CONTENTS
12 January 1993
Pre-budget consultations
Nomura Canada, Inc
Dr Leo J. de Bever, vice-president and chief economist
Bank of Nova Scotia
Aron Gampel, vice-president, economics
Royal Bank of Canada
Mark E. Chandler, assistant chief economist
Benoît Durocher, regional economist
WEFA Group
Ernest Stokes, managing director
Hon Floyd Laughren
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
*Chair / Président: Hansen, Ron (Lincoln ND)
Vice-Chair / Vice-Président: Sutherland, Kimble (Oxford ND)
Caplan, Elinor (Oriole L)
*Carr, Gary (Oakville South/-Sud PC)
Christopherson, David (Hamilton Centre ND)
Jamison, Norm (Norfolk ND)
*Kwinter, Monte (Wilson Heights L)
*Phillips, Gerry (Scarborough-Agincourt L)
*Sterling, Norman W. (Carleton PC)
*Ward, Brad (Brantford ND)
Ward, Margery (Don Mills ND)
Wiseman, Jim (Durham West/-Ouest ND)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Conway, Sean G. (Renfrew North/-Nord L) for Mrs Caplan
Coppen, Shirley, (Niagara South/-Sud ND) for Mr Sutherland
Harrington, Margaret H. (Niagara Falls ND) for Mr Wiseman
Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND) for Mr Christopherson
Mammoliti, George (Yorkview ND) for Mr Jamison
Swarbrick, Anne (Scarborough West/-Ouest ND) for Ms Ward
Also taking part / Autres participants et participantes:
Kaufman, Jay, Secretary of the Treasury Board
Clerk / Greffière: Grannum, Tonia
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 0942 in committee room 1.
PRE-BUDGET CONSULTATIONS
The Chair (Mr Ron Hansen): Good morning. We are going to have the hearings on the pre-budget consultations of the standing committee on finance and economic affairs. I would like to introduce our head table to our guests.
Mrs Beth Grahame: My name is Beth Grahame and I am the Hansard reporter with this committee.
Clerk of the Committee (Ms Tonia Grannum): I'm Tonia Grannum. I'm the committee clerk for this committee.
Ms Elaine Campbell: I'm Elaine Campbell from legislative research.
NOMURA CANADA, INC
The Chair: Good morning, Leo. Welcome to the committee. You're from Nomura Canada, Inc, vice-president and senior economist. You may begin. We've got until 10:15.
Dr Leo J. de Bever: What I propose to do is make a fairly brief set of comments and mainly talk to some graphs that are in the pre-filed evidence I've given you and then leave it up to you to give me a hard time.
The graph I'd like to start with is the one on the first page of the summary. It essentially recapitulates the situation thus far, which basically has shown a fairly shallow recession but also a very slow recovery compared to 1982-83.
I think there are a couple of reasons for that. One is that this time around, fiscal policy really wasn't a factor in terms of softening the blow, or not nearly as much as in 1982, and the reason for that is that the deficits that were run up during the last business cycle did not leave enough room to do much in the way of stimulating the economy.
The other factor that's clearly obvious, both in Canada and in the United States, is that during the last boom, because it lasted so long, labour costs got out of hand. So when it came time to cut costs when the recession hit, given the inflexibility of wages, employment got hit, which created a lot of confidence problems, a lot of unemployment and made the whole economy much more lethargic than it would have been otherwise.
The final factor is that both Canada and the US are involved in some sectors that have gotten a lot more international competition, and as a result we've gotten a number of sectors, raw-materials-related, but also sectors like autos, pulp and paper and steel, that just aren't growing the way they used to, because they're becoming relatively less important in the overall economy.
On the hopeful side, on the next page I show the cyclical behaviour of GDP per capita for Canada and the United States. It indicates that Canada tends to follow the US into recovery. It looks like the US is finally on something approximating a sustained recovery, and therefore I expect that Canada will follow suit. All the indications are that way. If I had been here a month ago, I would have been less convinced of that, but the year-end economic statistics look very hopeful and it's now a question of getting follow-through. I don't think we'll see 50,000 or 60,000 jobs being created every month, but I think even the employment picture will look a lot more respectable than it has over the last year.
Ontario, being the province most closely tied in with the US, probably will benefit from this US resurgence more than some of the other provinces, and that's to make up for the fact that we got hit much more than the other provinces. In fact, if you look at the bottom of page 3, it shows the relative performance of Canada and Ontario. During the 1986-88 period, we clearly outperformed Canada on a growth profile. In 1990 and 1991, we got hit much more than Canada in general, but also much more than the original estimates indicated. I suspect that by 1993-94 we will start to outperform Canada again.
At the bottom of page 2, I have an outlook for inflation. What you're going to see is producer price inflation, which is mostly goods exposed to the foreign sector. Those prices are going to rise fairly dramatically compared to last year. You're going to see inflation rates of 4% or 5% there. That does not mean that general inflation's going to pick up to that point.
There is going to be some rebound in CPI inflation. The main reason for that is that certain products have essentially been sold below cost during the recession, because people were clearing inventory and because they drastically needed to cover whatever part of their fixed costs they could. As the economy recovers, that is going to stop and you will find that prices are going to rise a bit. But inflation is not going to be a big issue.
Page 4 shows you the conundrum we face, and I've mentioned this before this committee before. If you look at the bottom graph, which shows you the share of wages to net domestic income, this looks like a workers' paradise. Clearly, I don't think the man on the street would agree with that, and the reason for that is the top picture. Profitability is so low that any prospects for employment growth are fairly limited. This is the problem we face.
Maybe you saw the article in the Globe and Mail yesterday talking about the pursuit of productivity being the reason for the 10% unemployment decade. I think that is putting the problem in the wrong perspective. You can look at productivity two ways. Productivity means you can produce more goods with the same number of people or you can produce the same number of goods with fewer people, and depending on what perspective you take, you end up with a different conclusion.
I fought this argument in 1982, and this is what is so amazing: how quickly we forget. I was called very naïve at the time for suggesting that producing more goods with the same number of people was the correct interpretation of the numbers. This time around I think you have the same problem, that people just refuse to believe that. In fact, I think you are going to get that result. You are going to get more hiring and a higher productivity, meaning a higher standard of living, once certain things get fixed. The main thing that needs to get fixed is profitability. No one is going to take on extra workers if there isn't any money to pay for them. The fact that profitability has sunk to such a low level is our main problem. In fact, you can see the close link between profits and employment on page 5.
Mr Norman W. Sterling (Carleton): Sorry. Can I just ask, on your profitability chart, what does the 8 mean, 8% of what?
Dr de Bever: That is the economy's profit margin, if you wish. The denominator is net domestic non-farm private income. What I'm trying to get rid of is some of the problems that confuse the picture, such as farming and taxes.
Mr Sterling: Is it 8% of investment?
Dr de Bever: It's 8% of net domestic income, effectively. A normal number for that is somewhere around 16. Over the long haul, that is what you would like to see for a decent profit performance. As you can see, it has dropped from that 16% to 8, so profits right now are roughly half the normal level, and that is a big part of our problem.
People on this committee are from different parts of the ideological spectrum, and I respect that, but you have to realize that at the end of the day no one is going to take on employees as charity cases. They have to be able to make money for whatever company employs them, and the situation right now is that there effectively are no profits: 8% is way too low to cover normal capital expenses.
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You can see on page 5 how the profitability and the employment growth tend to follow each other with a lag. You can see that with the exception of 1986, where we had some peculiar situations in the oil and gas industry, profits and employment tend to follow each other fairly quickly. That's positive because, as you can see, profits are heading up, in the sense that compared to a year ago profits look a lot better, and that would suggest that in 1993 employment ought to be heading up. But the main point there is that profits have to go up an awful lot before you have the kind of employment effect that will give you a drastic reduction in the unemployment rate.
Part of the reason that profits are not going up -- it's not just wages. We talk about wage costs being high, but a lot of companies are still suffering from fairly high interest costs as well. On page 6, I show you what Canadian and US interest rates are going to do. Given our inflation performance, I would have expected interest rates to drop a lot further than they have and I think there is where we see the residue from some of the developments last year on the constitutional front and the internal divisions, the worry about Quebec separating, and, forward-looking, the worries about any problems we might have after the federal election, because people are starting to worry about stability at the federal government level.
Long rates have that same problem. The spreads with the United States are extremely wide. This morning they are 130 basis points. When you look at the fact that we should have lower inflation than the United States, or, at the very minimum, only the same level of inflation, these spreads should be a lot tighter. I think there's a great deal of worry there that, financially, things in Canada are just not what they should be.
I should emphasize that Ontario is becoming a fairly big part of that picture. I am amazed at how the developments surrounding Ontario Hydro are getting international attention, how I get questions on things that a year or two ago no one would have asked me. People are worried that the deficits are not cyclical. I try to tell them that they are, and in doing so I often feel like a devil's advocate. I'm telling them, "Yes, there's a problem, but once the economy recovers, a large part of that deficit will disappear."
The Japanese and the European investors are very sceptical that that will in fact happen. They're hedging their bets. It's becoming very difficult to borrow money in Canadian dollars. Ontario just borrowed, but it borrowed in US dollars, because not only are foreigners worried about our fiscal policy but they worry that if we run into trouble we will devalue the currency and make them take the hit on the Canadian-dollar bonds they bought.
I'm trying to tell them also, on page 7, that the exchange rate outlook is for stability rather than further deterioration. I am basing that on the fact that our currency is fairly cyclical and that during recoveries it tends to be fairly good or behave fairly well. It is also true that the current level is probably more than fairly valued, meaning that at this level manufacturers should have no problem competing internationally. If they tell you otherwise, I think they are not doing their job.
The thing that really bothers investors abroad is what I show you on page 8, and that is the deteriorating trend in the current account balance, because ultimately your ability to pay back the money you borrow depends on your ability to earn income internationally, and that picture is not pretty. It shows that since 1985 there's been a continuous deterioration.
On the bottom of page 9, I show you how that breaks down. We run a surplus on merchandise trade, not quite as large a surplus as we used to, and that's in large part because the prices we get for some of our key exports are not what they used to be.
The bothersome aspect is that on services we run a structural deficit. A travel deficit is particularly worrisome, and it's related to the fact that we have a larger retired population having a tendency to spend a lot of time abroad. I think as the population ages that problem is only going to get worse.
The bottom line, which is services plus net investment income, shows another aspect of the problem; that is, because we've been borrowing to finance our current account over the last five or seven years, the interest payments keep on getting bigger and bigger, and that's hurting us. Every year we're going to have to earn more money on merchandise and service trade to make up for the fact that we're spending more money abroad on travel and on investment income servicing.
On page 10, another aspect of this whole discussion is illustrated. There is a lot of argument about the causes of this recession and the reason for its depth. One of the arguments usually trotted out is that free trade had a lot to do with it. I frankly don't think that is a tenable position. In fact, our surplus with the United States has maintained itself fairly well. Where we're having trouble is with non-US exports -- and the US is having the same problem -- in that we're not able to compete in some of the market that traditionally used to be ours and where we're now getting competition from emerging countries.
On page 11, I switch to Ontario. The graph on that page shows you the ratio of employment to population of working age. In other words, if you look at an economy from a basic availability of labour resources, you have to start with the proposition that it's the workers, with the knowledge they have and the equipment they work with, who generate the output. This is the ratio that shows you what proportion of those potential workers we employ. It doesn't mean we can employ 100%. Presumably not everybody between the ages of 15 and 75 is going to be in the workforce, either because they have worked long and often are retired or because they are in university or in high school or whatever.
The two graphs we show here, Ontario and Canada minus Ontario, indicate one reason why Ontario on average does better than the rest of Canada: We have more people producing goods and services proportional to the population we have. It also indicates that, contrary to the last recession, when the rest of Canada got hit harder in terms of losing jobs relative to population, this time around it's been Ontario that's been hit pretty hard.
The third aspect shows, though -- and this is something where memories are short -- that yes, times have been tough, but they are in part a consequence of the fact that they were incredibly good during the period 1986-89, and in terms of the economy being able to produce jobs, we're just back to where we were in the bottom of the last recession in terms of the ratio of people employed relative to the available population. It's good to keep that in mind, because sometimes we think, "Things are so awful, they've never been so awful, and they're never going to look up again." I don't believe that for one moment, and I want you to keep that in mind.
On page 12, I have the behaviour of employment in various sectors of the US economy. One point I want to leave you with is that employment in Ontario manufacturing is not going to be any higher in the year 2000 than it was in the year 1990, than it was in 1980. It's going to be the same number over that entire period because whatever gain we make in terms of creating more output is going to be eaten up by the fact that in that sector you're not going to need as many workers because productivity is rising. That does not mean that overall employment growth is not going to be rising. Employment is going to be shifting to services, which are much more labour-intensive, and our overall increase in standard of living is going to come from the fact that we are able to spend less resources purchasing goods from manufacturing and that leaves us more money to spend on services, where the shift in demand is occurring.
Manufacturing in Ontario right now is in a fairly weak position in a number of key aspects. I already mentioned pulp and paper. Steel is another one, and I think autos are going to be a liability. You may not think that is going to be an issue, but I would warn you that, long term, it is going to be an issue. Think about it this way: We have 20% of the productive capacity in automobile assembly. It's a declining market in the sense that it is not going to grow as fast as the overall economy. So instead of being a boon to Ontario, which it was in the 1960s and 1970s when it was an expanding sector, it now is becoming a drag on the economy. So we're going to have to find a way to lessen our reliance, I think, on automotive production.
Again, it has nothing to do with free trade. People are saying, "We're going to see a lot of these plants disappear to Mexico." But look at it from a continental point of view. The market is emerging in Mexico. Given some of the advantages in Mexico, why wouldn't you locate the next plant in Mexico rather than in a market that has a lot of excess capacity? I would warn you, though, that this Mexican thing is way overblown. The average productivity level of the average Mexican is just -- essentially, he is justifying his wage, at least at current conditions. So I don't believe for one moment that NAFTA is going to make all that much difference to us. In fact, if low wages were the driver for investment, then the Maritimes should have the highest rate of investment in Canada, and it clearly does not; it has the lowest rate. So there must be other factors that make up for it, and I think some of the basic amenities -- the infrastructure, the availability of skills and complementary services -- are very important there.
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I don't want to say much more, except that the last 12 months have taught me two lessons. One is that we don't know as much as we think we do, and I'm referring there to the fact that I think we were all surprised that the final estimates of what happened in 1991 were substantially different from what we thought had happened, and as a result a lot of the forecasts for 1992 were way off base. That's an occupational hazard for a guy like me. I'm not apologizing for that, but it's a fact of life.
The other thing is, and it's equally important, we don't seem to remember some of the things I think we do know with a certain degree of accuracy, and I'm referring there to this whole 1982 story. I was called a lot of names for suggesting that this was not the end of the world in 1982. Maybe you don't remember, but there were forecasts made in 1980 of 40% unemployment for secretaries out there by the year 1990. I was working at the time on something called the Ontario task force on microelectronics and I was called a lot of names by some people in the union movement who argued that microelectronics was going to cause mass unemployment, particularly in areas like secretarial, because everybody was going to be replaced by machines.
That just isn't going to happen. You're going to find an increase in the standard of living, if we are able to get around the fact that you have to create conditions where companies are in a position to hire people. You have to create profitability before you can start thinking about increasing employment, and that's I think the key dilemma you face trying to make our labour markets more flexible.
I'm not arguing that you should give employers a free ride and just make them earn any kind of profits that they would desire. What I'm suggesting is that we should create incentives to negotiate smarter contracts, contracts that do not force the employer against the wall when he's forced with a profit squeeze, that allow unions to retreat with grace or to take somewhat less in income in return for employment security. We just don't have those things in place, and I think that was a large reason the recession was as deep as it was and as many jobs were lost over the last two years.
That's it.
The Chair: Okay. Looking at page 12, from 1980 to 1992, it looks like stress tests I had at the doctor's about a month ago. We'll go on to Mr Phillips with the first question.
Mr Gerry Phillips (Scarborough-Agincourt): As usual, I really value your opinions. One question I'm interested in is, what implications are there for us in terms of borrowing our finances in foreign currencies? What's the upside to that, what are the advantages, and what are some of the things we should worry about? Just the $2.5 billion to $3 billion in borrowing today, I gather if the Canadian dollar strengthens it's good; if it weakens it's going to increase our costs. Are there any, as I said, long-term advantages or disadvantages to us?
The second part of it is whether you had any comment on the implications to the Canadian financial community on what looks to me like shifting the organizations that handle our debt financing to out of Canada and to a more global base.
Dr de Bever: I think both decisions are sort of forced on us, because it is not economically feasible in terms of interest cost to get these kinds of deals done within Canada, and if you're going to go abroad, then you have to have the Goldman Sachses of this world take a bigger role, because the Canadian houses just don't have the clout in London, Tokyo and New York to get these kinds of deals done.
On page 14 of this document I show you what has been happening to borrowing by both the federal and provincial governments, and it is very disconcerting that the proportion of borrowing done by the provinces abroad has risen to over half. It's now more than 60% of the total that they have to borrow. In addition, of course, it's very disconcerting that the total amount being borrowed by the provinces has gone up so much.
The problem with that from a cost point of view is that if you become what they say is a familiar name -- and Ontario has become very familiar lately to international investors -- the premium for being able to float additional debt goes up. We saw that. Ontario, I think, is borrowing money at 79 basis points over the US Treasury's. BC was able to do it for 48. The reason for that is that after a certain point, from a diversification point of view, people don't want the paper in their portfolios any more because they already have so much of it.
Then it becomes a chicken and egg. Your interest costs go up, making your deficit go up, which then makes your interest costs go up because people worry about your debt. It's a vicious cycle that can only become a virtuous cycle if somehow you manage to cut through that and get yourself lower interest rates and lower deficits. So there are serious implications.
Mr Phillips: Foreign currency, too, I'm interested in.
Dr de Bever: Oh, the foreign currency part. Sorry, I left that out. The cost of that depends on how you do it. I understand that a lot of this debt gets swapped back to Canadian dollars, meaning that the effective rate the government borrows at is not the US Treasury's plus 79 basis points; it's the US Treasury's plus 79 basis points plus whatever the cost is of swapping it back into Canadian dollars. You can do it a number of different ways. I don't know how Ontario did it in this case, but you can insulate yourself from the currency impact at a price. In other words, the price is effectively the differential in interest rates in Canada and the United States over a longer period of time. Some institutions do not swap back all of the coupon payments and all of the principal, because it's expensive; some of them do. It depends how you do it. If you do all the swapping -- 100% -- back to Canadian dollars, your cost goes up but you have security; you're insulated from movements in the Canadian dollar because that risk has been assumed by a foreign institution. If you don't do it, if you only swap part of it back, then you have exposure to currency movements. If the Canadian dollar goes down, then your cost of debt goes up. I don't know in this particular case how it was done. I understand that at least part of it was swapped.
Mr Phillips: Have I got another minute or two?
The Chair: You've got another 30 seconds.
Mr Phillips: One of the strengths of Ontario has been its financial community. I think we've thought we are a world-class financial community, and that's something we're going to try to develop. The signal that we have to go outside of Ontario to float something like this is concerning to me on the surface, that we're sending almost a global signal that we can't do it here in Ontario. Should I worry about that, or is it sort of irrelevant?
Dr de Bever: It's a fact of life, given the kind of amounts we're trying to get done. If you're talking about doing $500 million a couple of times a year, I think our institutions could do it, but you have to reach into an awful lot of pockets to get $3 billion done. The only people who have access to those kinds of pockets are the big international houses. In fact, there is a risk that has arisen over the last few years with the rise in provincial and federal deficits combined. The risk is that we become one of the currencies people like to take a shot at, which makes us more vulnerable over time. I think that is as much a risk as the fact that it's not getting done by Canadian institutions.
You shouldn't exaggerate that, because the leads are foreigners but there are Canadian houses that are comanagers. But the facts of life are that a large part of this particular issue was done in the United States and you need access to the US houses to do it. We just can't do it.
The Chair: Okay, we've got to go on to Mr Sterling.
Mr Sterling: I found your brief very interesting, as I did our conversation immediately preceding your brief. Putting those two together and some of the evidence we had yesterday in front of this committee -- we had someone tell us that we'd lost about 15% in the last part of the 1980s in terms of productivity vis-à-vis the United States. What would our loss of productivity be vis-à-vis other industrialized countries? You say the United States has difficulty competing offshore. I assume, therefore, that we have lost even more than 15% in the latter part of the 1980s in terms of productivity.
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Dr de Bever: It depends in what sectors and against what countries. I would say we probably have lost a lot of competitiveness vis-à-vis the Far East, although there are offsets. We lost productivity relative to Taiwan in electronics, but lately both Canada and the United States have been gaining it back. In my profession you need a lot of hardware to do the kind of analysis you do. The products that were used in the upgrades were all North American; they were Canadian and American. The products they replaced were Taiwanese. There's a message there: If we set our minds to it, we can create the products at the price and of a higher quality than some other nations can, so it's not something where you can say that it doesn't matter where you are, that you lose competitiveness.
We have lost competitiveness in sectors where we didn't pay attention. Steel is one of them where we lost competitiveness relative to the US and relative to the Far East because we just didn't do anything. We let the devaluation of the dollar in the early 1980s carry us. Profits didn't look too bad so we didn't do much in the way of upgrading our situation, and as a result we did lose competitiveness, measured in the way of unit labour cost.
I would say that our biggest problem is in two areas. One is the emerging nations in the Far East. The other problem really has nothing to do with productivity in terms of being able to produce so many tons of something per worker or per man-hour; it has to do with the fact that there's new supply coming on. You look at Inco, Falconbridge: People in the metals markets are having to compete much harder than they used to with supply from the former Soviet Union because, instead of funnelling their supply into their defence industry, they're now selling it internationally. So it's a different source of losing competitiveness.
Mr Sterling: One of the things that I think you said in your brief to us today, and what I've gathered, is that the low productivity in the latter part of the 1980s and the relatively high rise in wages and the loss of employment during this recession have resulted basically from those people who have fairly good-paying jobs really being too greedy. Is that a blunt statement of the fact?
Dr de Bever: That's basically it. The way I usually put it is that if all of us had taken 5% less in terms of earnings, we probably would have 3% or 4% more jobs than we have now; it's that easy. You would have the same wage bill but it would be distributed over more people, so on average more of us would have jobs at a somewhat lower rate, but we probably would make up for it in terms of not having the stress level that a lot of us work with because of fears that we might be next.
It's that kind of psychology. All of us are out for number one. You're not going to change that. But you have to create an environment where you induce people to be not quite as greedy, or at least leave themselves a way out when times turn bad and it becomes obvious that this greed, whatever you call it, was just not justified. That's what we're lacking.
Mr Sterling: I guess what you're saying, therefore, is that the labour policies of the governments of Ontario and Canada should be changed. We've just come through a very tumultuous year in terms of strengthening the power of organized labour, those who already have. So I would assume, from what you're saying, that the government has gone completely in the opposite direction in strengthening the hand of organized labour, those who already have, to get more. It would have been more logical in terms of what appears to be going to weaken their hand.
Dr de Bever: It all depends on what kinds of unions you're dealing with. It used to be that a good union leader was the guy who got you the biggest raise. I would maintain right now that he is probably one of the dumbest guys around. The smart union leader in the 1990s is the guy who gets you the most flexible union contract, the one that leaves you the flexibility to take when there is money for the taking but allows you a graceful retreat when times are bad. I think that's where the problem is.
Unions are only bad from the standpoint of the employer if the union fails to keep pace with what is happening in industries and is not willing to cooperate in terms of making employment patterns more flexible and shifting resources around so that the aggregate pie keeps on growing. I think that's where a lot of unions have made mistakes. Look at Algoma: Algoma never should have happened, because it's clearly an example of old-style union bargaining.
What you have to have in the future is much more flexibility, because it's going to be done one way or the other. The way I see it being done now in sectors where there isn't that flexibility is that people become unemployed and end up taking jobs elsewhere at a much lower level than they were earning before. The overall friction would have been a lot less if they had been smarter and started to throttle back when there was still time to save the corporations they were working for before.
Ms Margaret H. Harrington (Niagara Falls): I really appreciate your brief. Certainly I think it's worth a couple of weeks of a university course.
You made some interesting statements. I just want to follow up on a few of them. I did appreciate your saying that labour should be more flexible and treated with grace, a different attitude, the things you were just mentioning to Mr Sterling about cooperation, a different psychology and working together, because we can't have that unsustainable type of growth, I would agree with you, that we had during the 1980s. We need stability and partnership going ahead.
Dr de Bever: Right, but that has to have real content; it can't be just lipservice. That's where I often find things a little shallow. I would be a lot more comfortable if a lot more union leaders had a better understanding of the dynamics that drive their industries. I realize that sometimes the public persona is different from what they really understand and what's going on, but I think that's what a large part of the problem is.
Ms Harrington: They need the knowledge, and therefore they can then be partners with the managers, I would think, in looking ahead for the future of that company.
Dr de Bever: You have to have that. I think you get bad unions when you have bad management, and good unions I think can work with good management. That may seem like a platitude, but ultimately, if you compare Canadian and US unions in that regard, US unions sometimes tend to be a little bit more pragmatic than Canadian unions. There's a bit more ideology when I listen to the language that's being used here, and I think that's part of the reason that Canadian unemployment rates tend to be more cyclical than US unemployment rates.
Ms Harrington: You talked about the future and that things would not be healthy in the steel industry, that there would be less reliance on auto, and you talked about more service-type industry in the future. How can we help? What advice would you give to us as a government as to how to stimulate that, and can you explain what you mean or give some examples of services?
Dr de Bever: You see, this is the problem. Many of the services that are going to be produced over the next 10 years are just concepts now. I find that particularly in business services, where a lot of them have to do with communications, software and things of that sort. It's very hard to visualize what's happening there. You see companies developing to provide new services with, say, half a dozen people instead of the large industrial organizations we're used to.
The fact is that when you look at the service industry, it has been growing and it keeps on growing over time. Even though it's hard to visualize what the incremental services are going to be, my intuitive sense is that they're going to be revolving around monitoring business processes to make them more efficient; in other words, software to do industrial monitoring, to do financial monitoring, to do more automated banking, those kinds of things that facilitate other transactions. And they're going to be related to what is often called human capital formation, education types of activity. I think one of the growth industries in the 1990s is going to be education in all its forms, not just public education but also industrial education. That's where the service industry is going to be growing, because, as a number of people have already pointed out, knowledge is what's going to produce the products of tomorrow, whether they be goods or services. That's the direction we're heading in.
The trouble a lot of people have visualizing that is I think part of why they fear the future so much. You can relate to a ton of steel, it has a feel to it, whereas services are ephemeral; you can have trouble visualizing. People talk about restaurants, flipping hamburgers. That is not the service industry. There are a lot of good jobs in the service industry. In fact, right now there are probably more people involved in producing software than there are in producing cars. Those kinds of statistics are starting to amaze people, but that's the reality. That's the way our economy is shifting.
The Chair: We have to come to a close here, Leo. I think a lot of the remarks you have made are consistent with some of the other presenters we've had, so either you're reading some of their briefs or this is your research in this particular area.
Mr Gary Carr (Oakville South): Or they're all right.
The Chair: Well, I hope they're all right. It's a pleasure to have you here again this year, Leo, and maybe we'll see you again next year. Thanks for coming.
Dr de Bever: Good to be here. Thanks.
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BANK OF NOVA SCOTIA
The Chair: Our next presenters are the Bank of Nova Scotia. Would you come forward and identify yourselves for the purposes of Hansard. Welcome to the committee. You've got nothing but good news.
Mr Aron Gampel: Of course.
The Chair: I'm at the Royal Bank. I had the manager call the other day: He wants my charge card, to snip it up after Christmas. I've got to be good.
Mr Carr: Tell him about your big pay raise.
The Chair: Oh, yes.
Mr Gampel: My name is Aron Gampel, vice-president of economics, Scotiabank. I've brought along my colleague, David Rosenberg, senior economist at Scotiabank. I'd like to read into the record our submission to this committee.
Ontario economic prospects: Lower interest rates and currency depreciation are helping to stabilize the Ontario economy. However, a vigorous expansion is unlikely any time soon. Provincial output should rise by just over 2% in 1993 following an estimated 1% gain last year. This meagre two-year advance recoups less than half of the recession's damage.
Scotiabank's forecast for the province is much less optimistic than the projections contained in the Ontario Economic Outlook prepared by Treasurer Laughren last October. In our view, provincial growth will continue to lag the national average, as it has over the past four years. Additional forecast detail is provided in our Global Economic Outlook included with this submission.
Ontario will continue to struggle with widespread industry rationalization, which has reduced employment by 5.5% since early 1990. The bulk of these job losses has been permanent, reflecting the massive restructuring dominating this recession, and will take time to replace. Moreover, the shift to part-time hirings is likely to continue.
Employment conditions in the hard-hit manufacturing and construction sectors should improve. However, job creation is likely to be fairly limited in the public sector and a number of other service industries that dominate provincial employment. With businesses focusing on improving productivity and containing costs, a revival in output will be accomplished with only limited job gains. On balance, Ontario's unemployment rate will likely remain stuck in double-digit territory, only moderately below the 11.1% rate reported in December.
A slow-motion recovery and the prospect of further setbacks will keep the household sector cautious and financially conservative. There may be temporary spurts in spending, but a solid and sustained rebound is unlikely until record household debt burdens are brought down. This process is being frustrated by the ongoing assault on income from layoffs, wage compression, higher taxes and the rising cost of government services. The pervasive weakness in housing prices and a soft equity market performance are adding to the cautious tone in spending.
As a result, the consumer will contribute only modestly to the recovery under way. While sales should outpace inflation, as they did in 1992 for the first time in three years, competitive pressures on retail margins will remain intense.
However, there will be some good news for local merchants as cross-border shopping recedes from last year's high-water mark. The 10-cent US drop in the Canadian dollar since late 1991 has begun to reverse a five-year runup in buying excursions south of the border. More aggressive pricing, Sunday shopping, tougher border rules and the startup of numerous discount wholesalers also are helping to bolster domestic receipts.
Ontario producers will continue to benefit from the better sales environment in the United States. Domestic competitiveness has been boosted by significant exchange rate depreciation. Firms have moved to restore profitability by cutting costs and increasing productivity. Businesses also are benefiting from recent budget initiatives by the Ontario and federal governments to reduce the tax rate for manufacturers and provide for more favourable accelerated depreciation allowances.
Motor vehicle output should rise by over 4% in 1993 following a similar gain last year. Production of popular light trucks and vans, now accounting for one third of all North American vehicle sales, will lead the way and help lift domestic motor vehicle production above 2 million units for the first time on record. These vehicles make up over 40% of domestic assembly capacity.
Ontario housing starts are expected to climb by more than 10% to 63,000 units in 1993. Builders will receive support from low mortgage rates, strong international immigration and a firm supply-demand balance in single-family homes. Extending the RRSP tax holiday for house purchases should also help. Nevertheless, multiple-unit activity will continue to be undermined by the highest vacancy rate in two decades. The ongoing construction of government-assisted units in Ontario will underpin starts but also will aggravate the existing supply overhang.
While we expect Ontario to lead the country in housing construction this year, provincial starts will be 40% below the peak levels of the late 1980s. Weak confidence is offsetting much of the stimulus from reduced financing costs. Declining real estate prices have improved affordability for first-time buyers but have reduced the ability of existing home owners to trade up using accumulated home equity. Uncertain jobs prospects also are an impediment to a strong revival in sales.
Non-residential construction is confronted with a massive supply overhang. Vacancy rates have soared to record levels and are still climbing. The need to absorb an enormous number of empty offices, shopping centres and industrial plants left over from the building boom of the late 1980s will constrain activity through mid-decade.
The supply glut is acute in commercial real estate. Close to half of the 58 million square feet of vacant office space nationwide is situated in Toronto. Nearly 70% of the nine million square feet of new supply added to the downtown core from 1989 through 1991 has yet to be absorbed.
More than half of Canada's 140 million square feet of empty manufacturing facilities is in the Toronto region. Industrial land values and leasing rates in this area are down by 50% over the past three years. Industrial construction has continued to slide, with sagging permit values pointing to further slippage in 1993.
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Demographics remain favourable to growth, with provincial population increasing by almost 2% annually. Ontario is the destination of more than half of new arrivals, an inflow of roughly 100,000 last year. There also is evidence that the outflow of Ontario residents to other provinces which began in 1989 is diminishing. However, the challenge is to create jobs at a pace that will accommodate our expanding population.
With Canada likely to experience a low-inflation, slow- motion recovery in 1993, interest rates should continue to decline. However, the flexibility of monetary policy to provide durable relief has been undermined by the need to borrow $30 billion annually in overseas markets to fund a chronic current account deficit. This imbalance is dominated by interest payments on government debt. Sudden shifts in international investor sentiment have triggered recurring bouts of exchange rate and interest rate turbulence in recent months, repeatedly putting roadblocks in the way of recovery.
Budget implications: Lingering economic strains will continue to put enormous pressure on provincial finances. Despite widespread tax increases, the Treasurer already has indicated that revenues in fiscal year 1993-94 could fall more than $4 billion short of last year's projections. The shortfall could be even larger if Mr Laughren's optimistic growth projections fail to materialize. Deficits in the $10- to $15-billion range are unsustainable and put a heavy mortgage on future growth prospects in this province.
Ontario is falling into the same debt trap that snared Ottawa during the 1980s. According to last year's optimistic budget assumptions, sustained economic growth fails to bring spending into line with revenues for the foreseeable future. Deficits of more than $5 billion through mid-decade will push outstanding debt above $80 billion, twice the level prevailing at the start of the decade. Debt service costs, which absorb 12 cents of every revenue dollar, will increasingly dominate provincial spending even under a strong growth scenario.
Provincial finances will stay under intense pressure even if business activity accelerates more sharply than anticipated because spending has moved massively out of line with revenue-generating capacity. The government now spends $1.22 for every tax dollar raised, the highest of any province. Despite the lipservice paid to spending cuts, program expenditures continue to outpace inflation by a considerable margin.
Cuts in transfer payments from Ottawa have aggravated the fiscal imbalance and will probably continue to be a fact of life for provincial policymakers. However, excessive spending, not inadequate revenue growth, is the real problem. Federal transfer payments to Ontario have risen at a solid 6% annual rate since 1984.
The November 1992 Ontario Fiscal Outlook highlights the enormous requirements to upgrade an aging infrastructure, protect the environment and maintain public services. However, the government is in a fiscal straitjacket. Soaring debt service and social welfare costs are already forcing retrenchment in health care and education. The need for cutbacks in these areas has been amplified by the Treasurer's decision to insulate other priorities from recession damage. Expenditures on pay equity, non-profit housing, the employee wage protection program, the Jobs Ontario Training fund and legal aid are to rise by almost $700 million this year, absorbing most of the net gain from all revenue measures contained in last May's budget.
Ontario's fiscal challenge: Meaningful progress in reducing Ontario's deficit requires a multi-year freeze of total program spending. Attempts to pay for new programs and offset a softer revenue trend with tax increases are self-defeating, particularly in an increasingly challenging international environment. Recent tax relief for manufacturers at the federal and provincial levels is a welcome development. However, the shift in the tax burden to the household sector undercuts the potential for a rebound in sales activity.
Ontario cannot borrow its way back to prosperity. Ottawa's debt trap is a stark reminder of the need for a cautious borrowing strategy. Credit rating agencies already have flashed warning signals, downgrading Ontario's debt to double A from triple A. Sustaining or improving the province's rating requires meaningful restraint, not initiatives that obscure the underlying problem or move spending off-budget.
The cost of servicing a record debt load is already siphoning off the funds needed to improve competitiveness, shield business from adverse developments and meet pressing new environmental and infrastructural requirements. The average Ontario household now carries a net federal-provincial debt totalling $60,000; that is, $45,000 federal and $15,000 provincial. At an interest rate of 8.5%, households would have to pay more than $400 in taxes per month to service this liability even with no repayment of principal. This interest burden is slated to continue rising through mid-decade, notwithstanding optimistic official projections.
To prevent deteriorating finances from dominating the policy agenda through the 1990s, the government must move forcibly to streamline existing programs. Many programs will have to go through a major downsizing to make room for new requirements. Aging road and sewer networks are in urgent need of upgrading. Massive requirements are looming for environmental protection.
To get the economy back on track, the government must focus on improving competitiveness. At the most fundamental level, new initiatives that conflict with this goal should be shelved. Health care and education will absorb over one half of government spending for the foreseeable future. Debt service costs are growing rapidly. With about two thirds of spending already locked in, the decision to divert the remainder of expenditures to social services has worrisome, longer-term implications for productivity growth.
The government has little option but to bring spending commitments in line with available revenues. Fiscal reform is never easy, particularly in a weak economic environment, but there is simply no alternative. Borrowing allows temporary breathing room but only at the cost of much more painful adjustments later this decade.
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The Chair: Thank you. I think there's a lot of meat in this brief that you've had. Mr Carr has questions, to start off with the Conservatives.
Mr Carr: I really appreciate the brief. If the Treasurer could do nothing but read page 3 of your brief, I think he would get it in a nutshell. I don't know how you can say it any clearer.
Looking at the facts, the one that really intrigued me was down at the bottom where we look at the average household debt, and putting in the interest rates, they will have to pay more than $400 per month just to service this liability. As a married person with three children, it's a daunting thought to think of what we are leaving the children.
Having said that, looking at the provincial debt where it stands right now -- and the Treasurer is coming in this afternoon -- what would be your recommendations to the Treasurer with regard to our debt that now is probably in the double digits, 11, 12, 13 or whatever it is? What do you say to him about our deficit? What should he be doing with it?
Mr Gampel: In our view, one must start off with what the economy is expected to do over the next year. What we would like to see the government do is to put in place a series of programs, obviously, that will help the economy grow at a faster pace. As I read into the record, our forecast is that the economy will likely remain subpar through 1993 and far below the government's projections, which are close to 4% for provincial output.
A lot of the problems are not Ontario-specific. We are locked into a slow growth environment globally. At a time when North America is picking up some steam, economic conditions around the world are slowing sharply. Japan and Germany are now locked into very serious recessions which are dragging those regions into significant downturns.
What Mr Laughren can do, obviously, is to put in place a budget that will reinforce confidence among business people, households and investors. That's a daunting challenge at this particular time. Holding the line on spending, putting in a very, I think, longer-term view towards reducing the deficit significantly through major spending cutbacks is obviously a major cure for what ails this province. I think there is nothing magic that can be done. It requires significant cutbacks in spending to get the deficit down, because revenues alone are insufficient to do the job.
Mr Carr: I think we're winning the battle with the Treasurer very slowly. I remember when they came in and said they were going to spend $700 million to spend our way out of the recession. I remember watching the other side clap and cheer. In this quarter alone, we'll cut out more than that because of the fiscal pressures. I honestly, truly believe, as you know, the Premier made the decision to hold the deficit, and I don't think it's because he woke up and became a fiscal conservative. I think what happened was he was getting a lot of pressure, realizing that we are borrowing offshore. I also believe one of the reasons he made the trip to Japan was to alleviate some of the fears, not because he wanted a holiday there.
We've heard many economists come in here and talk about how our real concern is that our debt is owed to foreigners. That's a major problem because we don't only owe ourselves provincially; we owe foreigners. Would you like to comment -- I think you were here for the other presentation -- on what that means for us in Ontario to owe so much to the Japanese, the Americans, the West Germans and so on?
Mr Gampel: When we are borrowing so much at a time when domestic savings are obviously at a premium, we are increasingly tapping offshore markets. There is obviously a risk to that, because confidence is a fleeting factor that can change overnight, and certainly the weakness in the Canadian dollar has tended to reinforce the view that Canada may not be the best place to put money at this time.
There is a market out there for higher-quality government securities. Ontario will be able to float issues. The problem will be that we will have to do it at a higher cost to the province and we may have to do it in foreign currencies in order to encourage continued access to foreign funds. Essentially, what it means is that we will be able to borrow, but it's going to be at a higher cost. It's not so much that there is a buyer strike out there, it's just that they're demanding an extra premium. There may be a case that can be made that portfolios will become sated to the point that even a higher interest rate may not be sufficient to guarantee that we can float our issues, but we have not reached that point as of yet. Certainly, at a time when private sector credit demands are still quite weak, governments can go in and float issues. However, it is going to cost us more to do so.
Mr Sterling: When I was a member of cabinet in the early 1980s and was involved in the 1982-83 recession, when we were coming out of that recession there was a question as to whether or not the government of Ontario should really constrain expenditures in order to eliminate a deficit which was very, very low in terms of today's deficit figures. I think it was around $1 billion to $2 billion. The banks at that point in time said to us, "Look, don't be too stringent in terms of coming out of this recession" etc.
We're in a different time now. A lot of people who have been in front of this committee say we're taking on the federal problem, that the province of Ontario seems to be a mirror of the federal problem before. Prime Minister Mulroney came in in 1984, and from 1984 to 1992, he's increased his spending by 3% per year in operational matters and has not gone above inflation, while Ontario's increased its expenditures by around 10%. That's happened by various and nefarious means, but that's a fact. Yet it doesn't appear that Mulroney has control of the federal financial situation. It seems a conundrum or a problem where he's no further ahead now than he was in 1984.
What seems to be the lesson is that some government has to take some very, very dramatic action in order to deal with this. Quite frankly, I don't really believe this Treasurer or this government are going to do it, but I think perhaps the next government will do it, be it Liberals or Conservatives or whoever.
What kind of action can a Treasurer take to address this situation? As I say, I think the federal situation indicates that a slow, gradual approach is not going to work. There's got to be some kind of shock or there's got to be something that's very, very dramatic. Have you any suggestions at all as to what options a government has?
Mr Gampel: Again, as we've mentioned in our submission, obviously we have to go through all program spending and either put freezes in real terms or dramatically scale back spending in order to free up funds that can be used to revitalize industries, to help with infrastructural improvements, as opposed to running up very large deficits which in turn have been a major factor in now distorting our current account balance.
This is one of the problems we face, that right now, at a time when we have low inflation, our interest rates are very high. Lower interest rates would obviously go a long way towards improving economic conditions, improving affordability for home owners, for small businesses. One of the problems, of course, is that the massive runup in federal and provincial deficits and debt over the past decade has come to the point that our interest payments are essentially pushing these deficits out of control. Because of that, we now have a chronic current account deficit that requires us to borrow annually something in the order of $30 billion. That massive borrowing has put Canada into the big league of foreign borrowers -- we are now the number two net debtor in the world -- so we must now continue to offer very high real interest rates in order to attract funds into this country.
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I don't think there are any magic answers other than, at a time when economies are growing slowly and are not spinning off high revenues, even with massive tax hikes, and with the increase in the cost of government services, a major attack on spending has to be implemented in order to get the deficits down, to reduce the growing interest burden, to improve government fiscal finances, which in turn would improve our credit rating and help to alleviate the interest rate pressures which continue to exist. In short, cutbacks, streamlining of all programs, has to be the order, the rule rather than the exception.
Ms Anne Swarbrick (Scarborough West): I appreciate why Mr Carr was feeling particularly positive about your presentation, because I confess that of all the banks and all the traditional economists who've made presentations to us so far yesterday and today, yours is the first where I clearly feel some very definite politics behind the presentation. I'd like to make reference to a few parts.
For instance: "Despite widespread tax increases, the Treasurer already has indicated that revenues...could fall more than $4 billion." No reference there, nor in the small reference later, to the fact that the federal government took $4.5 billion out of our revenues last year alone, no reference to the fact that we in fact lowered business taxes.
You later say: "Spending has moved massively out of line with revenue-generating capacity. Despite the lipservice paid to spending cuts, program expenditures continue to outpace inflation by a considerable margin. Excessive spending -- not inadequate revenue growth -- is the real problem."
You make no reference to the fact that this government very much scrutinized expenditures last year, to the point that we managed to cut the growth in government expenditures in this province by $3 billion when we had only been in office for one and one half years. That's the largest cut in expenditure growth in this province in almost 40 years, and no credit given for that to a government of a year and a half of experience here.
You make no reference to the fact that the greatest spending problem isn't the spending problem by this government. It's the great increase in social assistance costs, and we haven't created that problem. That's the problem created by the reality that we're dealing with out there, the incredible recession that's gone deeper than any of you had expected it to and caused greater job loss than anybody had expected, for a longer period of time.
You give us no credit, no reference at all to the phenomenal -- and yesterday there were a number of presenters who made very positive reference to the phenomenal turnaround that our government has been able to make in the cost of health care in this province, costs that under past governments had been double-digit increases each year for at least the last 10 years. Ours is now down to 1.6% in annual increase, I believe.
So I guess my questions to you are, number one, could you please get rid of the politics behind your presentation and deal just with the facts and the problems that we're all facing?
My real problem to you is that you say, in answer to my colleague's questions from the other side, that you believe we should be introducing major spending cuts. First, could you try to be specific? It's very nice for people to come here with very generalized suggestions that we undergo spending cuts. Well, we've put in place one heck of a lot of spending cuts. I'd like to hear you be specific about which ones you think the Ontario public in fact could swallow.
Second, if it is non-profit housing, as Mr Carr suggests that you talk about, then I would like you to comment on what the impact of that would be. Because as we heard yesterday, the starts in non-profit housing have been where the increases have been in the housing starts in this province last year. It seems to me that what we've done there has been very positive in terms of helping to stimulate the economy, to start the minor bits of recovery that have already been starting.
My other specific questions would be, what are your comments in terms of some of the prescriptions that other people sitting in your chairs yesterday and today have talked about, the needs to put more money into infrastructure, the needs to put more money into training? What are your comments in terms of those kinds of prescriptions for improving our economy?
Mr Gampel: Let me just address one issue. On page 3 of my submission, we allude to the fact of cuts in transfer payments from Ottawa, which have been a factor, obviously.
Ms Swarbrick: I know you allude to it.
Mr Gampel: Well, it's in the record. Again, federal transfer payments to Ontario have risen at more than a 6% annual rate since 1984. That's a very healthy rate.
Ms Swarbrick: That kind of comment of course makes no reference to what the needs have been and what the demands have been, so I'd really appreciate it if you'd get to the heart of my questions. What exact spending cuts would you prescribe? What are your comments about infrastructure and training and those kinds of investments?
Mr Gampel: When we look at what the budgetary situation is and living within the government's means, we still have, even with the significant expenditure cuts -- I guess what I could do is forward to you our budget analysis after the spring budget; I did not bring it along today, but I can. In that, we went through some of the significant restraints you had mentioned. I would think expenditures are still out of line, because they're still growing faster than inflation. The only way in a soft-growth environment that we can get the deficit down --
Ms Swarbrick: Which expenditures? Social assistance, right?
Mr Gampel: That's one area that is growing very fast. Interest payments on the public debt as well --
Ms Swarbrick: Those two.
Mr Gampel: -- which continues to rise at a very, very healthy rate. I would say our best type of advice here is to set the stage as to what the economy is doing from a national and international perspective.
For economists at the Bank of Nova Scotia to provide you with detailed spending areas is not what I think my job should be at this particular date. What we would see is government working with business and the consumer in trying to revitalize economic activity and putting in place an environment that is friendlier to economic growth. In that case, we need to get interest rates down; we need to get government spending down to try to get the deficit under control and reduce the debt burden and inexorable rise in interest payments and taxes which that entails. One of the problems we face here is that the tax burden has risen so much that it is deflecting businesses and spending outside of this country. I think that is an issue that has to be addressed.
Again, as I mentioned in this brief and as I mentioned already, it is exceedingly difficult to make the choices as to what program, which line item has to be cut. What has to be done is obviously right across the board. Expenditures have to be brought down. If it has to be, for example, as you mentioned, social assisted housing, we're putting in more multiple-unit starts at a time when we have tremendous overcapacity in that particular sector. It is just adding to the glut and helping to drive down prices in the area.
Ms Swarbrick: Thank goodness they're helping to drive down prices.
Mr Gampel: I think the easiest way to do it is to cut spending across all sectors, whether it's in social spending, in government compensation -- it could be right across the board. I think that's the easiest way of cutting back, whether it's health, education, welfare, any industrial policies. Everything has to be cut at this particular time to try to get the economy into better balance.
The Chair: Mr Ward, I'm going to have to pass you. You're time is up. I'll put your name down for the next presenters and go on to Mr Kwinter.
Mr Monte Kwinter (Wilson Heights): Mr Gampel, I just wanted to draw your attention to a statement you made on the first page and a statement you made on the second page.
The one on the first page says, "Scotiabank's forecast for the province is much less optimistic than the projections contained in the Ontario Economic Outlook." By that, I assume you feel that their projections as to the economic growth are not going to be as buoyant as they think, and as a result of that their revenues are not going to be as buoyant as they think, because revenues are directly tied to the ability to tax the increased growth.
Then on the second page at the bottom of the second column you say, "The shortfall could be even larger if Mr Laughren's optimistic growth projections fail to materialize." So you've already, in your minds anyway, made the decision that they're not going to materialize, that they're optimistic, and you feel it's going to be a more subdued growth. That means it isn't a matter of whether his projections are going to materialize, that they're not going to materialize; which means that the deficit which is now, they admit, going to be at least $10 billion and could be $12 billion or $13 billion and maybe even higher -- what is going to be the direct impact of that happening? It isn't whether it's going to happen; it's going to happen. I'm asking if you feel that way.
Mr Gampel: Again, these are forecasts, so to be as definitive as you are might be difficult. Our best guess is that the economy will not grow as strongly as Mr Laughren has indicated, and therefore we would expect the budget deficit would likely come in over the projections that have been indicated.
At the bottom of page 2, we indicate that deficits in the $10-billion to $15-billion range are unsustainable and obviously are going to continue to put a heavy mortgage on our future growth prospects. I think that what we're left with is a continued budgetary imbalance that is massive by historical standards and will continue to aggravate our growing and chronic debt burden.
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What it means, of course, is that the Canadian dollar will remain vulnerable to periodic turbulence and interest rates probably cannot come down as much as we'd like to see them come down relative to a more subdued growth and inflation pace. Other than accounting changes, ie, moving various items off budget, which could give a one-time more optimistic view, I think we have to look at the total picture. It would be hard pressed in a slow growth environment, unless we have major expenditure cuts and tax increases, to see the deficits come down in the environment that we paint of relatively subdued activity.
A faster growth scenario would obviously benefit revenues. It would also mitigate some of the expenditures that are highly cyclical. But the bottom line is that it is hard pressed, in looking at total deficits, whether they are on budget or off budget, to see any significant improvement from current levels.
Mr Kwinter: If I could ask one more question, and I'm not asking this to be self-serving on your part, your projections are relatively sobering and relatively small-c conservative compared to some of the others we've heard. I'm just curious to know, historically, how have you guys done?
Mr Gampel: That is sort of a difficult question to ask economists. Before everyone sort of hurts themselves laughing, I think there are numerous ratings that are in various trade papers. The Conference Board of Canada does regular summaries of banks and investment houses on their forecasting records. If you go back, as we do on numerous occasions, and look over the past maybe five years, I think Scotiabank ranks very high in its forecasting accuracy. We have been consistently on the side of a much deeper economic downturn, and more importantly, a much slower snapback in economic activity from the recession lows. On that basis, we continue to be at the low end of the forecasting spectrum right now, and we will remain so until we see more consistent evidence that the economies in Canada and the United States are turning up at a faster pace.
Mr Sean G. Conway (Renfrew North): Don't be bashful. I think you've made an interesting and helpful presentation. I am not normally a member of the committee, but I was looking at some of the material yesterday and from what I can judge, people who have been here in previous years who have been spectacularly wrong returned this year even more aggressive than last time, so don't feel the need to be shy or self-deprecating on that account.
Many questions present themselves, but there is one very specific question, one sort of general question. I was home over Christmas and I was reading in the papers -- I think we should get specific. Now I'm the Treasurer of Ontario and you're my adviser in this current environment. I read in the paper early in this year, "Ontario judges to receive 6.7% increase," over I forget what term. Ontario provincial judges are among the best paid people in the province. You're my adviser on the basis of this kind of data that you presented.
Should I endorse that kind of expenditure increase in that particular category, for example? Would that be a place to say, "Good people undoubtedly underpaid for what they do," but 6.7% in this kind of climate, with this kind of red ink and given the leadership position here -- not on?
Mr Gampel: I would say that wage settlements significantly in excess of what the running rate of inflation is, for a government, are just unacceptable at this particular time. I think it's awfully difficult to constrain wages, whether it's because of pay equity or productivity gains or productivity levels. The bottom line is that given the seriousness of the budgetary situation in this province, wage restraint has to be the order of the day. These are very tough times, and therefore all measures which can reduce government expenditures at this time probably should be taken.
Mr Conway: But on the basis of what you submit here today, surely that's got to be the easiest decision I'm going to make as Treasurer.
Mr Gampel: Certainly there are many areas that restraint --
Mr Conway: Just forget all the rest. I'm talking about a specific example.
Mr Gampel: That is an example. Wages, because they comprise so much of government expenditures, obviously are a key area of restraint.
Mr Conway: Finally, can you help me? Yesterday, I left this committee and, incredibly, went home and watched the Panetta confirmation hearings in the Senate, and I just thought: "God, this debate is very similar. In this country, whether it was the Trudeau or Peterson Liberals or the Davis Tories or the godless New Democrats, they've given us this mountain of debt." But then you go to the United States and you see the Reaganite crowd. They were as bad as David Stockman said they would be 10 years ago. So now they've got this mountain of debt. Thanks to the Conservative right, we've got the same mess in both jurisdictions to some real extent.
There's good, old Ross Perot in Dallas saying now that this entire establishment is completely and congenitally incapable of doing the things you, sir, submit that we're going to have to do. I don't believe this is a matter of economics; I think it's really a matter of psychology and how we deal with some sense of public commitment on all sides to be responsible and disciplined and do the right thing. What advice do you have for us as politicians as to how we create a climate where individual citizens see that they have some responsibility to do something personal and particular, whether it's giving up twice-a-week garbage collection in Rosedale or whether it is the judges? I see the federal judges are going to take Mazankowski to court because they don't really think a minimum salary of $155,000 is enough.
We spend a lot of time talking about welfare abuse, by the way, at the other end, and I was ranting about that yesterday. How do we create an environment and a psychology where everyone, particularly the middle-class, opinion-making élite, who work in legislatures, banks and universities, who've had one hell of a lot to do with driving up some of these big-ticket items, is going to understand that we can't pay for it, and that means something to them personally, like, "Judge, you're a great person, but you're just going to have to live with zero per cent," or to university professor X, "You know, you're a great person doing wonderful work, but an average salary of 80 grand is enough for the moment." How do we do that?
Mr Gampel: Until governments essentially just take the bull by the horns and unilaterally do it -- I think as long as people feel they are getting some benefit from services that are provided and cannot really bear the true cost for those goods, well, then, they will continue to utilize them, and not in an economic sense. Right now, though, the tax burden that has risen so dramatically is probably rifling home what has to be done. With the marginal rates in Ontario back above 50%, with the gigantic increases in the cost of government services, with user fees or higher costs for water, for hydro, for licences, the message is being driven home.
Obviously, though, it's up to governments to essentially now buckle down and take the situation in hand. I don't think there is a general view out there that this is a problem related to any specific government or a problem that's related to any specific province or country. This is a problem that is facing the North American countries and is not going to go away. I don't know if we have to educate any more. I think people are getting educated every time they have to do their tax form and every time they have to go to the store.
Mr Conway: The latest public opinion research indicates --
The Chair: Mr Conway, I'm sorry. We're over right now.
Mr Conway: Just a final question: The latest public opinion research indicates that the public wants less taxes and more of the higher-cost services. What do we have to do to break that psychologically?
The Chair: Mr Conway, I'm sorry, we're over time. I was very patient. It was a good question you had and I ran over. Gentlemen, I'd like to thank you for appearing before this committee. The last question Mr Conway had was a real good one. I liked your answer too.
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ROYAL BANK OF CANADA
The Chair: The next group we have is the Royal Bank of Canada. Would you come forward, please, and introduce yourselves for the purposes of Hansard. I'd like to welcome you to the committee.
Mr Mark E. Chandler: Good morning. My name is Mark Chandler. I'm the assistant chief economist, Royal Bank economics. I will be giving you the presentation this morning that deals with the global outlook and the national outlook and the implications for our financial markets. I'll be followed up by Benoît Durocher. Benoît, do you want to introduce yourself?
Mr Benoît Durocher: As Mark said, my name is Benoît Durocher and I'm regional economist for the bank. As such, I'm responsible for the forecasting of economic conditions, growth and all the variables for all 10 Canadian provinces.
The Chair: Okay, carry on.
Mr Chandler: I'll get started right away then. I hope to keep my comments brief on the national outlook and then we'll turn right away to what we see for Ontario.
I'll start by saying that this is the third year in a row I've been before the committee and I'm certainly more optimistic than I have been in past years, although in some sense this reflects the depth of the problems in the past.
Last year, we called for a very poor 1992, with output growth of just 1.7%. In the event, growth was not too far off that figure, I'm sorry to say. We also warned that revenue growth would be lower than projected for the province and we recommended that discretionary expenditure growth should reflect this reality.
Some of the factors we cited at that time for this weak growth included weak growth elsewhere in the world and a high level of real interest rates. It included some adjustments to recent policies including freer trade, deregulation and privatization, adjustments to the GST and environmental legislation. We also had high debt levels at both the household and business level as well as at the government level. We also had a situation of low commodity prices, and internationally as well as in Canada a focus on price stability. Adjustments to all those factors suggested that we were going to have some structural things in place that would detract from any normal, cyclical acceleration in growth that might be forthcoming.
This year, many of the same factors are in play that might hold back a typically strong cyclical rebound. Nevertheless, we do have some factors in our favour that will yield moderate but not spectacular growth. Here are three factors that make us more optimistic this year:
The first is that the Canadian dollar has, for several years in the past, been trading at above its competitive value based on a long-run cost basis. It is now roughly in line with our cost structure after falling more than 10% in the past year. Interest rates are about 25 basis points below where they were a year ago.
As well, Canadians are beginning to adjust to an era of low inflation. As a result, we see some downward pressure on interest rates, particularly long-term interest rates, despite the expected acceleration in growth. Our forecast calls for a further reduction of some 50 to 75 basis points in long-term interest rates this year, while prime rates are expected to average at the current level of 7% throughout the year.
Finally, while economic activity is expected to languish in Germany and Japan, growth in the OECD countries overall will indeed pick up. The OECD is expecting growth of 2% in the first half of this year and 2.5% in the second half of this year. Of direct importance to Canada is the expected performance of the US economy. Here we see growth accelerating to 3.2% this year and 3.5% next year. This will afford Canada and Ontario some much-needed room to improve their external trade. Indeed, we see exports adding about 0.5% to growth for the nation as a whole this year.
These positive factors are expected to offset the drag on growth from some of the structural changes the nation is undergoing, structural changes that have had a particularly devastating impact on Ontario. On balance, we see the growth for the nation as a whole at 3.5% this year and 4.1% next year. As I said, we expect the prime rate to hold at its current level of about 7% throughout the end of this year and for the Canadian dollar to weaken initially before recovering to 79.5 cents by the end of this year.
I will now turn the discussion over to Benoît Durocher, our regional economist, to discuss the implications for growth and the fiscal arrangements in Ontario. Before I do so, I'll just explain some of the documents you have in front of you in your package. We have our latest Econoscope, which covers some of the issues involving Canada's international competitiveness, and some looseleaf papers, including Ontario's economic outlook, Canada's economic outlook and the US economic outlook. Those will have all the figures you will need.
Mr Durocher: I'd just like to start by picking up on a few of the elements Mark mentioned as they pertain to Ontario's economic environment in the coming years. Three of these elements we feel are very important in shaping the way Ontario will perform in the next few years.
The first one is a low-inflation environment. We're starting to think in terms of low inflation, whereas prior to that we always thought in terms of higher inflation. Now we've come to relatively low inflation or quasi-price stability which we feel will stay for the next few years given the stated monetary policy at the federal level, the Canada level.
Another factor that will shape Ontario's performance during the next few years is intensifying world trade, which should continue and intensify even more over the next few years. I'm not talking here only about NAFTA and the FTA, which of course make headline news every day, but also about the GATT negotiations. What GATT reflects is a worldwide will to increase or facilitate trade flows across countries or across national borders.
The third factor that will shape Ontario's performance or future and has already started to do so, along with the two previous factors as well, is indebtedness. I'm not talking only at government levels but at the firm level or business level and the household level as well.
Here are some examples of why Ontario has been shaken and will take a little while before it shakes off the detrimental effects of these three elements to its economy.
On inflation, for instance, we've seen very tangible effects of the reduction from a high-inflation environment to a low-inflation environment, particularly in the real estate sector where asset prices or asset values have fallen very quickly and have led to structural changes in that segment of the Ontario economy. It has done the same elsewhere in Canada, but for Ontario it's been particularly acute.
Intensifying world trade: What that did is reveal very quickly some of the shortcomings of Ontario's economy or some of the competitiveness or productivity problems we've been fueling or hiding, if you will, since the 1980s. Unit labour costs in manufacturing particularly have risen spectacularly in Canada and are now only starting to come down under the effect of a very hard or very austere monetary or anti-inflation policy.
By the way, this restructuring in manufacturing is very vivid in Ontario, where now the total number of jobs in manufacturing represents below 18% of total employment in the province. Just 15 to 17 years earlier, from 1975 to about 1981, manufacturing employment was around 24% to 25% of total employment in Ontario. So we see that there is a profound structural change in that very important segment of the Ontario economy.
The third factor is debt. Ontarians have gathered huge amounts of debt, as I said, at the household, business and government levels in the 1980s without that debt being supported by real tangible assets. In the 1980s, that led to a frenzy in consumption. What it has done in the late 1980s and early 1990s is lead to a restructuring in retailing, where we see that consumption has really slowed down. It's starting to pick up again, but it's slowed down.
Restoring wealth creation in this environment, which would be the main thrust of this forecast or this presentation before you, will not be easy, but in our view it should be the overriding concern or objective of public policy in Ontario and indeed in Canada.
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With this changing environment in mind, I'd like to give you a more detailed or sectoral view of the Ontario economy for the next few years. I'd also ask you, although this is not an apology, to bear in mind that these new economic conditions or the emergence of this new economy does not make life any easier for a forecaster, which is already a perilous profession. So instead of focusing on numbers as such, I'd like you rather to focus on the thrust or on the reasons of why we see Ontario, in a nutshell, growing a little slower than the Canadian economy as a whole.
For 1992, many people ask, "Was the recession over in 1992?" It sure felt like a recession. Employment still dropped. We've seen it particularly acutely in manufacturing. Employment dropped from 1.1% to 1.2% in 1992. That's a fairly sharp drop. So people were still asking, "Is the recession over in Ontario?"
There have been positive points in 1992 which should carry on into 1993 and 1994, for instance exports, which is a large part of the Ontario economy, particularly to the United States. Exports to September had increased by 12% in value. That was mainly in crude materials. To September the increase was 18%, but that was due to the devaluation of the Canadian dollar, since many of the commodities that were exported, or the base metals and all that, were denominated in US dollars. With the devaluation of the Canadian dollar, it of course increased the value of exports in Canadian dollars.
The residential construction industry: After three or four years of consecutive decline, residential construction finally showed some growth. In Ontario, as we said prior, the declining house prices or real estate prices made house construction, new home construction, more attractive, accompanied by a decline in interest rates and a sense that consumers are being more confident about the future of the economy that really buoyed residential construction in Ontario. Although the increase was not spectacular, it's still a step in the right direction.
Retail sales: Retail sales, again, dropped by over 3% in 1991. We had the impact of the GST, which Mark alluded to. We had the restructuring in manufacturing and the whole of the change from a high-inflation to a low-inflation environment. That led retail sales to drop in 1991. In 1992 they seem to have picked up. To October they were up by 1.4%, which is a good thing.
Overall for 1992, we feel real gross domestic product in Ontario averaged slightly above 1% in real terms.
There are restraining factors to this growth. We are not seeing the same kind or the same type of growth we've seen in the previous recoveries, particularly in Ontario, because of the changing environment we alluded to earlier.
One of these restraining factors obviously is restructuring. Restructuring, or the decline, if you will, of labour to produce output, in the short term could be a restraining factor, but for longer-term growth, productivity increases are essential to maintain or sustain longer-term growth. So even though employment, say, in manufacturing has decreased, we feel unit labour costs in Ontario have been decreasing as well or reflect an increase in productivity.
Another thing that has happened in Canada throughout 1992 is the surge or the rise in investment in machinery and equipment. To us, that is not of course a restraining factor, but it goes hand in hand with productivity increases. As we invest in our productive capacity in the most efficient technologies or the most efficient processes available, then this bodes well for future growth, but it takes time before this productivity is indeed instilled in the economy.
Consumer debt: We tend to think that consumer debt is actually declining in all of Canada, in Ontario and Quebec, for instance, but our estimates show that consumer debt, or household debt, is actually increasing as a share of personal disposable income. The rate of increase has slowed down, but due probably to higher taxes, the ratio of debt to personal disposable income is still increasing, but slowing down, which is the good news. The deflation of asset values is also a problem, since the ratio of debt to net worth will be affected by that, obviously.
In non-residential construction, particularly in the industrial and commercial or office space side, that's another restraining factor. There's enough supply on the market presently to last for at least the next two years without any new major projects being started. So the bulk of non-residential investment is actually taking place in machinery and equipment.
Another restraining factor, of course, would be public finances. With high taxes, a high deficit and high debt, which means higher taxes in the future, that also constitutes a restraining factor. We talked to the effect of higher taxes on slower personal disposable income growth.
Also, overlapping that is the uncertainty of the policy environment. We're not quite sure at this moment that the right policies are in place to foster sound and sustainable growth in Ontario.
Growth factors: I talked at length a little earlier about productivity. Labour productivity is on the rise and we still have to wait and see if wage gains will wipe out the effects of productivity gains, but we feel that the time is ripe for notable productivity increases in Ontario.
With the lower dollar, the higher productivity, with the US recovery, Ontario exports almost 80% of its total merchandise exports to the United States. We feel that the exports sector will be a very positive factor on Ontario's economy for the next few years, and as I said earlier, investment in machinery and equipment bodes well for the longer-term or sustainable growth.
Residential construction, finally, one of the last positive factors we've identified, should also continue in its increase, supported to an extent by socially assisted housing, but still the overriding or the fundamental conditions or criteria -- the real estate prices, declining interest rates, a slowly improving employment situation or picture -- should boost demand for housing.
Sectorally, how does this translate in Ontario? The transportation equipment, which is central to Ontario, accounts for almost 30% of total manufacturing shipments in Ontario. While the outlook is generally positive, the auto assembly sector is still competitive compared to other firms or other plants elsewhere in the world, but it is coming under increasing fire to improve that competitive edge and we must not lose it if we want the outlook to remain generally positive for the longer run.
The transportation equipment segment has suffered from international competition or from rationalization, from restructuring as well, and there are closures that have been announced, but there have also been investments that have been announced in that sector, particularly in the auto assembly.
In the auto parts segment, the jury's still out on that sector. That segment seems particularly vulnerable to outside competition, so we have to wait and see what will happen with the parts segment. There's been already a lot of rationalization in the auto parts manufacturing sector and we feel that most of that rationalization has already taken place and it should be in better shape now to benefit from the emerging recovery.
Retailing in Ontario: There have been large downsizes. There have been a lot of bankruptcies in retailing due to the consumption frenzy of the 1980s and to the sharp downturn in consumption. Retailing seems to be changing. It changes not only in size but also in the way it gives out retailing services. We see the emergence of warehouse-type stores, which seem to appeal to consumers who are more sensitive to the prices they pay for the goods they buy, and warehouse-type stores seem to be addressing that need particularly. So we might see a shift there from exclusive stores to more warehouse-type stores or more discount-type stores. That is also tangible proof of the emphasis that industries in general will be putting on competitiveness.
Construction I've alluded to already. It should increase because of the lower interest rates, the low house prices and the government supporting subsidized housing. The non-residential side should see a major stop, if you will. It's already seeing it because of the overcapacity in that segment.
As far as utilities go, and particularly Ontario Hydro, it seems the government is taking the right steps to stop the problem from getting even bigger. It's already a problem, but they've cancelled the Manitoba deal, which would have increased the energy overcapacity, energy that's not needed in Ontario right now. They still, to my knowledge, have a moratorium on nuclear power plants and further costly developments in that segment, so that seems to be doing very well.
Overall we see moderate growth compared to previous recoveries in Ontario. If I'm not mistaken, we're seeing 3.5% growth in 1993 and 4% or 3.9% growth in 1994. So it should be slightly under the national average, which is quite unusual for Ontario, but as I was saying, these restructuring elements or this emerging new economy is really hitting Ontario the hardest. So on balance, Ontario will still represent 40% of Canadian GDP by the end of the forecast period.
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I avoided mining. I'm sorry about that. Mining in 1992 had I guess a so-so year. If it weren't for the declining value of the Canadian dollar, the value of exports or the value of shipments in mining, it might not have posted an increase, but for 1993 we already know about closures or reductions in Inco and Falconbridge, so in volume terms 1993 should remain around stagnant and should be neutral as a contributor to Ontario growth.
Where does that take us towards public finances? I'll turn my attention to public finances. Where are we now and how did we get there? I was listening earlier on to comments made by someone on the panel here and they were saying that yes, expenditure growth was tremendously high during the latter part of the 1980s. I'd have to agree with that. Public expenditure growth in Ontario in the late 1980s was increasingly generous without concern about the supportive wealth we were generating to support that type of public expenditure growth. We actually based our expenditure growth on the wealth illusion of the 1980s. We thought we were creating wealth. Obviously, I think we didn't create as much wealth as we thought we did.
Of course on the revenue side there were problems of downward pressure because of the recession, and there was also downward pressure on the public revenues or government revenues because of the changing economy. We're in a low-inflation environment now. We have to face that and that wages will not automatically increase by 6% or 7% and automatically increase government revenues by 7% or 8% to 10%. Those times are gone now.
It's the same thing with retail sales tax or sales tax in Ontario. Again, the low-inflation economy will not yield high-revenue growth during the next few years. So we're stuck, it seems, with a high structural deficit for the next coming years. This was correctly alluded to in the government's Ontario Fiscal Outlook. Even if revenues were to increase by 10% it still wouldn't reduce significantly, or it wouldn't wipe out anyway, the high structural deficit, so we're still keeping or we're still adding to total debt.
What does that do when we add to total debt faster than we actually create wealth or faster than the GDP grows? The debt services payments continue to increase, and they increase as a share of total revenue, they increase as a share of GDP. What we're actually doing is that the increasing debt service costs are cutting back on much-needed public policy interventions such as in education, in health and in infrastructure and in this new concern that governments seem to be having which is the environment.
We've looked at environment spending. Environment spending, rather than to increase, has declined from very low levels in 1975-76 to the current levels now: It's under 1% of total expenditures or just about. Debt service is acting like a straitjacket. It forces the government or it constrains the government in its spending on much-needed initiatives.
What are the solutions to this public finances dilemma? Unfortunately, and I think government realizes this, there are no quick fixes. You cannot, first of all, cut back on expenditures savagely without taking a close look at what the impact would be on the economy, just as you can't increase revenues very fiercely without judging or without jeopardizing this recovery we're in right now.
The government will have to analyse, first of all, cuts in the global scheme of things and also revenue increases, maybe think about user-pay mechanisms. We might talk about that a little later on. What we've been doing or what public policy should be doing, in our view, is to focus on wealth creation, because wealth creation is eventually what will support expenditures and what will bring revenue to the provincial coffers.
One of the objectives of fiscal policy is to redistribute wealth, and that's one worthy objective of the tax system in Canada. But the first condition to redistribute wealth is to create wealth, and so far, in our view, public policy has failed to address this concern adequately. In fact we have to borrow to give us the illusion that we are indeed redistributing wealth. Of course we're not; we're borrowing it, so sooner or later we'll have to pay it back.
With this in mind, I'll turn it back to Mark for summing up.
Mr Chandler: Just to summarize, we were appropriately cautious about growth last year and we think we're appropriately more upbeat about growth this year. We also recognize that this acceleration in growth will do little to dramatically improve the labour situation in the province or that it will ease the pressures much on the twin problems of weak revenue growth and strong requirements for social services spending.
In this environment there must be increased focus on improving the efficiency of delivering government services whether through the increased use of technology, a sea change in the delivery of the programs or appropriate pricing and signalling mechanisms. These are essentially microeconomic questions and this goes back to Benoît's point that there are no quick fixes.
The macroeconomic question of whether to spend more to get us out of recession has already essentially, we feel, been answered for us. We simply do not have the kind of room to manoeuvre that would afford us this kind of luxury. Our net external debt as a country is more than troublesome at 38% of GDP. It is an albatross on our future standard of living and prevents us from providing the current level of services to future generations. With that, I'll turn it over.
The Chair: I'm going to start off with Ms Harrington.
Ms Harrington: I like your positive approach and I like your phrase "consumption frenzy of the 1980s." You said Canada is going to be producing more, 3.5% this coming year. I'd like to ask your views on a particular situation, that is, the Hamilton-Niagara region.
Other people have told us we are going to have to rely less, obviously, on steel and auto. In our region we have a very well trained workforce. We're losing our industrial base we've had for a long time. We have a very good location for US distribution. What can you foresee? Other people have told us that the service industry is going to be much greater in the future. What might you predict for the future for our region?
Mr Chandler: I'll start just by answering a little bit from a national perspective of what we see and how that might relate to your region. Clearly, one of the things we're hoping for this year and counting on in terms of the recovery is exports, and particularly exports to the US. The rest of the world will not be performing extremely strong.
As Benoît alluded to, 88% of Ontario's merchandise exports go to the US. A lot of them go through the Golden Horseshoe region. I think if you're looking for some areas where you will see growth in the long term, structural changes suggest more service employment, but in the short term, in terms of Ontario's near-term recovery, a lot of that's going to come through manufacturing exports. The manufacturing sectors in the near term may be those that turn around the quickest, those that have experienced the most pain in the past as well.
Ms Harrington: Can you see, say, foreign investment coming into our area to set up small manufacturing?
Mr Chandler: I think we've already seen it in terms of some of the auto investments that have been announced in the Windsor area and the Hamilton area in particular. I'm sorry, I don't know. I'm not aware of any projects, but there have been some new investments announced in the auto assembly area that are encouraging, because it suggests Ontario can recapture a manufacturing competitiveness. It's just going to be tough work.
Mr Durocher: I would like to follow up on Mark's comments. Indeed, for your particular region, we have to think more globally, not only in terms of selling to other global markets but also that there is global competition out there and that Hamilton-Niagara -- the way it traditionally manufactured steel or steel products may not be the most efficient way in light of global competition.
We're seeing the process provincially, we're seeing it in manufacturing, we're seeing it in Canada, where we talked about declining labour and the use of more advanced technology. That is all part of the solution. It's not overnight. This process of restructuring didn't happen in 1990 in the second quarter when we went into recession. This restructuring process in manufacturing started way back in 1989, possibly 1988.
What we're seeing is that this global competition is hurting, so we have to think -- I'm not much aware of the problems of the Hamilton-Niagara steel complex -- but is it worth producing, say, 100 million pounds of steel rail when there are no railways being built and actually there are rail lines being cut? Is that the product you want to do? If so, where is it needed? We have to answer to a need. This is basic economics. How can we do it cost-efficiently or cost-competitively?
Japanese and Korean manufacturers are making steel much more competitively than we are. They've been accused of dumping or stuff like that by other governments, even our own, but the fact of the matter is they're being aggressive in our markets and we have to do that. To do it requires labour training or manpower retraining.
Obviously, displaced workers in the steel industry cannot find a job in, say, mini-mills, which are more automated, which use more information technology. Obviously, this displaced worker will have to have training in that area. I think maybe governments are at fault for not providing the correct incentives but, as I pointed out earlier, they may not have the means to provide these incentives, these moneys, for retraining. Debt service costs are actually preventing them from doing so.
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The Chair: Okay, I'm going to have to go on to Mr Kwinter.
Mr Kwinter: Mr Durocher, I found some of your comments interesting and a bit of a conundrum; not a conundrum in what you're saying but in the reality of the situation. You said that last year one of the bright spots in our economy in Ontario was that we had a 12% increase in exports, most of that US. In your projections for 1993, you again see American exports as being one of the bright spots in the economy.
When you consider that over 30% of our gross domestic product is based on exports, how do you square that with the fact that every time anyone, particularly the government, mentions the recession, it is coupled with free trade, when in fact one of the bright spots in our economy last year was the fact that our US exports grew so dramatically, given that the total growth in the economy was only 1.2%?
Mr Durocher: What can I say? We feel the FTA has been beneficial to the Canadian economy overall and to the Ontario economy in particular, but it's not the only factor affecting the Canadian economy. The FTA is not, for instance, instantaneous in its effects. In some industries and for some goods the tariff reduction period extends out to 10 years, so it's not instantaneous, for one thing. The FTA has opened up markets for some goods in the United States, but conversely, it has opened up the Canadian market to goods for exporters in the United States.
I think the FTA on balance has had a generally positive effect, but the FTA couldn't counterbalance by itself the problems we ran ourselves into in the 1980s with productivity declines and horrendous unit-labour cost increases, which have been detrimental to the competitiveness of the Canadian economy. If we've been so bad competitively that we actually couldn't overcome our reduction in tariff barriers or that the reduction in tariff barriers actually exacerbated that competitiveness loss, then it's our fault. We let it go; we were veiled by the wall of protectionism. Now that the wall is down, it's a new game. We're in a world event here.
To answer your question, I think the FTA is generally positive or favourable for the Ontario economy, but then again it does not overcome all the other structural problems the Ontario economy has run itself into. So it's a positive contributor to growth.
Mr Conway: One of the interesting things about these submissions is the extent to which governments have behaved with a credit-card mentality, "Consume now and pay later," and the whole psychology that the people around to pay will be the ones to consume and all of that sort of stuff. I saw something not too long ago about the level of personal consumer debt. It was staggering. I couldn't believe it. I can't believe it, which leads me to my question.
These things apparently are an individual and a collective evil, if for no other reason than that they are just inducing a whole bunch of people -- a lot of people individually and, maybe more importantly, the community as a collective -- to be grossly ill-disciplined and irresponsible in terms of the way they behave. It is to such an extent that good bankers like you come and say: "Hey, this is getting a little out of hand. You can't keep doing this."
Should we start to take, individually and collectively -- let's start with the individual. These things are really bad, aren't they, apparently, in practice though not in principle?
Mr Chandler: I think you're asking a couple of questions there. First of all, that's a TD credit card, so if you're going to stop, that would be a good place to start.
Mr Conway: Apparently, they're enormously attractive profit centres for all of you.
Mr Chandler: That's not true. If you look at some of the breakdowns in the bank statements, it's not the area where we make most of our money. But in answer to your question, it's talking about whether you restrict availability of credit to the nation's individuals. Is that the sort of thing you'd want to do in a democracy?
First of all, we do not say that you cannot buy beer, alcohol or wine in Ontario. Instead, what we do is make it available. We also tax it very heavily, but we make it available and we put regulations around it that will control its use. Similarly, I think what you see in the financial institutions is that you give financial institutions rights to do things and at the same time you regulate them through things like the Bank Act.
Mr Conway: But I don't think we --
The Chair: Sorry to interrupt you, Mr Conway. Mr Carr.
Mr Carr: You can have a bit of my time, if you want.
The Chair: You want to give him your time?
Mr Conway: I'll conclude with sort of a supplementary. Of course they're a good thing. I think they're a wonderful thing. But apparently there's an awful lot of very bad behaviour out there. My friends who are in the banks, my friends who attend at bankruptcy court -- I was talking to a friend of mine, a lawyer, who does a fair bit of work around bankruptcy court, and he said it's a scandal, it's a perfect scandal. These financial institutions, he tells me, will give anybody, no matter how profligate -- no matter how bad your past is, apparently, they'll give you another one.
I want to reduce this to the micro level. We talk about the macro, and it's very useful, but I'm just a poor old practical politician and I'm a bit of a Cassandra. I think I know the medicine we have to start administering and I just know how pleased the judges are going to be to be told: "I know it's tough, but $130,000 or $160,000 -- you're just going to have to make do. And you may take us to court and all the rest of it."
You people are coming in here and making very compelling arguments about the way in which we, as governments, are living beyond our means. I guess I just ask a trifling little question. Maybe it starts at home. Maybe the financial institutions need more encouragement from government and the bankruptcy courts to start to show a little more discipline and responsibility about the way these things are issued and the way in which poor performance is not being dealt with.
Mr Chandler: I think you're simplifying the issues a lot.
Mr Conway: Of course I am.
Mr Chandler: The banks have some blame in this as well, but I would argue that one of the reasons that personal debt to net worth increased a lot in the late 1980s was, of course, that net worth fell. A lot of mortgages were lent on the value of housing. The value of housing took an unprecedented decline in Ontario and people lost their homes. In part, some of the fault is that people in the banks as well as people in the economy as a whole didn't expect us to move from a level of inflation of 5% and asset inflation of much more than that, if you look at things like house prices, to, instead, a level of inflation generally of 2% and asset deflation in a lot of categories. That's where the problems in debt occurred.
And it's a wrenching, heartbreaking adjustment to move to that low-inflation environment. Now people do not expect their homes, as they did in 1988 and 1989, to increase by 10% or 20% a year, and they will not be granted mortgages on the basis of homes increasing 10% to 20% a year. Rather, we have, we hope, adjusted to a low-inflation environment, and the credit approval process will reflect that.
The Chair: I'd like to thank you gentlemen for appearing before this committee.
Mr Sterling: Mr Chair, could I just add --
The Chair: Have you got a statement or a question?
Mr Sterling: I want to ask a question.
The Chair: I'm sorry, but Mr Carr gave up your time. We have Mr Stokes back there, patiently waiting to come before this committee.
Mr Sterling: This question will take a minute. We haven't had an opportunity to ask a question. We gave some of our time, but we didn't expect the --
The Chair: He took all your time. Look, he's got his card out. He's buying lunch today, Norm.
Mr Conway: No, I'm not. Don't you know there's no free lunch? That's what this is all about.
The Chair: It wouldn't be free. You'll pay for it when you get your statement. I'm sorry, we're going to have to carry on. Norm, you can see the gentleman out in the corridor if you've got a very important question.
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WEFA GROUP
The Chair: Our next presenter is Mr Ernie Stokes. Would you come forward. It's the Wefa Group. What was that called before? Is that a new name for the group?
Mr Ernest Stokes: No, it's the same name.
The Chair: Okay. It was someone else who had some change in name. We have until 12:30, but could you leave some time at the end? As you can see, some of the committee members are very eager to ask questions, so make sure there's enough time left that Norm doesn't miss out.
Mr Stokes: Obviously everybody's getting ready to go for lunch, so I'll try to keep it brief.
Our forecast for the Ontario economy and the Canadian economy is probably not a lot different from most forecasts. For 1993, we look for growth around 3%; in Ontario around 3% to 3.5%. Inflation is going to stay low, around 2.5%. Interest rates have come down and we think they're going to stay down, and we think the dollar is going to average around 78 cents.
Over the medium term, we expect growth to improve, to stay in the 3% to 4% range in Ontario and Canada; inflation to remain low in the 1.5% to 2.5% range; interest rates generally to trend down over the next five or six years, and the Canadian dollar to stay pretty well where it is and maybe depreciate a bit.
That's all nice, but what I want to really talk about here are some key issues behind the forecast which have policy implications. Everybody here is getting impatient about the economy recovering. I just want to talk a little bit about why we think it's going to have difficulty and why the recovery is going to be slow.
I'll walk through this handout. I'm on page 2 now. What I want to look at are some of the forecast assumptions and discuss those, and the policy implications associated with those.
When we do forecasts, what we look at are two main sets of factors. One set is what's going on in the rest of the world; Canada is a small, open economy and what happens in the rest of the world is very important to us. The second set of issues is really what governments are doing, what domestic policy is doing. Those are the two main issues that drive our forecast.
On the external environment side, the US is our most important trading partner, so I'll concentrate on it. What we look at there is what's happening to growth. The reason we look at growth is because we export things and that's important to us. Stronger growth in the US means stronger growth in Canada because of exports. We tend to import things from the US, so if the inflation rate in the US is high, we'll import their inflation; the prices of their goods will be going up.
Interest rates: Everybody knows that capital markets are global these days; you've heard that over and over again. That means if interest rates are high in the US, it's difficult for us to have low interest rates.
What we see for the US economy is probably what everybody else is saying: a fairly slow recovery, continued low inflation and interest rates pretty well staying low and maybe gradually rising over the next few years. That's fairly non-controversial.
One thing I'd like to bring out, though, and point out to people is that everybody's sitting around waiting for the US to pull us out of what I call stagnation. That's the key policy response so far, just to wait for the US to do something. I think that's a mistake. One reason I think that's a mistake is what the previous speaker was talking about. We had export growth of 12% in Ontario last year, and in Canada, we expect to have export growth of 8%. Well, that's 3% above average growth. If you look back 20 years, we're growing at above-average export growth. So if you're waiting for the US economy to pick up and increase its export growth, I think you're wasting your time. We can get a little bit more growth through that route, but not a lot.
So 1992 was not a poor year for trade; it was a good year for trade from a historical perspective. So what's wrong? Well, what is wrong is that we're not adding value to our exports. One of the things that's happening is that our economy grew 1% last year in Canada and imports grew 6%. What that means is that we're not competitive. When we export things, we measure the total value of the export, but how much does Canada contribute to that? We got 8% real export growth in 1992 but no growth. What happened? The problem is that when we export things, we don't contribute much to those exports.
We got lucky last year on the auto side. We happen to produce trucks in Ontario, and trucks were very popular in the US. In 1993, trucks will probably hold their own, but there won't be any increase, so we don't expect autos to do well. I wouldn't look for strong growth. The main reason is simply that we're not competitive. When an auto producer sells something to the rest of the world, it imports parts to produce the cars. How much does it add to value? It may put some of the car together, but 80% of the car may simply be imports. If you observe auto exports and auto imports over time, you find out that when auto exports go up, auto imports go up. So on a net basis, you're not any better off.
So our problem on the trade sector is to make sure our value added share of the exports goes up, ie, the amount we produce in Canada. If we simply export a car, it looks like good stuff: you know, a $10,000 or $20,000 car. Unfortunately, the Canadian contribution to that is small, because we import everything to produce that car and sell it abroad. On a net basis, we're no better off. We have to add value to the product before we resell it, ie, we should be producing more things domestically rather than importing them so we can export them. It's just a matter of re-exporting. We can make exports look really good by simply importing everything and exporting everything. It looks great, but we're not adding any value to it.
The idea of waiting around for the US to pull us out of stagnation is crazy, because we had above-average export growth in 1992 and we couldn't grow. That is not our problem. Our problem is that we can't add value to anything. We need to improve our competitive position. The US economy is going to do better this year and we think exports will do all right, but so what? If you look at a lot of the forecasts, you'll probably notice that imports are still growing fairly rapidly, and that reflects the fact that we're not competitive.
We have to make sure that we import less. Even if we import less and export the same, we're going to do better. The idea is to get our competitive position up so the share of exports we actually produce in Canada goes up. It's not just waiting for the US. If you go back to 1982 and 1974-75 and look at the previous recessions, you find out that this recession is above average in terms of export performance. The trouble is that we're not producing any of those exports, we're only producing part of those exports. I don't know if that's confusing. It's just that we're not adding much value to the exports.
On the US side, the implications for Ontario and Canada are, one, there's going to be stronger growth so our exports will do okay. That doesn't guarantee growth here; it guarantees that exports will still flow. Secondly, inflation will remain low in the US, so that will mean we'll be able to keep our inflation rate low in Canada, because we import so many things from them. Interest rates are not going to go up, skyrocket in the US, so that allows us to keep our rates down, and that will help us out. Those are the implications of what's happening in the US.
If you look at the three charts I have following that page, you'll see US inflation, US growth and US interest rates and how Canada follows them around. That will give you an idea of what I'm talking about.
The rest of what I want to talk about is really what's impeding Canada from performing in the next few years. If you go to the page on structural change in Canada, these I think are the major reasons we're having difficulty in this country. In the early 1980s and the late 1970s, we had very poor productivity performance, and this led to a number of changes.
Governments felt they were the reason we had poor performance, so they started putting into place a number of different policies: deregulation, privatization, tax reform and so forth. The impact of these policies is to cause people to change what they do. Obviously, that's what we're trying to do. Governments go in and say, "You should produce this," and they do that by subsidizing industries and offering preferential taxes. If governments take that out, it means the industries that were previously profitable are no longer profitable and those products don't get produced. That means the people who were working in those industries have to change jobs. That's structural change. You've heard about that.
What we've had over the past 10 years is a lot of structural change, and that raises what we call structural unemployment. It's difficult for people to change jobs, so one of the things these changes are doing is making it more difficult for us to keep unemployment rates low. If people don't have jobs, they're not buying things, and governments can't raise revenues if nobody's buying anything, because they tax things. It makes it very difficult. Structural change is causing us difficulties and will continue to cause us difficulties over the next few years.
The Canada-US FTA is just like the other ones. It's just changing where resources go and it's causing difficulties. The GST was another example. You're saying, "We're going to tax services now and we're not going to tax goods so much." That means that people who are in the service sector are going to do worse than they did before and people in the goods-producing sector are going to do better than they did before, and resources move. If you happen to get caught in the middle, you could be out of a job and you're in trouble.
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All these things are going on, and the implications of free trade and GST and NAFTA and so forth are going to continue to cause that over the next five years. We're going to have people losing their jobs and having to move to different jobs, and it's just going to be a difficult adjustment. The household sector is going to bear a lot of the burden of adjustment because those are the people losing the jobs. But that's going to happen.
The impacts of this are positive in the long run, but unfortunately, in the transition period they are not necessarily positive. So if somebody says that free trade has a positive impact, you have to ask if that is in the short run or the long run. I think in the long run it does, but for some people it's going to cause trouble.
Governments, the federal government in particular, suggested it would provide funds for adjustment of people; it never did. So what we've done is decided that we're going to impose all these policies and not help people out. That's causing difficulty for people, and that's going to make it difficult for the economy to perform strongly over the next few years. But once we get all these adjustments taking place, then we will be in better shape.
Two of the areas I think that have caused and are continuing to cause severe problems are government deficit reduction and zero inflation. We've decided now that government is too big and we want to get it out of the economy. That's a similar structural change to everything else. You're saying that government consumption is too big, so we have to reduce. If I sell to the government or you work for the government, you're in trouble; you're not going to be working for it any more, and I can't sell you anything. So that's another structural adjustment.
In the longer run, that means that more resources will be devoted to the private sector, which, depending on your ideology, is good or bad. But it implies structural change: people are going to be out of work, some of us who sold to government have to find new customers and so forth. So there is going to be damage done in the short term. In the long term, you may end up giving more money for private investment, which will make you better off, but there is this transition period during which you're going to cause difficulties. But you don't get something for nothing. Somebody said that just before I got here. If you're going to make these changes, you've got to pay for them. There's no free lunch in this case. There have to be adjustments made or we don't become more productive.
We see over the last two years that where governments have been trying to reduce deficits when there's a recession, it makes the thing worse. That's what governments have been doing for the past three years; they've been making a bad situation worse by trying to solve deficit problems. That's okay in the long run, but you can ask yourself, "Should we be reducing deficits in a recession or should we wait till the recovery comes?" There was no excuse for not trying to reduce the deficits in the late 1980s. In 1988 we could have reduced the deficit dramatically, and we didn't; we increased it. Now we're trying to do it in a recession. It's not a good idea.
What's going to happen over the next few years as governments try to wind down these big deficits? I predict that we're going to lose 0.5% off growth every year for the next five years because we have to reduce the deficit. So the government deficit in the country is about $50 billion, which is 7% of Canadian GDP. We've got to take 7% out of the economy in the next five years to balance the budget; that is a lot. So in a sense you're taking 7% of GDP away to balance the budgets. It will in the longer run lead to lower interest rates etc, but it's going to cost us. So don't expect anything else other than slower growth because of it. It's going to cost. That's going to make it difficult. To try to reduce deficits any more quickly is going to make things worse, not better.
Zero inflation: I think that's caused considerable damage to the economy. The main reason it has is that nobody has gone along with it. None of you were willing to take salary cuts; I wasn't either, but I am now. In fact, I did anyway.
Ms Swarbrick: Three years of freezes.
Mr Stokes: Freeze isn't enough. Your salaries have to all be cut. It's not good enough, and I'll go through why. The main problem here is that the Bank of Canada has decided to go to zero inflation. When you do that, you have to get everybody to change their expectations of the future. Nobody went along with the bank. They just ignored it, and that's the reason we've had a severe recession.
In order to get inflation down, how do you do it? Nobody here will willingly lower prices or wages, will they? So you've got to threaten them. You say, "If you don't lower your wages and prices, I'm going to put you out of a job or put you out of business." That's how monetary policy works: It has to frighten people enough that they won't ask for big wage increases, or it has to bankrupt businesses so they're afraid to raise prices or they actually lower them. That's how we do it in this country. We have to be honest about it. That's exactly how it works.
If everybody went along with the governor of the Bank of Canada and lowered their wages and prices, there wouldn't be a recession. It's as simple as that: All the wages come down, all the prices come down, no effect on the economy. But the way we get it down is to put people out of work so that they won't try to get high wages, and we put businesses out of business so that they'll lower their prices. That's exactly what we've been doing since 1988, and that's why we're in so much trouble. The impact of this is going to continue over the next few years.
What I want to go through now is what I consider the major transitional problem. If you go to the next chart, which says "Canadian Exchange Rate," there are two lines there. The bottom, the dark one, is the actual value of the Canadian dollar, like 80 cents. The top line is a measure of the competitiveness of Canadian manufacturing relative to US manufacturing. The top line going up means the costs in Canada are going up relative to the US. That top line is made up of two things. It's made up of the Canadian dollar, because I have to put both costs in the same currency. So as the Canadian dollar rises, our costs rise relative to the US. It becomes more expensive to buy things from Canada. The line will also go up if our wage rates go up faster than the US or if our productivity grows slower than the US.
So there are a number of things in there: If the dollar goes up, our cost competitiveness worsens; if our wage rates go up faster than the US, our cost competitiveness worsens; if our productivity goes up slower than the US, our cost competitiveness worsens. All those factors can make it difficult for manufacturers to compete.
Why is Canadian manufacturing, in particular Ontario manufacturing, in trouble? You just look at that line. Since 1986, the competitive position of manufacturers in Canada has deteriorated almost 50%. Why? Part of it, you can see, is the dollar; the dollar has gone up. The other part is the fact that we've been paying people too much money in this country relative to the US, and our productivity performance isn't keeping up. You must have seen these numbers, this story before. This is a serious problem. What is the consequence of this? We've seen what's happened to manufacturing in this province.
If you look at the next chart, we have the current account balance, which is essentially the trade balance, the exports minus imports, as well as the interest payments that we pay to the rest of the world. As a percentage of GDP, that simply tries to adjust it for the size. The bigger the negative number, the worse the current account deficit is. So if you look at the two charts, you see that cost competitiveness worsens and the current account worsens. So what happens is that as we become less competitive, we export less and import more. So the consequence of the rising costs in Ontario and Canada has been a deterioration in our current account balance. It's a terrible trade balance, the biggest current account balance we've ever had. It's a record.
The other consequence is the next page, which is the share of profits in GDP. If costs are going up and we're not selling anything, we're in trouble. Profit share of the economy now is the lowest it's ever been. This is all a consequence of that one chart, our cost competitiveness. You can argue, "What about the rest of the economy, not just manufacturing?" Oil and gas prices are fixed in US dollars. If the Canadian dollar goes up, their prices go down in Canadian dollars; they lose money.
What has happened is that since the mid-1980s our costs relative to the US have gone up, and that's basically been a result of the industry and one policy. The one policy is the Bank of Canada tightening up monetary policies. This caused the exchange rate to go up, and that's contributed about 20% to 30% of the increase in the costs. The rest is because our wages are going up too fast relative to the US and our productivity hasn't been matching the US; it has actually been growing slower than the US.
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This all started quite a while ago. In the 1980s the US went through a period when its exchange rate went way up. Remember when Reagan came in? The exchange rate went way up in the United States. Do you remember the rust belt stories in the US? Well, we're the rust belt. The same thing is happening here, only it's happening five years after it did in the US. In the US, what happened is that the exchange rate went up and the manufacturing sector became completely uncompetitive in the States. What they did is they restructured. They moved from the northern states to the southern states to take advantage of lower costs, all sorts of structural change, which is continuing to go on. One of the consequences was that productivity went up in the US quite rapidly and the wage rates didn't grow in the US at all, adjusting for inflation in the 1980s. Not so in Canada. So what happened is that we're five years behind the US in our adjustment to this situation.
What has to happen in the future for us to get out of this mess? I call it a mess. We have a terrible current account deficit, we have a terrible profit position and we have terrible government deficits. The government deficit is of course completely associated with this problem. If government revenues fall it's because profits fall, because you get corporation taxes. Employment's fallen apart because of this. You lose all your personal income taxes. That's what it is, and then your expenditures go up because of high interest rates, which are associated with zero inflation, and also because of your social assistance payments. These have all gone up, and it's all because of this problem.
This is only labour-cost competitiveness in this. It doesn't include the cost of capital, which is also higher in Canada. It also doesn't include a lot of the property taxes and other taxes in Canada that affect the cost of doing business here, and I don't think you could argue from a tax or the cost-of-capital point of view that we have an advantage over the US. So one of our major problems in this country to solve or to get out of this situation is to reduce costs relative to the US.
What we see in our forecasts is a suggestion, but it's very painful. If you go back to the exchange rate table, the solution to our problem is to get the top line down, which means to get Canadian costs down relative to US costs.
How do we do it? I gave you the three sources. One is that the Canadian dollar can come down. Wage rates can fall relative to the US or our productivity can grow faster than the US. Everything you hear out there is some combination of these.
Why we are so preoccupied with productivity and competitiveness in this country is this: Productivity has got to go up, and productivity is going up, and wage rates aren't growing as fast as they used to and the dollar's coming down, so this is all helping.
A lot of this governments can't do anything about. Some of them are structural problems they really can't do anything about. Fiscal policy can't handle this in the short run. You can stimulate the economy. This is why when you see exports increase, you don't see the GDP increase, because we're not producing GDP any more. We're exporting things we've imported. We're adding just a little bit to those products and reselling them.
If we can get this line down, we can start getting a bigger share of those exports that are attributable to Canada rather than to some other country. The solution is to get that line down. This is difficult.
You have to remember, first of all you could say: "Well, we've got wages growing slowly in this country now. They're growing much slower than they used to." That's not good enough. They have to grow slower than in the US. If US wage settlements are 2% and ours are 2%, that doesn't do any good. We're not improving our competitive position; we're maintaining our bad competitive position. If our productivity growth in this country is 2% and it's 2% in the US, it doesn't do us any good. It's got to be better than theirs.
What's the way out? If we can't have lower wages and we can't have higher productivity, what's the way out? The dollar falls apart, right? The dollar's the safety valve in this. If the dollar can come down, what happens is that we improve our competitive position, and that's what it has done. The reason the dollar fell from 88 cents or 89 to where it is now is because of this. We cannot support an 89-cent dollar with this current account problem and this profitability problem. You've got to get this competitiveness problem solved, and the way it always gets solved is some combination of higher productivity, lower wage rates or a lower dollar. In the US they solve their competitiveness problem to a large extent by exchange rate depreciation. If you look at the US dollar, what happened is that from 1985 on it collapsed, absolutely collapsed, and that helped them out.
Now, what's the problem here? Why can't we just have the dollar come down? Remember I talked about zero inflation? John Crow says he wants inflation at 1% to 2% for the next five years. If the dollar comes down, what happens? Well, we import 25% to 30% of our products. If the dollar comes down, our inflation goes up. The rule of thumb we use is that if our imports are about one third of our consumption, then if the dollar comes down 10%, our inflation will go up 3%, one third.
Ms Swarbrick: Or we choose to buy Canadian.
Mr Stokes: That's right. You can do that. If you can get people to buy Canadian and not go to the Price Club etc, that's fine. I won't argue that. But the point here is that the dollar depreciation route, which is normally used, which has been used for ever -- we did this in 1971, in the mid-1970s etc, we've depreciated our way out of these problems every time.
What Crow is saying is that, "No, you're not." He's come down 10%. That's what we've come down now, about 10% on the currency. He's saying here, "We don't want it to come down any more." Why are interest rates still high? Why did they go up in the fall? Partly it was the Constitution, but that was associated with the dollar, wasn't it? The Constitution caused the dollar to be weak. I don't like attributing a lot of the constitutional problems --
The Chair: Ernie, can I just break you here, because -- Mr Phillips.
Mr Phillips: I have to go. Not that I'm not keenly interested by this.
The Chair: I know Mr Sterling didn't get a chance to ask any questions last time and I think there are some questions of the committee. If you could just sort of wind up.
Mr Stokes: Two minutes, I'll finish it up.
The Chair: We can wind up going to the two parties that are left here.
Mr Stokes: The main point here is the banks are not going to let us depreciate our way out of this unless we fire the governor. That may happen in the next election, but I think that would be a mistake. Anyway, we can't depreciate our way out of this, so the other thing is that when I mentioned that zero wasn't good enough for wages, it isn't. This is a 50% loss in our competitive position.
Now, you're always nervous about data, but what we're looking for is a 10% to 20% reduction in wages relative to the US. Nobody's going to do that here, are they? We can't convince people to do that. We've got to cut our costs. So if you eliminate wages, that leaves productivity. One of the reasons you're having a high unemployment is that firms can't get their wages down, but they've got to get their costs down, so they just lay off people.
The exchange rate isn't allowed to come down, so they can't recover their competitiveness that way. It all goes out the unemployment rate. That's what's happening. Interest rates go up and the unemployment rate goes up. That's why we are forecasting high unemployment for the next five years. It's simply that the only solution to this problem is increased productivity. We think the dollar will come down more, but the bank won't let it, so it's a long painful process. The major adjustment we have in this country is to get businesses more competitive.
Another solution, of course, is to reduce business costs through taxes etc. If you start imposing taxes and so forth, it increases the business costs to doing business. Goodbye jobs. It's simple as that, because they have this problem faced and if you raise their taxes and let the dollar depreciate, then that's fine, but if you raise their taxes and don't let the dollar depreciate, they're dead.
That means unemployment is going to be the residual and that's exactly what the unemployment rate has done. It's gone up to try and solve this problem because you're trying to solve it all through productivity, which is not possible in the short run. I'll stop.
The Chair: We'll lead off with Mr Sterling.
Mr Sterling: I think you told us the same story as our first witness here today, that basically those who have jobs have been too greedy in the last five, six, seven years in terms of taking more out of the economy than they're entitled to. Is that correct?
Mr Stokes: If you're a true capitalist-type person, you try and get as much as you can; it doesn't matter. I guess the problem is that when we talk in economics about the efficiency of the market system, we're assuming there are no labour unions, no wage restrictions etc, that the regulated industries are a minor consequence and so forth. What happens is that if you're a competitive industry, your wage rates don't grow much. If you look at a lot of industries, that retail trade sector, they've been taking wage cuts and a lot of industries have been taking wage cuts.
The hydros etc are not taking wage cuts. Government, zero, that's a good idea. I think that's a good idea as a signal to the private sector that we can't have high wages, but if you've got major power groups' ability to extract -- we call them rent seekers -- if they have the ability to extract high wages and we don't stop them, we can't solve the problem. So I wouldn't call the people greedy. The basis of our whole system is that if people maximize their own wellbeing, we'll all be better off, but that presumes there's no major power groups.
You may be right in the sense that there have been some areas of the economy that have market power or the ability to raise their wages and they've made it worse for everybody else because if the governor of the Bank of Canada says, "I want 2% inflation," and the regulatory agencies or the governments are giving 5% wages, that must mean the rest of the economy's getting zero or negative.
It's an income distribution issue here. The people with the power get what they want and the rest of the people -- well, I'm a small business person. I'd like to get zero. That would be nice. So I guess that's what it is. It's a matter of certain groups get the higher wages and --
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Mr Sterling: If it's income distribution, which was Mr de Bever's argument as well, then that says to me that the function of government is to change the labour policy to make the powerful less powerful.
Mr Stokes: Labour and business, because --
Mr George Mammoliti (Yorkview): Change the mentality of the capitalists.
Mr Stokes: No, it's not labour necessarily. If you have market power, if you can control your price, then you're just as bad as the labour union. Suppose you're a big firm, an oligopoly, a big set of firms, and you have a labour union working for you. They raise their wages or you'll give them their wages, because you figure you can just pass it on to the consumer.
Mr Sterling: I agree, but the profit pictures that are presented to us don't say that business has the power. They don't have the flexibility.
Mr Stokes: I asked some business people -- for example, in 1991, wages went up by 5% in manufacturing and prices went down by 2%. How do you explain that? I asked the manufacturer: "What's going on here? How come you're giving your employees 5%?" They say, "If I don't give my employees 5%, they'll go on strike and I'll lose my market share." Dead, because it's an adversarial system. The workers in the firm have no perceived incentive to go along with the producer. As long as it's adversarial, you can't do anything about it. I mean, that's how our system works. You go out and try and get as much as you can and the other person does, and that should all -- that's Adam Smith.
Mr Sterling: But that relates to the power that various groups have in society.
Mr Stokes: That's right.
Mr Sterling: All the evidence that's been presented to me today says that the powerful groups have done okay, but they have done so at the expense of costing jobs to the less powerful.
Mr Stokes: The purpose of competition policy, for example, or free trade is to stop those powerful groups. In other words, if you have a lot of competition, you don't get anybody with power. So free trade opens the border up. Look at what's happening to the retail sector in this country. I saw a show on TV last night where they were talking about a 25% reduction in prices because of the new retail structure. I think you have to have competition.
In the case of hydro or something where it is a regulated industry, then it's really up to the regulators to make sure that they're going along. But in terms of overall competition policy, I think free trade is good for that, or trying to make sure that you don't have industries that misuse their power. But that's difficult.
The Chair: We have two minutes left. Mr Carr.
Mr Carr: I have a quick question and it's kind of a strange question. It doesn't relate to any of the figures. As we sit here, one of the things that strikes me is that economics are fairly simple. Yet in our education system, unless you go on to universities or colleges, you don't take economics and many don't understand.
We heard the previous person talk about how without having US exports we would have been in trouble, yet if you ask 80% of the people in this province, they would say, like the government does, the problem is the free trade agreement. The statistics don't show that. One of the problems we've got is, people don't understand economics. As an economist, do you think we should be teaching economy to our kids and, if so, at what grade? High school? At what grade should we be teaching economics to the people in this province?
Mr Stokes: I think they already teach it in high school right now, so I'm not sure. Economics is not very exciting when you're a high school kid.
Mr Carr: It's probably not worse than math or anything else.
Mr Stokes: They take it and they read it; it goes in this ear and out this ear. It's even tough for adults to read. Somebody told me once that you should keep an economics book beside your bed if you want to go to sleep at night.
Mr Mammoliti: I think that as well as economics we should have some courses, perhaps mandatory, in terms of labour relations in our high schools. That's a personal opinion. I think that would go a long way in perhaps bringing a better relationship in the workforce, something we have got a lot to learn about here in Canada.
That leads me into my question. In some of the countries in Europe the labour unions and employees have the ability to perhaps sit on boards of directors or make the crucial budget decisions in companies, which is not possible here. Do you think perhaps one of the government's responsibilities, and perhaps a way in which government can participate in getting a better relationship in terms of understanding company budgets and in terms of understanding the crucial decisions that would mean keeping a business afloat or going under -- do you think government should perhaps do something in the way of having labour or perhaps educating the public on the benefits of having labour involved in their boards of directors, opening up the books per se, so that decisions such as those 5% raises that you were talking about earlier might be easily rectified without folding the company? Do you think that this might be a way of --
Mr Stokes: No. I think the adversarial system is what's causing the trouble. Let's put it this way: You get a 5% raise, you still think you're working. What is a union bargaining for? Are they bargaining for jobs or wages? The example, I think, was given that Air Canada wanted to bargain for the GST. They gave their employees the GST wage increase, but then they laid everybody off. So you got the wage increase, but you didn't get the job.
I guess to the extent that the employer and the employees can get together and agree on what's going to happen, it's got to be a positive outcome. If you're there and you're basically saying, "I want a bigger share of the pie" --
Mr Mammoliti: How do we do that? I don't think we're going to have a problem with convincing the labour unions that this is a good thing to do. I think where we're going to run into a problem is with corporations and companies and the head honchos in some of those companies. I think they're the ones who would say: "No way. I'm not going to have my employees looking into my books." How do we do that as a government? How would we go about doing that?
Mr Stokes: I'm not really sure how you actually do that. I think it's a necessary thing. The problem is the mentality. You said you thought you could convince labour unions. I've heard that it's like the concept of profit-sharing. Some unions don't want to have anything to do with that.
Mr Mammoliti: Perhaps a long-term approach, like education, labour relations courses in high school -- that's mandatory labour relations courses in high schools -- that sort of thing might help.
Mr Stokes: Yes, if it makes people think differently. It's got to be cooperation. That sort of system works under ideal conditions. When you go back to Adam Smith, as I mentioned before, his system worked well because nobody had any power. Once that system breaks down, once people get power, you're in trouble. Why would you give a 5% salary increase when your prices are falling? It means somebody's got some power over you. Because you're insane; you know you're going to lose money.
What happened in the past is, when manufacturers or exporters gave these big wage increases, they simply knew that the dollar would depreciate by the amount and they got away with it. If you go back to 1976 -- remember, competitiveness was a problem in 1976 -- when we put wage and price controls on, the wage increases that were granted in the early 1970s never led to problems because the dollar depreciated. It went from $1.03 to 85 cents. Manufacturers don't care. They got their wage increases back through the dollar depreciation and higher prices.
What the difference is between then and now and what's making the difficult situation is the fact that the bank is saying, "Forget it, we're not going to let you do it this time," and I don't think it should.
Maybe if the unions and management realize that we can't do this any more, they will cooperate. There has to be some incentive. I really believe in incentives. If a union has no incentive to bargain or to cooperate with management, or vice versa, then they won't. It won't do any good. If the unions continue to think that management's trying to screw them or whatever, it won't work. Maybe education will help, I don't know.
The Chair: Ms Harrington, and at 12:30, I'm dropping the mallet. This committee will be dismissed.
Mr Brad Ward (Brantford): Maybe we should have more questions.
The Chair: At 2 o'clock, okay. The floor is yours.
Ms Harrington: We heard yesterday that this was a policy-induced recession, groups such as the Department of Finance, the Bank of Canada causing this recession to some degree. In your paper you also state here some degree of agreement -- I'm interpreting anyway -- that is, the structural change that you've seen in Canada coming from government, such as deregulation, the privatization, the free trade agreement, GST, deficit reduction and the zero inflation policy. Would you not say that we should therefore fire that government?
Mr Stokes: Put it this way. I like every one of their policies, but I don't like the fact that they put them all together at one time and threw them at us. I think every one of the policies was designed to make us better off. The problem with it is that they threw everything together at once in the middle of a world recession.
I did a paper last year trying to sort out what was the main reason for the severity of the recession and I came to the conclusion that monetary policy was. The Bank of Canada's goal of getting inflation down was the major reason for the severity; not necessarily the recession, but it was worse in Canada. That was one reason it was worse. The world recession also explains part of it. When you think of it, a lot of people are upset at the Conservatives, at least in terms of the coordination of the policies.
If you put in free trade at the same time you try to go to zero inflation without asking anybody, then you throw the GST on top of that, look out.
Ms Harrington: You would agree that it is a policy-induced recession.
Mr Stokes: Yes. I guess the problem is, and what I fault the government for, is not getting the cooperation of the private sector, because the private sector never went along. They put the GST on and the first thing everybody said was, "I'm getting it back through higher wages."
You're asking for it. You can't inflate. It's a tax increase. It's like what you're doing is, they raise your income tax, you go out and demand higher wages to get your income tax back. It doesn't work. So it's not just the government's fault. It's the government's fault for not getting the cooperation of everybody in doing it. Zero inflation is a good idea, but don't do it when nobody will go along with you. It's like I said. The way we get inflation down is to put people out of business or out of work, and that's what they did. That's the only way it works when we won't go along.
I would fault the government for the implementation of the policies, not for the policies per se. I like the policies, but the implementation was an absolute disaster. But I'm not sure. The government in Ontario, when you try and implement policies, if you do it when the people disagree with you and you impose a policy that they should go along with, you're asking for trouble.
Ms Harrington: I think that the last line here is that we need total commitment to restraint.
The Chair: I'm sorry. It's 12:30, Margaret.
I'd like to thank Ernie for appearing before this committee. We'll make sure that he gets a copy of Hansard. All your remarks will be in Hansard. Thank you for attending.
This committee will be recessed until 2 o'clock in room 151 this afternoon from 2 until 4. If everyone will note on their sheet for tomorrow, we actually start at 1:30 in the afternoon, not 2 o'clock, but you can sleep in an extra half-hour because we're not starting until 10, not at 9:30.
The committee recessed at 1234.
AFTERNOON SITTING
The committee resumed at 1404 in room 151.
HON FLOYD LAUGHREN
The Chair: I would like to welcome everybody to the standing committee on finance and economic affairs. This afternoon we have the Honourable Floyd Laughren, MPP and Treasurer of Ontario, coming before this committee. Mr Treasurer, go ahead.
Hon Floyd Laughren (Treasurer and Minister of Economics): With me at the table are David Trick and Simon Rosenblum from Treasury. I want first of all to thank you for the invitation. I always enjoy spending time with my peers. I sometimes get withdrawal symptoms when we're not in session. I'm joined now by Jay Kaufman, who is the secretary of treasury board and deputy minister in Treasury.
I want to do a couple of things this afternoon, with your permission, Mr Chair. One is to give an overview of what I think will interest the committee as to what we're doing in an attempt to help rebuild the economy, to the extent that governments can do that, to provide an update on the budgetary initiatives that we've already announced and to make some comments about what lies ahead, and then, perhaps even more importantly, to have an exchange with members of the committee. I'll try and move fairly quickly because I know it would be unfair to use all of the hour that's available for me to make a speech to you. I don't think that's what committee members want.
The committee members have been distributed a package of information, I hope. The first one is entitled "Recession in Ontario," which shouldn't come as any surprise to committee members. I assume all committee members have that information.
I think we all know how seriously the recession has hit Ontario. In all of Canada, between three quarters and 80% of all the job losses were in this province. Manufacturing has been the hardest hit of all. That's made it very difficult.
The problem has not been made any easier, quite frankly -- and I really believe it's important to speak directly and bluntly to you today -- by the very serious offloading that's been done by the federal government. I won't get into a long tirade there, although it is tempting, believe me, because of what they have done on transfers. Most members will know that less than three years ago, the federal government was paying about 50% of all our health care and post-secondary and social assistance costs. Now it's down around 30%. While the absolute numbers have gone up, for obvious reasons, their proportion, their share has dropped that dramatically and we've had to pick up the balance. Obviously, that's had a very serious effect on our fiscal situation.
We also are absolutely convinced that the monetary and fiscal policies of the federal government have played a role in that. On December 2, the federal Minister of Finance, when he made a statement in the House of Commons, referred to the policies of his government for the last eight years and indicated that he thought those policies had positioned this country well for recovery. I must take issue with him. Although I do believe in the fundamental strength of the Canadian economy and the Ontario economy, I simply cannot bring myself to support the policies of the federal government for the last eight years.
On the second sheet that you have, which is entitled "Shattering the Myths," I want to spend a little bit of time -- I'll go through this fairly quickly -- talking about some of the myths that have been spouted by the federal government people over the last number of years.
The number one argument the federal Minister of Finance keeps making, and I've heard the Prime Minister refer to it too, is that tight monetary policy has lowered the inflation rate and that this was a big plus for Ontario. I would remind you that it has done so at the price of the highest unemployment rate in the G-7 countries, and that the higher interest rates and the higher dollar level it has promoted have indeed led to higher deficits in this country.
Also, the impact of the free trade agreement has been negative, both in terms of Canada's trade balance and employment. That is in spades in this province, which is why I made special reference to manufacturing being in such a decline in the last couple of years.
I'm also very concerned that NAFTA, the North American free trade agreement, will, if anything, make matters worse because it's not going to relieve us from the problem of future trade harassment by the United States. We're already seeing that now -- not as a result of NAFTA -- with the steel industry. I'm worried that while the free trade agreement indicated there was going to be an agreement on problems such as with steel, with NAFTA that's not going to happen now. That removes it. So we're very worried that we'll see a continuation of what I would call harassment at the trade level such as we're experiencing with the steel industry. I really believe that NAFTA is not going to get us where the federal government thinks it will get us and will not have the benefits it seems to think it will.
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Ontario has done some things to try to cope with the recession, because if there's one component of it that's hit us the hardest, it's the impact on our revenues as a province. We've worked very, very hard on the expenditure side to contain the growth in the expenditures. I think we've had some success in that, although of course when your revenues are plummeting the way they have in the province, it becomes very difficult to match the revenue decline with parallel reductions in expenditures without really decimating essential services in the province.
Excluding debt interest this year, spending in Ontario is going to be growing by 2.8%. If you took out social assistance, which is a statutory requirement for us, there's virtually no growth in expenditures at all in the province this year. I think that's a major accomplishment, given that the rate of spending growth in this province in the last 10 years was very substantial. Because it was on an incline like that, it's not easy to simply turn off the tap overnight when a recession occurs. It takes time to get that under control, because it certainly wasn't. We've had some success at that, however.
I want to make one other comment on the free trade agreement, because I heard Mr Mazankowski talk about how there had been record exports to the US since the free trade agreement. While that's true, there have also been record imports from the US, and I suspect those imports would have even been higher if it hadn't been for the recession in this province.
In 1987, for example, we exported $13 billion more to the US than -- in goods and services; I'm not talking about interest and dividends and so forth. By 1991, that surplus had dropped to $3 billion. So it's fine for the federal government to talk about how wonderful free trade has been in terms of record exports. They always fail to ignore the other part of the equation, namely, imports, and that certainly has caused us some problems as well.
Despite those factors, however, we have an obligation to get on with it and to do what we can as a province to rebuild the economy, and I won't dwell further on that.
The next sheet that you have before you deals with "Ontario Government's Economic Action Plan," because from time to time I hear people say to me: "Well, do you have a plan? We know you're in a recession. We know your revenues are down. We know your expenditures are difficult to control. Do you have a plan at all to get us out of this recession and take us where you think we should be going?" There's a very simple graph --
Interjection.
Hon Mr Laughren: Each one of those is expanded upon later, Mr Carr, if you will just be patient.
Mr Carr: There should be more.
Hon Mr Laughren: It is divided into two sections. One is a "Response to Economic Downturn" and the other is "Response to Structural Change," because I believe most people acknowledge that this recession has two parts to it. One is the cyclical economic downtown, the other is the more profound structural change that's going on underneath this. We've tried to respond to both of those components.
If you look to the next chart, Mr Carr, you will see that we're trying to deal with the economic downturn part of it in the ways that are on this page. It says that the Jobs Ontario initiatives that we announced in the budget, the non-profit housing initiatives -- I won't go back, but the previous year we did the $700 million anti-recession package as well and announced the manufacturing recovery program in the previous budget. So that's the economic downturn component and the cyclical problem that we're trying to deal with in those ways. But some of those will also overlap into trying to deal with the structural problems as well.
The next slide deals with the response to structural change, the more profound changes that are going on underneath this. You can see, if you look at all of those initiatives, they add up to quite a bit. The training and adjustment initiative -- we're spending $930 million this year on training. That's a record for this province, ever. We've put a lot of effort into our Jobs Ontario Training. That's coming along. It started off slowly but we're getting there. It's a complex program, which I think was one of the reasons it started off slowly, plus the depth of the recession, but I think we're on the right track. There's the training and adjustment board initiative.
We haven't forgotten equity either. We've got employment equity, pay equity and minimum wage increases, which I think are important.
We're trying to elicit more co-operation with our partners out there. That's what the training and adjustment board does. The Premier's councils are at work. The changes to the Ontario Labour Relations Act, which some of you didn't like, nevertheless I believe are indicative of the direction in which we want to head, because they do indicate a need for more partnership at work out there.
Supporting workers in new roles -- I'm talking about the Ontario Investment Employee Ownership Plan, infrastructure support, all the base capital spending. Keep in mind that what we've committed to capital despite the recession is also at record levels.
There's the industrial policy framework through our sector strategies and our sector partnership fund of $150 million. There's the long-term financing we're dealing with through the Ontario Investment Employee Ownership Plan and the Ontario investment fund, which also has taken us longer to get off the ground than we thought, but at least we're still churning away there and we still intend to have an Ontario investment fund for members of the Legislature to examine and comment on.
We've also provided a lot of support for research and development and capital investment. Most of it was announced in the budget this year.
Those are some of the ways we're trying to cope with the structural problems we're facing out there.
Could we move to the fiscal outlook for 1993-94, because we're three quarters of the way through 1992-93 now. Keep in mind that we're going through the estimates process now in which all the ministries come before the treasury board with their expenditure requests. That is ongoing right now, so obviously I couldn't give you a final figure, even if I wanted to, for 1993-94 expenditures. We think we're going to be on track for our expenditure target that was laid out in the medium-term plan of $53 billion for 1993-94.
You could say: "Well, that's nice. How are your revenues doing?" You will know we announced earlier that we know our revenues are going to be the problem. There's going to be a $4.2-billion shortfall in meeting the revenue target we had for 1993-94 of $48 billion. Obviously, that's a major challenge for us to try to cope with so that we don't get involved in too many tax increases, in letting the deficit go crazy and at the same time manage somehow to maintain the essential services of this province. That's our goal.
We've already announced some measures to deal with that and they're outlined here: $600 million in 1993-94. That annualizes to $1.2 billion in the following year. That included slowing down the pace of the introduction of pay equity, restructuring the Ontario student assistance program, freezing senior-level salaries and limiting grant increases to major transfer recipients.
Of course, I'm talking about our major transfer announcements there. That's 30% of our budget, so we felt we had to do something. We announced a 2% increase for 1993-94, but that will not be built into the expenditure bases of all those transfer agencies. They're going to have to go back to this year's level in 1994-95. That's going to be tough, but I think when you're dealing with 30% of the Ontario budget, it's something we have to do if we're going to contain the growth in our expenditures and the growth in our deficit.
There are some very tough decisions still to be made, but we're determined to keep on track with economic renewal initiatives -- that means job creation -- with maintaining the essential services of this province and with keeping the deficit in check. It's a tall order, but I really believe we can accomplish it, perhaps not to everyone's satisfaction, but we're going to give it a good try.
The next page talks about managing better. It's taking one major ministry. Certainly, people in this room will appreciate the fact that health care spending is about a third of the budget, so if we're going to have major savings in the province, you can't do it without tackling health care. Hopefully, we're able to maintain the essential ingredients of our medicare system of which we're all so proud, but at the same time we've got to contain its costs. I don't think it's trite to say that if we're going to save medicare, we've got to contain the growth in its costs.
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This page shows the annual rate of growth of Ministry of Health spending from 1983-84 on. It averages over 11% a year. You can see that in 1986-87 there was a 13.3% increase in the growth of health care spending. It dropped then to 10%, then to 9%, then back up to 9.8%, 11.2%, 9.7% in 1991-92, and this year 1.6%. I hope you won't accuse me of boosterism when I give Frances Lankin, the Minister of Health, a bouquet for her efforts, because that has been a major effort on her part and on the part of the government. I give them a lot of credit for having been able to accomplish that. You know and I know, when you push a button in the health care system, you make somebody mad. I think Frances has been able to do it in a remarkable way.
Also this year, for every dollar in new taxes we were able to reduce the growth rate in expenditures by $4. So we've worked very hard at that.
The next page has to do with the continuation of managing the system better. Fifteen ministries of government this year will actually spend less than they spent last year. I'd like to know the last time that happened. Keep in mind that I know people don't like our deficit, but the growth in spending this year will be the lowest in 39 years. That is an accomplishment in the middle of a recession, when there are enormous pressures on our health care system, our social assistance system and enrolments are going up in our education system. I really believe that's a major accomplishment.
Ministries' budgets have been cut by over 15% for travel, supplies, consulting and other overhead costs.
Salaries of cabinet ministers -- I know you'll know this one -- MPPs and senior management have been frozen. As a matter of fact, for cabinet ministers it's the fourth year in a row, and for MPPs I believe it's the third year in a row that salaries have been frozen. As someone who spent most of his life as an MPP without the increase in pay that comes with being in cabinet, I know that's not as easy as the public would like to believe it is sometimes, so I appreciate the efforts that have been made by MPPs.
We are on track to reduce the size of the public service by 2,500 positions over two years.
We announced $400 million in savings in the budget. We're on track. We have achieved about $350 million of that already. In our second quarter finances, because of revenue losses, we announced a further $500-million savings by the end of the year and we're working away at that. We're not there yet on that $500 million but we're getting there. If there are more specific questions on that, Jay Kaufman is the secretary of the treasury board and knows a great deal about that problem -- not that he caused it, of course.
The next item has to do with the economic outlook as we look ahead. For 1992-93 you can see that real growth in the year we're in now will be about 1.5%, and for 1993, about 3.8%. Nominal growth, meaning basically with inflation built into it, is 2% and 5.5% respectively, and an inflation rate of 1.4% this year and 2% next year. Employment growth is negative again this year. That's a major problem, but at least a positive number for 1993. The unemployment rate is still disturbingly high at 10.8% this year and 10.6% next year. The unemployment rate is probably the part, when you look at it, that is most bothersome, because it doesn't drop dramatically even in the next two or three years. Along with that come a lot of other problems, as members of the committee will know.
There are, however, some good signs. The Ontario economy has grown about 3% since the spring of 1991, 48,000 jobs have been created since last August and CPI, the inflation rate, is low. The US economy seems to be firming up. There seems to be a recovery going on there. The uncertainty of the Canadian dollar may keep interest rates higher than we'd like, but the dollar has dropped by about 11% since a year ago, since the fall of 1991. That should help our exports, although of course it will add to inflation because of the finished goods that we import. So it will have that impact.
The next slide has to do with the sectoral outlook, and it's really meant simply to show where the growth will be in the next few years. This is between 1992 and 1996 and shows that the recovery is going to be led by the traditional industries such as housing and auto exports, that growth in consumer products will remain modest and that strong business investment and restructuring will underpin growth in business services and knowledge-based industries.
If you look at it, the highest there is the knowledge-based and business services sector, which in my view is a good incentive for keeping our expenditures up on education and training because that's where the growth has to come from.
It's a little disturbing if you look at the growth in non-residential construction, industrial materials and resources. You can see how low that is going to be, we think, and the physical and social infrastructure. But then it starts to build after that and you get all industries at 3.5% in real output and then the automotive sector, residential construction and the knowledge-based sectors accordingly.
The final paper in front of you is, as much as anything else, a challenge to this committee, if it chooses to take it. That's up to the committee, of course. I would appreciate your comments on this as well. I'm sure you've got your own questions, but there are three basic questions for the standing committee if it chooses to deal with them.
(1) Are there realistic limits on the amount of expenditure reduction that can be accomplished? What are these limits and, in particular, what services or groups in society should receive special attention as spending plans are reviewed? You can interpret that to mean special attention in reducing the expenditures that are spent now or in terms of maintaining expenditures in particular groups or sectors.
(2) While tax increases are always difficult and of special concern in these difficult times, are there tax actions the government should be considering that are fairer or better for the economy than some of the spending reductions that may be required? In other words, where is that mix of tax increases and expenditure reductions, keeping in mind where the big expenditures are: in health care, education and social services?
(3) What about the deficit? Would letting the deficit go up be better than tax increases or some of the spending reductions that may be needed? Does letting the deficit go up buy needed time because of the cyclical nature of the recession or does it just postpone hard decisions because it's not just a cyclical recession that we're in, as we indicated earlier? How would it affect confidence in our economy if we do let the deficit go up?
Those are some of the questions I would put to you. We've got some tough choices to make. I'm not trying to pass off those choices to the committee. In the end, it's the responsibility of the government to make those choices, but believe me, your suggestions will be taken seriously as we start the pre-budget process.
I don't know how ambitious your plans are, Mr Chair, on the pre-budget consultations. Ours are very ambitious, as they were last year, where we bring different groups in at the same time. I'd be very interested in hearing any suggestions you as a committee might have, either now or later, and will try to respond to any questions any members of the committee might have, if of course they have any.
The Chair: Minister, how long do you have? Till 3 o'clock?
Hon Mr Laughren: Yes.
The Chair: And your staff will be here from 3 to 4?
Hon Mr Laughren: I don't think so.
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The Chair: I thought we were from 2 to 4. That's why I questioned.
Hon Mr Laughren: It's my understanding that the agreement was that we'd all be here from 2 to 3 and then we'd get on with other business, running the Ontario economy.
The Chair: Okay. Let's not waste any more time. Mr Phillips has the first question.
Mr Phillips: Maybe the staff could spare another hour for us some time. I mean, if you want some considered advice from the committee, I would think, as a matter of courtesy, we might have, maybe some time, another hour from the staff. I thought we were having the staff here for the rest of the afternoon.
Hon Mr Laughren: Perhaps we could work that out with the Chair, who will consult with the members of the committee.
The Chair: Fine. Ten minutes for the Liberal caucus.
Mr Phillips: I'm sorry about that note, but if you want our considered advice, we've got far less information from Treasury this year than we did last year. I thought we would have more time to ask questions of Treasury, and I'm concerned about that.
The Chair: We'll arrange that, Mr Phillips.
Mr Phillips: I appreciate that. To help the committee along a little bit, Treasurer, I think when you announced the possibility of more taxes is probably when I got the most number of calls. I'm trying to understand why the revenue dropped by $4 billion. I look at your forecasts and I see that revenue from personal income tax next year is going up by $1 billion, revenue from corporate tax is going up by $455 million and revenue from retail sales is going up $220 million. Those are the big three taxes, and they're going up almost $1.7 billion. That's 55% of your revenue. The other part of your revenue is dropping by about 9%. I guess before we understand why you need more taxes, we need to understand why it is that the big three taxes are generating revenue at three times the rate of inflation increases and you're seeing major decreases elsewhere.
My second part of the question is that I understand the expenditures right now are planned to go up by about 6% next year. That's your target plan, that you're going to increase your spending by about 6%. Why is it that you want to increase your spending at a rate three times inflation for next year, before we look at those two numbers?
Hon Mr Laughren: You're talking about 1993-94?
Mr Phillips: For 1993-94, spending is projected to go up at 6%, and the revenues I talked about, the three big tax revenues, are going up at a rate well in excess of three times inflation.
Hon Mr Laughren: I think this is the same kind of question you asked in the Legislature one day.
Mr Phillips: And I never got an answer there.
Hon Mr Laughren: Because I didn't understand it then and I'm not sure I'm in a much better situation today to understand what it is you're getting at, Mr Phillips.
Mr Phillips: You're saying your revenues have dropped by $4 billion.
Hon Mr Laughren: Projected revenues.
Mr Phillips: Your projected revenues. I look at the personal income tax and it's staying the same next year as this year, but personal income tax revenue is going up by $1 billion, corporate tax revenue is going up by $455 million and retail sales tax revenue is going up $220 million. If those are all going way up, what has contributed to this enormous decline in the other areas so that you have no revenue growth next year?
Hon Mr Laughren: First of all, the base of the increase of 1993-94 over 1992-93 is over a lower base, to start with. That is a factor. If you're talking about an increase over a base that's lower than you anticipated it would be, you're going to have lower revenues, right?
Mr Phillips: I'm assuming your revenue this year is $44 billion and you're saying your revenue next year is going to be --
Hon Mr Laughren: But we've already announced that our revenues this year -- and we've taken some action in that regard -- are off by $500 million; we announced that late in 1992. So the base is down, and we're not through the fiscal year yet.
First of all, you've got a lower base in 1992-93 than we had anticipated, so naturally any increase is going to give you a smaller amount of money because you're dealing with a percentage of a smaller base. Secondly, the recession is worse than anybody thought it was going to be. Not that I'm using the federal government as a benchmark for many things, but look at its problems with revenue projection as well. I mean, we're struggling with our revenues next year being off in the neighbourhood of $4 billion from what we thought they would be; the federal government's deficit next year is going to be up $10 billion over what it thought it was going to be. So I'm not surprised, as I sit here now, that we're not going to get the revenues.
Mr Phillips: I'm using your estimates from this document you put out about a month ago. You show in that document, a month old, personal income tax revenue going up $1 billion from your September 30 forecast, year over year. I'm trying to get at why those three revenues would go up dramatically --
Hon Mr Laughren: Could I ask Mr Kaufman to try to take a run at this, because I'm not following you very well.
Mr Jay Kaufman: Let me deal, first of all, before the revenue issue, with the expenditure issue you raised.
Mr Phillips: The 6%?
Mr Kaufman: The 6%. With the budget plan we had would have seen, if the expenditure numbers were coming in at the originally projected level of $54.4 billion this year -- those are the original budget plan expenditure numbers -- we would have seen just over a 4% increase. We aren't, at this juncture, in a position to be explicit as to what next year's expenditure numbers are going to be, but we have been taking those expenditure numbers down, as we indicated in the second-quarter Ontario Finances. We have targeted to reduce those expenditure numbers down below the budgeted plan expenditure numbers by about $500 million. So the 6% you're referring to is against a reduced expenditure number this year. We'll see, as the Treasurer has said, at the end of the estimates process, the decision process we're into now, what the expenditure levels for next year will be. That's the explanation of your 6%.
Mr Phillips: You're saying that you're going to spend $50.1 billion this year, you're going to spend $53 billion next year. Is the 6% spending increase what we should look for?
Hon Mr Laughren: Could I add that there were no tax increases built into the revenue number for 1993-94, which would cause it to be lower as well.
Mr Phillips: All I want to know is why those three tax revenues are going up $1.6 billion next year over this year and all your other revenues are dropping by $1.8 billion. It doesn't add up, to me.
Hon Mr Laughren: The only thing I can think of is that, first, it was assumed that the fiscal stabilization plan, one of your favourite topics, would be built into our revenues for 1992-93 as revenues for 1992-93. If we don't get those revenues, then of course, once again, you've got a $1.2-billion reduction in revenues for 1992-93. One can only assume that they would be made up in 1993-94, but we wouldn't have them in 1992-93, which would give you that much higher a base from which you'd be operating, because it's year over year.
Mr Phillips: I think we would benefit from Treasury staff giving us the same estimates on the revenue by tax that we had last year when we were working on the budget.
Hon Mr Laughren: You mean how much tax revenues it had collected per point?
Mr Phillips: No, how much you are expecting, where your revenue is coming from, how you're getting the $43.8 billion. I know what you're going to get in personal income tax, retail sales tax, corporate tax. Those three revenues are going up dramatically, but all the other revenues are dropping.
Hon Mr Laughren: Because we do expect some growth in the economy in 1993-94, you appreciate that, and that would give us increased revenues in those areas.
Mr Phillips: I'll need the detail.
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Hon Mr Laughren: If you want more detail, please let us know specifically what it is you're after and we'd be happy to --
Mr Phillips: Because I think the numbers are very inconsistent: major growth in the three big taxes and huge declines everywhere else. That's factual, correct.
Mr Kaufman: As the Treasurer pointed out, I think that in this fiscal year, the projections include the fiscal stabilization. That's a one-time payment and therefore, in the next fiscal year, that is no longer an additional revenue source for us. So there are some major one-time-only revenues that are projected this year.
Mr Phillips: That accounts for part of it.
Mr Kaufman: We could easily sit down with you and the committee and give you a more detailed breakdown of the revenue sources. The fact of the matter is, as well, that there's the annualized impact, as the Treasurer mentioned, of the base drop that we've already indicated in the second-quarter finances. But in terms of more detail, we'll get that for you.
Mr Sterling: I had a line of questioning which was not too different from Mr Phillips's. You have said that your revenue forecast is $43.8 billion, and there is suspicion that that is not true, and there was question brought forward by evidence in the committee by one of the economists who have met with us in the last day. I would like to approach it from the point of view of your nominal gross domestic product.
In your 1992 budget, on page 58, you estimate that your nominal gross domestic product is going to be 6.1% in 1993. I believe you have revised that today to 5.5%; that may take in effect either the year or the slopover of the year or it might be just a -- and that goes back to a base before what has happened in 1992-93. In other words, that's a cumulative figure, the nominal gross domestic product increase, as I understand it.
Therefore, if in fact you're only going from 6.1% to 5.5% in your nominal gross domestic product and, as economists have given evidence in front of this committee, the ratio is usually in terms of government revenue to a drop or an increase in your nominal gross domestic product of .9 to 1, it seems that if you says it's going down by .6, you can therefore justify probably $500 million of lost revenue in terms of what you expected, and you expected $48 billion originally. Therefore, we have a great deal of difficulty in believing you in saying that your revenue will drop $4.2 billion in 1993-94 if in fact you are continuing to support the nominal gross domestic product increase of 5.5.
Hon Mr Laughren: Well, I hope you're right and that our revenues don't drop by what was in the fiscal plan.
Mr Sterling: But how do you justify it? Your nominal gross domestic product figure does not drop by five points. It doesn't go from 6.1 to 1.1 or less; it goes from 6.1 to 5.5.
Hon Mr Laughren: Right.
Mr Sterling: Therefore, you're justifying a drop of $500 million from the $48 billion. You see, the $4.2 billion which you're setting us up to believe is not going to be there in 1993-94 -- we don't believe you, because you're not justifying it in terms of your other revenue projections and the growth figure. How do you marry those two?
Hon Mr Laughren: I don't know how to express it other than that's our forecast. I don't want to retill the ground we went over with Mr Phillips, but if the fiscal stabilization plan was to come in this year, it would boost our revenues by $1.2 billion, but next year we wouldn't be getting that money -- that's a one-time hit this year -- plus the growth rate has been lower than anybody thought it would be. Secondly, you're talking about nominal numbers, which means inflation is built into them, and inflation has been lower than anybody thought it was going to be as well. So those lower the nominal growth rate -- well, it's true.
Mr Sterling: But it's built into the nominal 5.5; you've taken into account the lower inflation. You're asking for it both ways. Even if we give you the 1.2, you're still out by about $3 billion.
Hon Mr Laughren: Okay, but also in 1993-94 there were no tax numbers built into that and no asset sale numbers whatsoever built into that. We think we will achieve what we know inside government as non-taxed revenue measures, built into that as well. There are a number of components that lead us to think the revenues will be off by that amount in 1993-94. If they're not, I'll be the first to rejoice with you.
Mr Sterling: But you're not justifying the figures within your budget, which normally marry with each other. Economists have given evidence in front of this committee that they marry together. How will we believe the $4.2 billion? I think you picked it out of the air.
Hon Mr Laughren: I hear you saying that you think our revenues will be higher than we think they'll be in 1994. What would be the purpose of our deliberately low-balling revenue numbers for 1994? Why would we do that?
Mr Sterling: Perhaps you're laying the groundwork for bad news on May 1 or whatever it is and then you're not going to come in with such bad news. I don't know. It's been tried before, I hear.
Hon Mr Laughren: Not by this government. Would you stop hearkening back to previous governments, Mr Sterling.
Mr Sterling: If your Treasury officials could justify for me the 5.5 with the $4.2 billion, I would appreciate that in detail, because I would like to see where the $4.2 billion revenue loss really is.
Hon Mr Laughren: Perhaps we can take another run at that along with Mr Phillips's request, because I think they're serious requests. If we can't satisfy you with answers here today, we will see what we can do, because it's not something we're trying to disguise. There would be no purpose to that. We don't need to construct a bad-news scenario, with the state of the economy in the last few years.
Mr Sterling: Can I ask one other question?
The Chair: Mr Carr is looking at asking a question, but you have three minutes left.
Mr Sterling: I have one other question. I've heard for a long time the complaint by this government about transfers under the EPF and the other. According to your own document, over the last decade the province is owed some $15.5 billion. The document also says that all provinces are owed $41 billion.
According to your statement in November, the province provides 43% of all federal taxes. If we take 43% of the $41 billion to pay out EPF and everything else, that means Ontario taxpayers would be responsible for paying $17.6 billion. Therefore, you're requesting the federal government to give us $15.5 billion, but requesting the Ontario taxpayers to pay out $17.6 billion. Why do you want to do this when we've cost $2.1 billion to the Ontario taxpayers now?
Hon Mr Laughren: Wait a minute. That is strange arithmetic.
Mr Conway: It should appeal to you guys.
Hon Mr Laughren: If of all tax revenues that the federal government collects, 43% come from Ontario anyway --
Mr Sterling: That's what you said.
Hon Mr Laughren: -- then it seems to me we should be getting back our fair share of that. If we're not getting our fair share --
Mr Sterling: You mean they've got extra money, have they?
Hon Mr Laughren: Well, wait a minute, Mr Sterling. Transferring their deficit to the province of Ontario and other provinces is surely not playing fair ball.
Mr Sterling: It doesn't matter. It's where they get the money to repay.
Hon Mr Laughren: I get a little upset when I hear Mr Mazankowski stand up on a soap box and point his finger at the provinces and say they're not controlling their deficits adequately. I want to tell you that if we could transfer our deficit to the municipalities and then wag our finger at the municipalities and say, "You've got to control your deficits," I suppose we could try to look like heroes, too, but that's not the way we're doing business.
Mr Sterling: Some would argue.
Hon Mr Laughren: That's the way the federal government is doing business.
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Mr Sterling: But the fact of the matter is, Mr Laughren, that if you get $15.5 billion and the other provinces get their fair share under the programs, as it would be fully funded, the Ontario taxpayers would have to come up and pay $17.6 billion to get $15.5 billion.
Hon Mr Laughren: We don't pay 100% of the transfer payments to other provinces. We don't pay 100%.
Mr Sterling: I'm not saying you pay 100%.
Hon Mr Laughren: You're making it sound as though we're giving up more than we'd be getting back in transfers.
Mr Sterling: You would. The Ontario taxpayers would have to give up more, and that's what we find strange in your arguments in terms of complaining about the federal government not having more largess.
Hon Mr Laughren: The province has always been a strong supporter of equalization payments. We believe in the equalization principle. What we don't believe in is using other programs that are set up for other reasons, such as funding of health care and social services and post-secondary education, as equalization payments as well. We have equalization formulas out there for what are known as -- I don't like the term -- the have-not provinces. Then let's deal with equalization as an issue. Let's see if that's adequate. But don't use the other programs, everything from health care to the national highways program, as back-door equalization, because that's not the way it should be done. That's not negotiated; it's unilateral, and that's not the way we'll build a country where people feel good about sharing what we have in this province with other provinces.
The Chair: Okay, Minister, we're going to take a little different direction here. We've got Mr Ward with a question.
Hon Mr Laughren: How do you know if it's a different direction?
Mr Ward: Thank you, Treasurer, for coming before this committee to give your presentation on the present state of the economy as well as where we're heading in the future. We've heard from various representatives of banks and some economists earlier this morning and yesterday. They all seem to be in agreement that there is some semblance of a recovery, as shaky as it is, occurring within the province, if not throughout Canada.
I think there's a consensus that the recession we've experienced, starting in late 1989 or early 1990 really was twofold, that one was the normal business cycle downturn, but that it was also structural in the sense of something happening to our economy that hasn't happened before. I was wondering if you could expand on the structural changes the province is undergoing from an economic standpoint, as well as on page 5 where you outline some of our government's long-term objectives in dealing with that structural change. How do you feel these policies, such as the Ontario Training and Adjustment Board, the Ontario investment fund and the assistance for research and development can provide incentive or deal with the change in a positive fashion for the people of Ontario?
Hon Mr Laughren: To start at the beginning of your question, we know there are structural changes taking place. I'll give you one number that always sticks in my mind. In the recession of 10 years ago, about 25% of all the layoffs or closures were deemed to be permanent layoffs and closures. In this recession, two thirds of all the layoffs or closures were deemed to be permanent, so from 25% to two thirds were deemed to be permanent. To me, that's an indication of how much more profound this recession is than the one 10 years ago. That's why it's going to stay with us and why unemployment is going to remain high for the next three or four years. It's one of the reasons.
Secondly, there is the decline in manufacturing. That's a pretty good barometer of whether or not there's structural change going on, the state of manufacturing.
Third -- I always get in trouble when I say this, but I think I must -- is the whole question of resource values. The traded value of resources in a relative sense is declining, and a lot of the strength of this province has been in manufacturing and resources. If that's the case, we've got to work very hard at increasing the value, or the processing that's involved, for example, in resources. We've got to do what we can to encourage the private sector to add value to the resources it takes out before it takes it out of the province; in other words, make manufacturing out of it and so forth. That is really critical.
For those reasons, to go to the second part of your question -- don't let me get off track here, Mr Ward.
Mr Ward: Don't worry; I won't.
Hon Mr Laughren: The second part of your question had to do with how we support that, how we help make it happen. If you look at the bottom part of page 5, we talk about support for research and development and capital investment. That's exactly what the changes in the budget were supposed to do. In itself, it won't do it, but we like to think it was a signal that by increasing capital cost allowances, which are like depreciation allowances, it would encourage investment. We broadened what's called the superallowance for research and development so that there's a bigger deduction for research and development expenditures. We also gave a tax break for small business by lowering the rate of tax it pays by half of 1% -- I think it was from 10% to 9.5%, as I recall the rates -- and for resources and manufacturing. We really tried to do it on the tax side to encourage them.
On the other side, we said that if we are going through a profound restructuring out there, we had better try and respond in a public sector kind of way as well through training and apprenticeship programs. That's where we spent a lot of money this year. I mentioned earlier over $900 million on training and apprenticeship this year. That's a huge amount of money, and we are setting up the Ontario Training and Adjustment Board which also will help with training.
There's been some criticism: "What are you training people for? What's the sense of training people if there are no jobs out there?" But it seems to me that now's the time to get people trained, to get them thinking about their future, get them into college programs so that as the recovery occurs, we're not scrambling. I think now is the time to do that. Also, quite frankly, it is a stimulus to the economy to be spending that money.
I could go through the whole list, but I think that's an indication of why we think it's a structural problem and not simply a cyclical one that will be over in a year.
Secondly, the long-term solution is going to be supporting infrastructures, supporting education, supporting training. That's all expensive, but I think not to do it would have us paying a larger price in the years to come.
Ms Harrington: We've heard some very interesting things in the last couple of days from economists, generally positive, but we do have difficulties, as you know.
I have two questions. First of all, yesterday we heard from an economist who said that this is a policy-induced recession, namely, the policies of the federal Department of Finance and the Bank of Canada. We heard again this morning in a list here about government structural changes contributing to it, such as deregulation, privatization, the FTA, the GST and the deficit reduction policies. Then he made a comment, in his words, something about, "Fire that government."
My question to you is, if there is a change at the federal level, how would that impact your projections for the next year or your budget this year? Secondly, I just want to bring forward that we have a lot of problems in the Hamilton-Niagara area, problems with steel and the auto industry. We have a lot of good workers, skilled workers, good access to the US. What do you see for our future in Niagara? Our workers really want to pay you some taxes.
Hon Mr Laughren: Pass on my thanks to your workers. I know they have to be working to do that. I appreciate that.
In terms of a change of the federal government, that's a hard one for me to answer because I really don't, at this point, know, although I find it hard to believe that any of the other challenging parties that would possibly be governing next year, aside from the Reform Party, would be as singleminded about monetary policy, the high dollar and the high interest rate as the present government.
I think it would be more stimulative. I don't want to be simplistic about it, but I would draw a parallel between the Republicans in the United States and the Conservatives in Canada. You saw with the election of the Democrats in the States at least a stronger sense of hope for recovery, probably more stimulation on the part of the federal government in the United States. Certainly, Clinton's been talking that way. The numbers I've seen him talk about haven't been that impressive if you take it down to Ontario or Canadian dollars, but at least he's expressing more stimulative thoughts than the previous administration in the States did. I think it would be stimulative, a change in the government at the federal level. I think that would help.
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On the Niagara Peninsula question, I was looking at the unemployment rates by regions in the province and I know your area is quite hard hit, and it's been raised in the Legislature by you and others on several occasions.
I hope the automobile industry is able to put more money into Ontario. Actually, they have made some major investments in the province, as you know, in the last couple of years. That's been very encouraging. We hope they continue to do it. We have some major advantages in Ontario for investment, particularly by the automobile industry. They will tell you directly themselves, for example, that since they very often have to pay the health care premiums for the workers in the US because of contracts they have with their employees, that costs over $4,000 an employee in the States. In Canada it's around $650 per employee to pay their health care premiums; in other words, the employer health tax here. That's an enormous competitive advantage, and we need to keep saying that again and again.
Also, I believe that most of the automobile manufacturers would talk in pretty glowing terms about the skills of the Ontario workforce.
Thirdly, we do have an infrastructure here and a lifestyle that is, I think, considerably better than south of the border. They've got their own problems. I appreciate that, but I feel very strongly that we've got a place, in Ontario, to invest that's second to none.
They're having their problems. I looked at the General Motors announcement. There are major problems here, but look at the layoffs in the US that General Motors has announced as well. They're not simply picking on Ontario. They've got their own corporate problems.
The Chair: Minister, it's 3 o'clock and each of the caucuses has had 10 minutes.
Mr Conway: Surely you're not serious about that.
The Chair: Unless the Treasurer has any more time here to split up five minutes each, but I'm just following your directions at 3 o'clock.
Mr Phillips: I want to express my concern, because I think it was a year ago almost exactly that the Premier went on television and talked about opening the process up and making the numbers available. The material we've got so far from Treasury on the numbers is a fraction of what we got last year. The Treasurer shakes his head no, but we don't have revenue outlook by revenue point. We don't have any expenditure estimates that we had last year. There's far less information available to this committee.
We heard today that the staff was available only until 3 o'clock. I know we may change that, but I would hope the Treasurer would appreciate that for us to play our role, I think we should have more access to the Treasurer, more access to Treasury staff so we can get at some -- we have a whole list of questions that we thought we would be discussing this afternoon.
Mr Sterling: I want to add to the concerns. Not only was I able to ask only two questions and didn't receive any kind of detailed response to either one, but I was not able to ask a whole series of other questions along with my counterpart. If in fact the Treasurer does want some advice, I think it's only fair that we be able to have some questions as to what in fact his figures do mean.
The Chair: As the Treasurer asked some questions of the committee, maybe we could answer those next time the Treasurer comes back. And maybe make the questions a little bit easier next time; then you would wind up being able to ask a whole bunch of short ones.
Mr Phillips: Why doesn't he write the questions?
Mr Conway: Do I take it this is the Treasurer's only appearance before this committee before the budget? I've got a great deal of respect for this Treasurer, but he knows that coming to this committee for 58 minutes and ending an interesting submission with three very useful questions and suggesting that he and his retinue must repair to other important executive business is something between farce and fraud. I've got too much respect for my friend from Nickel Belt to honestly believe that as a very good parliamentarian, he honestly expects particularly my friends who ordinarily sit on this committee to treat this process seriously if he and his senior officials are not themselves prepared to make themselves available, to a legislative committee charged with advising on matters of finance and economic policy, for more than 58 minutes on a January afternoon.
Hon Mr Laughren: Mr Conway, I know that I could spend a great deal of time here and learn a great deal from what you would have to say, but --
Mr Conway: I want to talk about judges' salaries, for example. Do I get a chance to ask you that question?
Hon Mr Laughren: Let me finish my sentence. I was here last year for I think about the same period of time. There's been no attempt by Treasury not to provide you with all the information that we can. I think some of the questions have been put in a way that's been difficult for us to understand where you're coming from, but not because we don't want to share information. We're not in that business.
We are shortly going to be launching a major consultation, because I think it's our obligation to consult not just with members of the Legislature, with whom we spend a great deal of time for many months of the year, but with folks out there from across the province. So we're going to be spending most of our efforts in consulting with other people out there across the province, not just the people who sit in this chamber.
Mr Conway: Darcy McKeough and Larry Grossman couldn't have said it more contemptuously.
Hon Mr Laughren: I don't think that's contemptuous.
Mr Conway: Surely this committee and this Legislature count for something.
Hon Mr Laughren: That's why I'm here.
The Chair: Mr Conway --
Mr Conway: I have some questions and I want to know --
The Chair: Yes, but it's gone past 3 o'clock. The Treasurer said he will come back.
Mr Conway: I'm asking him to stay.
The Chair: This is the second day of hearings.
Mr Conway: I want to ask this man some questions about issues that concern my constituents. I'll come back if he'll come back.
The Chair: I guarantee you that he'll be coming back.
Hon Mr Laughren: Mr Chairman, we made an arrangement, both in my schedule and others' schedules, to be here from 2 to 3. If that was not acceptable to the committee I wish you had said so. I thought that was agreeable to the committee and that's why we're here from 2 to 3.
The Chair: I knew you would be here for only one hour but I didn't know if the staff did. That's why I asked the question at the very beginning, because it wasn't clear on the document.
Hon Mr Laughren: But the committee can't make an agreement one minute and say, "Yes, come for an hour," and then say, "No, no, we don't want you for an hour; we wanted you for all day."
The Chair: I would say you've been here longer than 58 minutes. I'd like to thank you for appearing before this committee, Treasurer. Some of the questions of Mr Phillips and Mr Sterling your ministry will get back to, and we'll see you back at this committee in a couple of weeks.
Mr Phillips: Mr Chairman, you told me that the staff was staying beyond 3 o'clock today.
The Chair: Treasurer, can any of the staff stay?
Mr Conway: I'm sure they can't; they're busy people.
Hon Mr Laughren: They are.
Mr Conway: I know they are. This committee is something more than a joke too.
Hon Mr Laughren: But they will come back.
Mr Carr: Mr Chairman, may I make one suggestion? I know the Treasurer wants to be helpful. We wasted a little bit of time arguing there.
The Chair: That was after 3 o'clock.
Mr Carr: Maybe if we had one more quick question each so I could get one question. I promise I'll keep it under 30 seconds. Would it be possible, since the staff isn't staying, that each of us get one more quick one if we promise to make it short? Can that happen?
Mr Ward: Just a point of order, Mr Chair: We had a designated time. It seems to me that the minister has other scheduled appointments to attend to, as well as his staff. But I think we should be able to work in another appearance by the Treasurer, if not his staff as well, at a later date.
The Chair: All right. Following the direction and being the Chair, I say no more questions.
Mr Phillips: Didn't the original schedule show the staff here longer?
The Chair: That's why I just asked the question.
Mr Phillips: The schedule I was given -- this is the first time I'd seen that schedule.
Mr Carr: Since we're into this now, my office was called, asking if it would be acceptable for the Treasurer to come for an hour but for the staff to also leave with the Treasurer. My reply to them was: "Thank you very much. The Treasurer is very busy but I would like the staff to stay."
Just so it's clear, I was under the impression, having been phoned in my office, because they then phoned me and said, "What about the staff?" -- I think the Treasury department will confirm this -- and my office said: "No, we would like to have the staff there. We don't get much chance to deal with them." So I came with the understanding that there would be at least another hour with the staff. That's why I thought that if there's a bit of compromise, if they can't stay and if the Treasurer would be willing, out of the goodness of his heart, because I know he's trying hard, to answer maybe one more question for each, we could do it. I want to tell you, my understanding was that the staff was going to be here for an extra hour. Anyway, that's for the record, so people know what happened.
Mr Phillips: I did exactly the same thing. The schedule that was handed out yesterday, Treasurer, as you know, has Ministry of Treasury and Economics officials from 3 o'clock on. I told people I would be late tonight.
Hon Mr Laughren: I wasn't aware of that. We'll make sure they come back.
The Chair: Mr Phillips, I was just talking to the clerk here. There was a little line at the bottom, "subject to change," and she did change it.
Clerk of the Committee: We handed it out Monday morning.
The Chair: So yesterday morning it was handed out.
Clerk of the Committee: The new one.
The Chair: The new one. Thanks, Minister, for appearing before the committee. We'll welcome you back again next time and we'll get shorter questions for you.
Hon Mr Laughren: Okay, thank you, Mr Chair.
The Chair: This committee's adjourned until tomorrow at 10 am.
The committee adjourned at 1511.