. That is the dilemma.
You have made several comments about how you think our initiatives should be placed in different areas. Say you were the Treasurer and you had to give political direction to the people at the Treasury. What would be the number one thing you would recommend?
Mr De Bever: I think our major problem is in southern Ontario, which is a largely urbanized area, where costs have been rising very dramatically over the last 10 years because of the relative increase in prosperity. As a result, you see a lot of comparisons with Buffalo, which is a relatively rural area, on any number of factors: labour cost, land cost, servicing cost, you name it.
Given that such a large component of the engine of Ontario is urbanized, I would focus on how I can streamline the delivery of services and the taxes imposed on that industrial urbanized area of Ontario, because if for a moment instead of thinking Ontario versus the United States you think urban versus rural, you find that we share many of the same problems with urban areas in the United States. I am talking about New York; I am talking about the Midwest.
There is a similar sense that costs in the urban areas have gotten out of line and there has to be some way of defusing pressure from those urban areas to other areas. In other words, do not try and pile everything into the same already clogged channels of service delivery; go to lower-cost areas. In fact a lot of companies are already doing that. A lot of companies are considering relocating in areas like, in the insurance industry that I used to be associated with, west to Waterloo and that area or up to Barrie. Those kinds of trends are likely to be there. I think they are beneficial because what they will do is reduce the pressure on land values and servicing cost in the principal driver of Ontario without negatively affecting productivity. In fact they will probably improve it, make our economy relatively competitive.
This is the amazing thing about what is happening here. In many ways we are our own worst enemy. We have very high labour productivity. We live in a society where increasingly it ought to be true that the specific location of where services are produced should not matter because transport and communication costs are very low, yet we find that we tend to concentrate a lot of activity in a very small area at a very high cost. I think the only way to break that cycle is to try and come up with ways that we can encourage people to move out of the central cores of the big cities in Ontario. That would be my prime recommendation.
The other one would be, instead of focusing on how we can generate more revenues out of business, to also spend part of the time seeing what the impediments are to undertaking business. I am not convinced we have as strong a comparative disadvantage vis-a-vis, say, Buffalo, as we are made out to have. Some surveys by, say, grocery chains and other manufacturers show that there is a case to be made that there is a lot more hype to this than reality. If that is the case, then we should identify what the true situation is, make citizens aware of it and, to the extent that there are impediments we can remove, we should remove them. I think that is the true function of government: to be the facilitator.
Mr Phillips: I really appreciate your report. I thought it was as thoughtful as we have had. At least I think it is -- maybe because I agree with a lot of it, so I always think it is more thoughtful. I appreciate your comment on the capital account, which I fully support and I think is something we will have to look at.
I think we are going to find a certain pattern setting in here at these hearings. This is our first day. It will be that the government says it is right and we will say, "You're wrong," and we will not know for a year or two. So it is just going to be a game of rhetoric, I guess. It will be worth while and we will hear really good witnesses such as yourself and others we have heard. But I worry that because we are all projecting what the impact is going to be, we will not see much movement on it.
My question to you is, what will be the signals of whether this budget is working or not working? In the end I think we will have to set up those kind of guideposts that say, "You were right and we were wrong," or "We were right and you were wrong," because I think you have personally given us a blueprint in many respects of what to do if it is wrong. How will we know that it is not working?
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Mr De Bever: Because we are a small part of a larger economy it is going to be very hard to tell, there is no question about that. But rather than focusing on keeping score I was much more interested in this case in saying, "Look, you're focusing on the wrong things." Money is not the issue.
This budget reminds me a lot of -- you may think this inappropriate -- the Great Society programs of Lyndon Johnson where there was a set of ills, social weaknesses, identified. The notion was, "If we just spend money on it, we'll upgrade education and we'll increase equality of opportunity and so on." I think the last 15 or 20 years have shown that life is far more difficult and complex than that. You have to be very specific on setting goals and making sure you get those goals. Just by spending money on R&D, which is laudable in itself, and just by spending money on education, you are not going to guarantee you are going to get results.
I think that is the lesson of a lot of Keynesian-type spending. Spending money will stimulate the economy, yes. For a while it will get you output, but it may not get you the specific results this government seems to be after, which is to increase productivity by giving people increased skills for which the world is going to pay. I think that is the ultimate objective. Unless you have very concrete specific programs in place that take the money that is being spent and channel it into very specific productivity-enhancing strategies, I am not sure it is going to be worth while.
How are you going to measure it? When I was at the Bank of Canada we did a lot of studies on what fiscal policy could do for you. The end result was that it cannot do very much for you structurally over the long haul. All it can do for you is in the short haul ease the pain of a recession. If you are after structural changes, you have to be much more concrete; you have to be much more specific. I guess that is the part I found missing in this budget.
The Chair: You have approximately three minutes left.
Mr Phillips: Another quick question then. In terms of where we are going to see jobs created, which is a huge worry for many of us, I think in your analysis you said, "Listen, 10 years ago you looked at the manufacturing sector and said we'd be lucky to hold the absolute number of jobs," although my recollection is that the percentage of the gross domestic product by manufacturing actually went up when the jobs stayed the same because of investment, so I interpret from your comments here we are going to be very lucky to hold manufacturing jobs. It is going to require a lot of investment; we are going to have to attract capital investment to hold manufacturing jobs.
That being the case, and the labour market growing at 1.5% a year, we need 75,000 new jobs just to hold even. We have lost 200,000, so we have to create 300,000 jobs very quickly. Where are they going to come from?
Mr De Bever: This was exactly the kind of discussion we got into in 1981-82 when I presented that projection. Unfortunately I find that you cannot make a case that to politicians or to laymen is very convincing. All I can tell you is, over the last 30 years there has been a dramatic shift of job creation out of the goods-producing sector to manufacturing. People say: "This cannot continue. How many services can you consume? You can only do one haircut. You can only go out to dinner so many times. Where are these services going to come from?" The fact is that between services and what is now referred to as the information-oriented sector, there is job creation in services and there has been. I am very convinced that there will be.
Just to illustrate that point, because it is a point that most people find hard to accept, in 1981 I got involved in a debate about the impact of computers on jobs and the same argument was being made. Suppose you go and invest in computers; you make a whole bunch of people redundant. Where are they going to find jobs? The projection was, we were going to have a 40% unemployment rate for secretaries in Toronto by 1991. I declared that forecast to be totally ridiculous and it turned out to be ridiculous, but at the time I must have debated it in three or four different forums. I could not make my case because people could not visualize that jobs would be created in other areas.
Mathematically it makes perfect sense that jobs will be created in the service sector and I think they will be. To visualize that is very difficult, but I think the shift of demand is away from goods. For every incremental dollar you will find that a smaller proportion will be going to goods and a larger proportion to services. Because of that we may in fact have, by the middle of the decade, a shortage of labour in many skilled areas rather than the surplus we are worried about now.
Mr Sterling: I would like to echo the sentiments of my colleague Mr Phillips in terms of your presentation. I really found it quite enlightening. Perhaps your knowledge of the budget matches anybody's in this province in terms of your understanding and going through it. I appreciate your analysis.
I once listened to a speech by Professor Phil Gillies, who used to be a provincial MPP, and I remember him saying that the whole debate over the free trade agreement was a bit of a farce because it did not matter whether we had a free trade agreement or not. Free trade was going to be a fact in 10 years regardless of whether we had an agreement; we were just going to be forced into it by what was happening in the world.
One of the problems I have is there seem to be three whipping boys in all the arguments that you hear. One is free trade, the other is John Crow in terms of his monetary policies and the third is the federal government in terms of the GST and that kind of thing. I do not see those as the real problems in regard to what is happening to us at this time.
One of the other things we have heard, particularly from the manufacturing and the business sectors, which have suffered greatly in the last little while -- as shown in your graph, their profit margin is way, way down -- is that everybody seems to argue for an 80-cent dollar. That seems to be the panacea in terms of solving the problems. Would you care to comment on what would happen?
Mr De Bever: Even if you wanted to, you could not get to an 80-cent dollar in a real hurry, because if Crow were to wake up tomorrow morning and say, "Look, I've been wrong all along. I want an 80-cent dollar. Go sell the dollar," it would not stop at 80 cents, and that would have problems of its own.
When you look at the history of devaluations in various economies, you find that weakening the currency is never the solution. My advice to manufacturers would be, find yourself 5% or 6% productivity in your operations rather than wait for Crow to drop the dollar, because if you have the 5% or 6% in productivity, you have that in your hand. They cannot take it away from you. The dollar may go up or down beyond your control.
If you think that is an unreasonable suggestion, go back to 1981-82. You may recall that the presidents of Falconbridge and Inco and so on were arguing very strenuously that without devaluation they would never be able to survive. Then when it dawned on them that between the dollar not doing what they expected it to do and commodity prices not doing what they were expected to do, they had better do something about their own operations. All of a sudden in the space of one or two years they realized dramatic improvements in their operations simply by saying, "Look, this is what we've got to do."
I think that is where the solution lies. It is only human nature that we tend to postpone unpopular decisions as long as possible. A lot of manufacturers have done that. Free trade is now bringing to the fore a lot of problems that have been subterraneously existing for a long period of time. Now that we are finally confronted with the fact that we have to compete internationally, these problems are being addressed.
I really believe that the answer is not complaining about the other guy; it is to a larger extent trying to do, in your own shop within your own sphere of influence, what is possible. I am not for a moment discounting the fact that government can play an important role in there, but I do not believe that it should be there with its money bag. It should be there to say, "Okay, what is the environment that we have to create for you to hire more people and to create employment?" and not necessarily as the subsidizer of new ventures.
Mr Sterling: If you were the Governor of Canada, in John Crow's place, would you take much different action than he has?
Mr De Bever: I must admit I am partisan. I used to work for John Crow. I might have taken a different tack in the sense that I think his basic error was that in the beginning he did not communicate what he was trying to do. So we have a situation where everybody was assuming that monetary policy was being geared to inflation continuing at 5% or 6%, whereas the reality was that he was serious when he said he wanted inflation down to zero. I think that has caused a lot more pain that it needed to, and it probably has caused a deeper recession than it should have.
In terms of the intent of the policy, no. I think the history of Canada shows that the errors in monetary policy have always been made in that they have accommodated much more inflation than they should have.
1630
Mr Sterling: You mentioned the $45 billion of debt which is held by Japanese interests. I understand there is a certain amount of debt out there -- I have heard the figure of $35 billion or $40 billion or something like that -- which is relatively short term, held in short term. If the interest rates were dropped and the interests of those four investors disappeared, what would happen?
Mr De Bever: If interest rates were dropped --
Mr Sterling: Presume that the two things that hold that debt are the value of the dollar relative to the other currencies and the interest rate. That is what the investor is looking at. So if the interest rate drops or the dollar drops, or a combination of the two, what happens if that $45 billion is no longer there for us?
Mr De Bever: The fact is that you could not finance your debt if you tried to do that. The Japanese or any other foreign investor is not there for philanthropy. They are strictly in there for returns, and they will sell us down the river any time it seems advantageous. They have no particular love for Canada or Ontario or anybody else. I guess the answer to your question is that if you try to refinance the government debt at lower rates, you could not do it unless you had a substantially lower inflation rate in your economy so that the real returns to the investor would remain the same. That is ultimately what the Bank of Canada is focusing on.
Canada's debt is extremely short; the average term to maturity is only around 4.4 years. What that means is there is a tremendous positive leverage from dropping inflation and interest rates. If you can bring inflation down, you can bring interest rates down. If you do that and you work out the mathematics of compound interest, it has a dramatic impact on both the federal deficit and the kind of provincial debt-servicing costs we are talking about here. I mean dramatic in the sense that it could wipe out half the deficit in a matter of three or four years. Every 100 basis points, every point reduction in interest rates, will, over a period of one to two years, reduce the deficit by $4 billion or $5 billion. The reason that this is being masked right now is the recession. The recession has caused both the federal and the provincial governments to spend more money. Once the recession is over, only the impact of lower interest rates will remain. So that is a very dramatic lever and it will continue to work for us, and interest rates will be able to continue to drop if we can get inflation down. The point is that by international standards our labour markets are not very efficient, and even though producer prices have been flat for the last year, wages are still rising at 5% a year. So we have a problem there in terms of getting people's perception adjusted until it is possible.
Mr Sterling: Do you think the provincial government in its budget should have done something in terms of showing some leadership in restraint?
Mr De Bever: One thing that other provincial governments have done is to stand behind the federal government in terms of saying: "Look, here is the wage budget. Do with it what you will. You can have fewer employees and higher wages or you can have the same number of employees and no wage increase." I think something like that would have been positive. I am not saying, by the way, that civil servant wages are necessarily too low; in fact there may be a case in some areas where they are too high. In some cases one may argue that they are too low. All I am saying is that what goes for the private sector also goes for the public sector, that there is a limited amount of resources and that you have to do with the resources as much as you can. I think one area where we traditionally have had problems is that the sectors that are not as much bound by profit-and-loss statements have tended to lead the way on wage inflation.
Mr Sterling: Dianne, did you have something?
Mrs Cunningham: We thank you for your presentation. It has been a real treat.
The Chair: Three minutes.
Mrs Cunningham: We also get to read the Hansards.
I have a couple of questions and maybe we could have a discussion. When you talk about the positive assessment of Ontario's economic potential, the positive statements that you have made with regard to "good quality of life" and "high level of education of labour force," my concern as a critic of Education and Skills Development, and my background being board of education in London, Ontario, for many years as an elected representative, your next sentence on that page disturbs me just a little bit: "I expect that our fortunes will be boosted significantly in the nineties by strong immigration."
My great concern has always been that yes, we have a great education system and our public are highly educated, but in the area of skills development and producing what we need them to produce, I think our system has been an abysmal failure. Most educators would say there needs to be a very major change in direction and training of young people, as well, of course, as retraining. I just wondered if you would comment on that and tell me what you meant by "strong immigration." Are they going to take the jobs we should be training our young people for?
Mr De Bever: The facts are that recent immigrants are dramatically different from previous ones. There is a high proportion of immigrants who are highly skilled. You are probably thinking about the proportion that is not skilled and in fact requires a higher level of government services to bring them --
Mrs Cunningham: I am thinking of both: the skilled ones doing the jobs we wish we had trained our young people for, or our workforce for, and the others needing so much more education, as we are all experiencing now.
Mr De Bever: That is right. As a parent, I would agree with you that what I see in the educational system is not what I think is possible. It comes back to an earlier comment: If we are spending all this money on education, let us set some standards that tell us whether we are doing what we think we ought to be doing. Again, the comment should be made that just spending money on education and providing for decent salaries for teachers and educators is not going to be the kind of thing that I am referring to here.
I would not want to go on a right-wing binge of the three Rs and all that, but there is a point where you have to bring it down to basics, and that is to measure both the skills you are trying to impart and the means by which you are doing so. Just saying, "Well, we have so many teachers per pupil and we are spending so many dollars; therefore the results are going to be there," I do not think is going to work. You have to be much more specific on that.
Mrs Cunningham: Which takes me down to the points you made on efficiency and delivery of health and education, where we talk about not measuring how our programs are working. I would thoroughly agree with you, with my background as a person who did private sector audits of programs.
I think what we need -- certainly we have been talking about this for probably 10 years, so I am not blaming any particular new government or previous government, but there just does not seem to be the political will to make the major changes and to do the measuring. It is so easy to go along with the status quo. As politicians we are advised by civil servants who are supposed to provide us with the expertise, and yet we are not getting the kinds of things I am talking about now and the kinds of things my colleagues of all parties here and out in the public want. We do not get that good advice. At least if cabinet members are getting it, it certainly has not trickled down to the regular representatives of the public, because I have never heard anybody, other than in lipservice, say that we need these major, major changes in delivery which France, West Germany and England -- I am very familiar with their skills councils -- have done and are continuing to do in criticizing themselves first.
How do you get it? You said once that you advised public servants, so how do we get that good advice? Where do you see the political will coming from? No one seems to be listening to the need.
Mr De Bever: I think the advice and the strategies are probably out there, but as you indicated, the political will and the obstacles to that are maybe very serious. You are talking about antagonizing some people -- I am talking about teachers and so on -- who probably do not want to be measured. Some of them do.
There have been proposals in the United States and other jurisdictions to make compensation much more responsive to performance. Of course the question is, how do you measure performance? The way it is right now, any teacher who has put in a fixed number of years is earning the same salary, regardless of what his or her performance is. So a lot of them are arguing, "Why should I take on more responsibility and get extra training so I can be more productive when I do not see anything showing up in my paycheque?"
I think those are the kinds of issues you are going to have to grapple with, and I am sure there are strategies out there that outline what you have to do to get there. The problem is that you are talking about some very major change and you are talking about antagonizing some people who are voters. It is like anything else. But I think it will ultimately boil down to a battle between two sets of voters, the educators and the parents. As educational resources become more scarce, I think the parents are going to more and more gain the upper hand and pressure the government at the provincial and local levels to shape up and do the kinds of things we are talking about here.
1640
The Chair: Your time is up.
Mrs Cunningham: Just one --
The Chair: No, I am afraid not. You are already over by four minutes.
Mrs Cunningham: Okay, if you had told me at four minutes -- we are not participating, in Ontario, in the national testing right now that is going on. That is one of the great concerns that we have --
Mr Sutherland: And we know why.
Mrs Cunningham: Thank you.
Mr Kwinter: On a point of order, Mr Chairman: I have had one of my colleagues, a member of the third party, ask me what Nomura is. I had just assumed that everybody would know and I would --
The Chair: If you would like to explain --
Mr Kwinter: One minute just to tell you what Nomura is.
Mr De Bever: Nomura is the largest Japanese brokerage company. I have nothing to do with the publicity that they garnered themselves over the last few weeks, but it is effectively, the largest brokerage company in the world.
Interjection: From Japan?
Mr De Bever: In Japan.
Mr Kwinter: They are Japanese, but they are the largest securities company in the world. Their capital base is as large as that of all of Canada. That gives you an idea.
Mr De Bever: The Japanese securities industry is not as well developed as the North American one. There have been certain problems in terms of how they treated one client versus another that have hit the press rather dramatically and caused the resignation of both the chairman and the vice-chairman.
The Chair: Thank you for returning and doing this presentation today.
We have some business to deal with as a committee. A problem has developed for tomorrow and I would like the clerk to describe what that problem is.
Clerk of the Committee: Because of the short time frame that we had for scheduling some of the witnesses, we were having difficulty scheduling some of the time slots to begin with. Since this morning, four of the groups that are scheduled for tomorrow have cancelled. We have been calling everyone else on our list trying to get other groups to take those time slots on short notice but have met with only limited success. I am just wondering if the committee is happy to have me keep trying to schedule as many groups as I can to try to come up with as much agenda as possible.
Mr Sterling: Which four have cancelled?
Clerk of the Committee: The 10:30 and 11 o'clock and the 3:30 and 4 o'clock have cancelled.
Mr Sterling: So all we have is the Ontario Nurses' Association at nine o'clock in the morning?
Clerk of the Committee: We have moved them to 10:30, and I believe my office has been able to get another group at 10 o'clock, so the committee will not have to meet at 9 am for only one group.
Mr Kwinter: The committee will meet at 10 o'clock in the morning?
Clerk of the Committee: Yes, but if you are happy with just having me work as much as I can to get other groups from the list --
Mr Sterling: Do you have somebody at 10 o'clock or are you trying to get somebody?
Clerk of the Committee: Yes, we do have someone confirmed at 10 o'clock.
Mr Christopherson: Why did four cancel?
Clerk of the Committee: I believe they committed to appointments last week believing they could make it. I think on reflection they just found they cannot make the time frames.
The Chair: Could we suggest to them that if they have no prepared statement but would like to come and make a short statement and have questions and have most of the time dealing with questions, that maybe would be a satisfactory alternative to them? This would of course have to be done with the okay of the committee.
Mrs Cunningham: Or come later on?
The Chair: Later on is not a possibility. We are booked pretty solid. There are very few spaces available later on.
Mr Sterling: I would suggest, Mr Chairman, if we are going to meet at 10 and at 10:30, that if you were able to have anybody else, you slot them in at 11 and 11:30 and that you do no more than two more.
Mr Sutherland: Let me just raise a point. I do not have my schedule right in front of me. Are we booked solid for Wednesday and Thursday?
Clerk of the Committee: Yes.
Mr Sutherland: Okay, because there has been some concern. It is unfortunate some of these groups could not come, because I have had a few people call me, some of the individuals who wanted to appear beforehand and because of the decision we made as a subcommittee that so many could not appear -- I was just wondering if there was any room to schedule any of them in. It does not appear possible?
Clerk of the Committee: The only gaps are in tomorrow's schedule.
The Chair: So the directive to the clerk would be to find whomever he can find and this committee will reconvene tomorrow at 10 o'clock? Thank you. We are adjourned until 10 o'clock.
Mr Jamison: Is that individuals or organizations?
The Chair: Whomever, I suppose.
Clerk of the Committee: From the individuals list as well?
The Chair: The individuals list as well?
Mr Sutherland: I would appreciate that. Given the fact that we cannot fill the time, we might as well hear from people.
The Chair: Okay, this committee is adjourned until 10 o'clock tomorrow morning. Thank you.
The committee adjourned at 1647.