Legislative Assembly of Ontario

PRE-BUDGET CONSULTATIONS

ONTARIO PUBLIC SERVICE EMPLOYEES UNION

CANADIAN FEDERATION OF INDEPENDENT BUSINESS

INFORMETRICA

BANK OF MONTREAL

ONTARIO RESTAURANT ASSOCIATION

CANADIAN MENTAL HEALTH ASSOCIATION, ONTARIO DIVISION

ONTARIO GOOD ROADS ASSOCIATION

CONTENTS

Wednesday 26 February 1997

Pre-budget consultations

Ontario Public Service Employees Union

Mr Jim Onyschuk

Mr Bill Kuehnbaum

Canadian Federation of Independent Business

Ms Catherine Swift

Ms Judith Andrew

Informetrica

Mr Mike McCracken

Bank of Montreal

Mr Tim O'Neill

Mr David Hall

Ontario Restaurant Association

Mr Paul Oliver

Canadian Mental Health Association, Ontario division

Mr John Kelly

Mr Glenn Thompson

Ms Ruth Stoddart

Ontario Good Roads Association

Mr Denis Merrall

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

Chair / Président: Mr TedChudleigh (Halton North / -Nord PC)

Vice-Chair / Vice-Président: Mr TimHudak (Niagara South / -Sud PC)

Ms IsabelBassett (St Andrew-St Patrick PC)

Mr JimBrown (Scarborough West / -Ouest PC)

Mr TedChudleigh (Halton North / -Nord PC)

Mr JosephCordiano (Lawrence L)

Mr Douglas B. Ford (Etobicoke-Humber PC)

Mr TimHudak (Niagara South / -Sud PC)

Mr MonteKwinter (Wilson Heights L)

Mr TonyMartin (Sault Ste Marie ND)

Mr GerryMartiniuk (Cambridge PC)

Mr GerryPhillips (Scarborough-Agincourt L)

Mr GillesPouliot (Lake Nipigon / Lac-Nipigon ND)

Mr E.J. DouglasRollins (Quinte PC)

Mr JosephSpina (Brampton North / -Nord PC)

Mr WayneWettlaufer (Kitchener PC)

Substitutions /Membres remplaçants:

Mr BillGrimmett (Muskoka-Georgian Bay / Muskoka-Baie-Georgienne PC)

Clerk / Greffier: Mr Franco Carrozza

Staff / Personnel: Ms Alison Drummond, research officer, Legislative Research Service

The committee met at 1003 in committee room 1.

PRE-BUDGET CONSULTATIONS

The Chair (Mr Ted Chudleigh): Could we call the meeting to order.

ONTARIO PUBLIC SERVICE EMPLOYEES UNION

The Chair: We welcome the Ontario Public Service Employees Union, Mr Bill Kuehnbaum and Mr Jim Onyschuk. Am I close?

Mr Jim Onyschuk: It sounds like "Honest Ed," except no relation.

The Chair: With the last name of Chudleigh, I'm sensitive about pronouncing last names correctly. Welcome to the committee, gentlemen. We have a half-hour to spend together. If you'd like to make a presentation, we could fill the remaining time with questions. Please proceed.

Mr Bill Kuehnbaum: Thank you, Mr Chair. I am Bill Kuehnbaum. I'm the first vice-president and treasurer of the Ontario Public Service Employees Union. This is Jim Onyschuk. He's a researcher from OPSEU's research department. On behalf of OPSEU, we're pleased to make this submission to the standing committee regarding the 1997-98 budget for the province.

I imagine most of you know who OPSEU is, but for the record, we represent about 100,000 workers in the Ontario public service, in the broader public sector and across the province in the community college system. Within this framework, we represent a broad range of workers: those people who inspect highways; who look after our public parks; who provide emergency care for medical patients in ambulances, seniors in long-term-care facilities, people with mental illnesses, children being protected from abuse and developmentally handicapped adults.

Our members ensure that Ontario has clean water and is protected from corporate polluters of our land, air and waterways. They work in not-for-profit correctional facilities, teach young adults and adults in community colleges. Some of our members work in universities. We work in courts, make sure that property taxes are assessed properly and collected. We deliver social services across the province, work for human rights. We provide support and resources to cultural groups, tourism operators, housing providers and tenants across the province.

The perspective we bring to the standing committee's work is that of the front line. We are the ones who deliver government programs. We believe that this makes us uniquely qualified to comment on the delivery of public services and issues related to their delivery. We're not the only ones who think that.

OPSEU has the distinction of being the only union mentioned by name in the Common Sense Revolution document, which states the following: "The Ontario Public Service Employees Union has developed several commonsense proposals for ending waste and duplication. We will work with government employees, listening to their ideas and eliciting their help in taking action." We are waiting for the consultation that was promised. Maybe this is part of it.

It should be no surprise to anyone that OPSEU disagrees not only with the specific measures but also with the overall approach taken by the government on budgetary matters. We know the approach of this government will increase economic and social inequality in Ontario. It's based on extremely short-term thinking. We know it will reduce public accountability over government expenditures, that it will damage the economic and social infrastructure of Ontario and that it will not achieve its stated goal of job creation. We believe this spring's budget calls for a new direction to begin correcting some of the more obvious distortions that the Common Sense Revolution is causing.

In the weeks ahead, OPSEU will be joining with other unions, the Ontario Federation of Labour, grass-roots seniors', students', women's and anti-poverty groups, with children's services organizations, teachers and a number of other groups that are within the Ontario Alternative Budget Working Group to present an alternative budget for Ontario. The alternative budget will take a fundamentally different approach from that of the current Ontario government, addressing the issues of deficit reduction, job creation and fair taxation head on.

The process of budget-making is about making choices. Most of Ontario history is about Ontarians choosing to build a public infrastructure: a framework of laws and regulations, provincial roads, schools, hospitals, parks, courts and correctional facilities. These services have evolved under the leadership of several political parties and have been gradually refined since before Confederation.

Public services have helped make Ontario what it is today: a place that people want to move to. We've attracted people from around the world. We've developed our natural resources and we've built great cities. Toronto was designated recently as the best major city in the world to live in by Fortune magazine.

Our network of roads, social services, education and health care form the base on which Ontario's private sector has thrived. One of your earlier delegations, representing road builders, noted that three quarters of our exports enter the US via public roadways. We know that public health insurance keeps health care costs low for companies like General Motors, relative to our competitors. We know that our post-secondary education system develops the brain power that has turned Ottawa into a booming centre for the computer software industry. We know that the public sector has a role to play in our current and future financial health and that financial health can pay for accessible public services for everyone.

But now, coming up on two years into this government's mandate, these pivotal elements of our society are under the deepest threat they have ever faced. Seniors, people with disabilities and family caregivers are extremely anxious about the availability and security of health care and the cost of user fees and privatized services. With post-secondary education funding drastically cut and tuition fees skyrocketing, parents are deeply worried about their children's future. It is time for a change of direction in this spring's budget.

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Before I go further, I'd just like to state as simply as possible the difference between the Ontario government's economic analysis and OPSEU's.

The government's official version goes something like this: Cutting public services will reduce the cost of government. Cheaper government allows government to reduce taxes. Reducing taxes stimulates economic growth. Stimulating economic growth creates jobs. Creating jobs will allow the government to eliminate the deficit and pay off the debt.

OPSEU's version is different. It goes like this: Money spent on public services provides more economic stimulus than money given to private citizens in the form of a tax cut. The reason for that is that all public service dollars are spent, and almost all are spent in Ontario. Money received by private citizens through tax cuts may be saved, it may used to pay down debt or it may be invested outside of Ontario. Therefore, cutting public services to pay for a tax cut reduces the amount of money in circulation in Ontario, and this creates an economic drag, reducing job creation.

We know from studies done on the federal debt situation that the three primary causes of government debt are high unemployment, high interest rates and a shrinking tax base. That's why we say in our next point that when unemployment remains high, deficits and debt cannot be eliminated. When governments reduce revenues and unemployment remains high, deficits will continue to grow even more. Deficits will grow as long as the real interest rate on public debt is greater than the rate of growth in the economy.

That's the short form of the story.

The government claims that it will accomplish the economic miracle of job creation, deficit reduction and tax cuts all at once, and we say they're nuts.

Which of these two theories is right or most likely to produce the desired results? The government's theory has been tried a couple of times before. It is basically a variation of the economic policies of the Reagan era in the United States. These are the policies that came to be known as "voodoo economics," and they're the policies that resulted in a massive increase in the federal debt in the United States. Over the period that Reagan practised this same kind of economic theory, the debt of the federal government in the United States quadrupled.

You don't have to go back to the 1980s in America to see the impact of these policies on jobs. Despite promises that the Common Sense Revolution would create 145,000 jobs a year in Ontario, job growth figures are now down for the first time in three years. Our current unemployment rate is over 9%, up from 8.7% a year ago, and over 500,000 people in Ontario are looking for a job. Thousands of young people despair of ever finding full-time employment. The increase in the number of jobs in 1996 was 35,000. Ontario was the only province to produce fewer jobs this year than last.

The Common Sense Revolution is not creating jobs, and without jobs it cannot pay down the debt unless interest rates are very, very, very low.

Obviously a person has to wonder why the government would bring forward the kind of policies that are in the Common Sense Revolution when they have been tried before and failed. The reason, we believe, is that the goal is not job creation or even deficit reduction. The real goal is to increase the role of the private sector in the economy and to increase the wealth and power of the people who are already wealthy and powerful. The most obvious example of this is when you look at who really benefits from the tax cuts. The major beneficiaries of reduced tax rates are people who earn far more than most of the members of OPSEU.

Further, cutting public services and cutting the taxes that feed those public services accomplishes the same thing. When you cut $1.3 billion out of Ontario's hospitals, some people are going to put pressure on the government to allow increased private medical care. Forget about the fact that Canada's public health care system is very cost-effective. It insures everyone in the country for only three quarters of the rate of the American system, and the American system has 35 million people who are not covered by health insurance.

We believe that the privatization of public services is more important to this government than job creation, more important than paying down the deficit, more important even than tax cuts. There is no evidence that privatization will or will not save taxpayers money. There is no evidence that taxpayers get better value for money through privatization.

It is certain that well-off investors increase their income through privatization. It is certain that public accountability is reduced. It's certain that the wages of ordinary working people go down as a result of privatization. It's certain that public services become accessible to fewer and fewer people through privatization. It is certain that overall economic equality in society is reduced through privatization. When the government talks about bringing the profit motive into things like control over our drinking water, people should be very concerned.

Since we are talking here about the government spending less money and since privatization is not likely to save money, I want to talk a little bit about the latest effort to cut money out of public services. I think the government is beginning to realize the difficulty of eliminating the deficit through the dubious savings of privatization and service elimination while at the same time reducing the revenue stream by cutting taxes. That is why they are now looking for another $2 billion or $3 billion to cut out of public spending. That is money that will come right out of the economy, resulting in further economic drag. Jobs will not be created.

The latest budget-slashing exercise is called "disentanglement." It seems pretty bizarre. To get their $2 billion or $3 billion, about $1 billion is going to come out of municipalities. Then once you've got control of the school system, we think you're going to go after the teachers for another $1 billion. This will of course cause a major disruption some time in 1998, affecting every school-aged child and every parent with school-aged children in the province.

For municipalities saddled with $6.5 billion worth of new services to deliver, the result will be public service cuts, increased user fees and, yes, even tax increases through increases in property taxes.

What we've got here is $12 billion being thrown up in the air, hoping that no one notices only $10 billion lands on the ground, and that's called the "wash." It's a pretty transparent deception.

Now, is the chaos really worth it? At the end of disentanglement, we will get a net economic drag, because the drag from the service cuts will exceed the stimulus from the tax cuts. As far as job creation is concerned, which is the only thing that will pay off the deficit without demolishing public services, this part of the Conservative government's agenda will be completely futile.

The net economic benefit to Ontario will be zero at best. The only people who say that public services will be improved by this are members of the government caucus. In fact, public services will be devastated. If all the government is trying to accomplish with this year's budget is no net job growth, no improvement in public services and a completely questionable impact on the deficit, there's a much simpler way to go about all this without anywhere near the same amount of hassle.

This is our recommendation:

First of all, forget about the tax cut. Secondly, forget about disentanglement, which is causing you a headache everywhere in the province, and take the summer off. When you get back in the fall, lobby the hell out of the federal government to do everything it can to lower interest rates. We know that they're lower than they have been, but they could still go lower. Lower interest rates not only reduce the deficit, they'll also stimulate the economy and reduce loan payments for homeowners and other borrowers and homeowners will really thank you for this. When you go to borrow money, borrow as much of it as you can from Ontarians so that the interest payments stay here and the economy grows some more.

One last word: The government says it wants to attract investment to Ontario. The best way to do this is to create a stable environment for business, filled with healthy, well-educated workers, a clean natural environment and a strong public infrastructure. The opposite choice is to continue on the road we are on now, the road that makes Ontario look less and less like a modern democracy and more and more like dirt-road Alabama. Thank you.

The Chair: Thank you very much. That leaves us about four minutes per caucus and we'll start with the official opposition.

Mr Gerry Phillips (Scarborough-Agincourt): I guess just a couple of questions on your presentation. I do think you have your finger on what we regard as, if not the most important, probably one of the top two or three most important, and that is the employment situation. I think you point out an interesting statistic, that Ontario is the only province that created fewer jobs in 1996 than it did in 1995. You also point out among young people how serious it is. We've just seen the largest unemployment rate among young people that I've seen in Ontario ever, at least as far back as I can see the records.

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The question is on levels of services, because you're in a unique position, I think, to give us some advice on what's actually happening to levels of service in the province. The thing that I worry about is that we're moving to so much "community-based" care, community-based services that are difficult for us to measure. It's services in a different way and services often in the home. Can you give us any advice on what's actually happening to Ontario people who are looking to the government, and then in turn often your membership providing those services?

Mr Kuehnbaum: The most obvious place where we see this -- we see services declining everywhere, but I think you're talking about the service that the government provides for care of people who can't care for themselves.

Mr Phillips: Don't limit yourself just to that, but I'm thinking that's among the more difficult to measure.

Mr Kuehnbaum: It's hard to put statistics on it, but what we see is that the policy statements are, "Let's get out of the big institutions and get people back into the communities." OPSEU has never resisted that concept, but what we invariably see with the closure announcements which mean that people are going to disappear from the big institutions is that you cannot find the community-based organizations that are taking them up. We have case study after case study of people leaving institutions and there's no place really for them to go.

There are two places where they end up. One is on the street, like you see in Metro and Parkdale. You can go there any time of the day or night and those are people who used to be in institutions at one time. The other place they go is back to their parents. Often these people are adults now, and as their parents age, it's an impossible situation to care for their kids, but the kids end up going home and somehow they survive.

There's lots of different ways to deliver public service, and we support changes in the delivery of public service, but what we see are announcements of closures of public service or elimination of public service and no announcement about what's going to take its place. The family support program is a good example: "Let's really change how that's delivered," and some of those changes might have been a good idea, but that part of it wasn't put in place.

Mr Phillips: Can I ask a question on the size of the Ontario "bureaucracy," as they say? The government during the campaign in their Common Sense Revolution said they would trim the direct provincial workforce to the equivalent of what it was in 1985. We found last year when we looked at the numbers that the day they took office, the public service was the same size as it was in 1985. Those were the numbers. I think the committee members will remember that the staff produced those numbers that the public service was the same size in 1995 as it was in 1985. Then they're going to, I gather, trim 12,000 more or something like that, to reduce it to 12,000 fewer than it was in 1985.

Have you got the up-to-date numbers on the size of the Ontario public service now?

Mr Kuehnbaum: I don't remember the numbers from 1985, so I can't give you that.

Mr Phillips: I do.

Mr Kuehnbaum: I know that from our membership, the decline in the last year and a bit -- this is our direct public service membership -- is about 8,000.

The Chair: If we could move to the third party.

Mr Gilles Pouliot (Lake Nipigon): Thank you and good morning. I too have some compassion and sympathy vis-à-vis your presentation. I have a few brief questions. I need your help.

Take or leave $100 million or $200 million -- I'm referring to the four instalments regarding the tax cut -- our calculation is that, grosso modo, when everything is in place, you would be looking at lost revenues of approximately $5.4 billion per year. We know that the PIT on the revenue side generates about $15 billion a year, so you would in essence take 30% out of that $15 billion.

We're also very painfully aware, and we have been reminded, that when the new government took office on June 8, 1995, they were burdened. They had to face a debt of some $11 billion.

As economists, are you of the impression that if you were to apply the $5.4 billion or a portion of that $5.4 billion directly against the debt, it would be more beneficial than hoping that you would recover through trickle-down rhetoric -- simply put, do you believe they're on the hook for a 30% tax cut? Revenues are always the glass jaw of every government's economic argument. What would you do if you were the government on the eve of the budget?

Mr Kuehnbaum: We're convinced we're not going to deflect the government from diminishing public services. We've got lots of arguments why they shouldn't do that. We're not going to succeed in that, so the gist of this presentation is: Go ahead and do that. We know you're going to do that. But for heaven's sake, get out of the tax cut business, because that works directly contrary to all of the other objectives which are stated. It's not going to provide the kind of stimulus -- if deficit reduction is what you need to do before we can get back thinking about delivering public service, let's attack the deficit; it's a lot better, and reducing your revenue stream doesn't get the deficit down.

Mr Pouliot: You've placed an emphasis on alternate services being in place before downsizing or re-engineering of the civil service. I remember vividly, and I'm not asking that question, but by way of comment, that we had a red book that said they would cut 12,000. Then we had a blue book -- a curse on both their houses, I guess -- that said they would up the ante by 1,000, gutting the civil service by 13,000.

We had the social contract. I guess time does that, but when I look at their intent and their actions, I see the social contract had a human dimension attached to it. Do you feel that by the normal rate of attrition -- do you intend to come up with an alternative proposal? Again, what would you do? In your preamble, the tone is that things change. We're in a constant flux of changes; things cannot remain the same. You're the front-liners. Your members are doing the work. How would you do it cheaper and as efficiently without privatizing? What's your answer to a mixed bag? What would you do?

Mr Kuehnbaum: There's no question in fact that in the Common -- I shouldn't say that. I don't remember in the Common Sense Resolution.

I know from listening to all-candidates' meetings in Sudbury, this question was raised by Mr Zanibbi, who was the Conservative candidate, and he talked about big downsizing in the public service by attrition. We thought that those numbers could be reached by attrition, especially when we see the last collective agreement had some decent stuff in it about early retirement incentives, and those work. There is no question that the number of direct public servants could have been knocked off by the thousands without lots of layoffs or elimination of services.

We've found we have to acknowledge there has been a huge inefficiency in the delivery of services. I work in a community college, and we have fewer staff and are delivering approximately the same number of programs. So efficiency goes up right away, and that efficiency was created by people departing of their own free will through incentives but the same number of programs being delivered. That is a way to increase the efficiency of delivery of service in a very rapid fashion.

The Chair: Thank you very much. If we could move to the government side.

Ms Isabel Bassett (St Andrew-St Patrick): Thank you very much for your presentation. Two things that you mention in your report I want to pick up on.

One is the tax cuts. You implied that it was going to the rich, and I just want to make clear that 91% of the tax cuts go to people earning a combined income of $60,000 or less and that they can expect a cut in the income tax rate. Secondly, Patti Croft, who presented here last week, said that one way -- the only way, in fact -- to get consumers spending again is to put more money back in their pockets, and that's through a tax cut and reducing the level of taxation. I wanted to point that out.

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Secondly, jobs: In terms of jobs, what we are doing is restoring business confidence. Anywhere you go, statistics and reports show that we are considered as a place where confidence is good. Businesses are moving in here. In 1996, Ontario created 90,000 private sector jobs, 56% of the national total, and Ontario accounted for 82% of the net new retail and wholesale trade jobs here in Canada, 73% of the net new manufacturing jobs in Canada. We are beginning to move; the ball is beginning to move. Are you totally against businesses moving in here because of tax incentives? They are the ones that are going to give the jobs. I just don't see where you're coming from when we see this starting to move.

Mr Kuehnbaum: I'm assuming you are making your argument that businesses want to move here because the government is getting its fiscal house in order and all that kind of business.

Ms Bassett: Yes, good business.

Mr Kuehnbaum: Right. But what I'm saying is, if that's your objective, getting the fiscal house in order, you can't suck and blow at the same time. If fiscal responsibility of the government is what you think makes businesses move here, and I'm not exactly sure that it is, but if you think that, then abandoning your tax cut will make them think even more highly of the government for attacking its deficit problem, because it won't be sucking and blowing at the same time.

Mr Jim Brown (Scarborough West): We agree. I agree with you that interest rates are very, very important for job creation. You're recommending that we take the summer off and lobby the federal government to do everything to lower interest rates, but since June 1995, interest rates have come down significantly, and June 1995 is when we got elected. Interest rates, I'm sure you'll agree, are a reflection of the confidence level in the Canadian economy, in the value of the dollar, and since Ontario comprises probably the most major portion of the Canadian economy, would you not agree that a lot of what we've done has caused the interest rates to fall? If you don't agree with that, what would you say did cause interest rates to fall?

The second question is, to lobby the federal government I guess to get their house in order -- is that what you're inferring?

Mr Kuehnbaum: The federal government has a much bigger impact, more leverage on the level of interest rates, than you folks do, and they can do it in a bunch of different ways. But interest rates are driven by the demand for money, and if you folks go through with your tax cut, you're going to have to borrow money in order to finance that. That means there is more demand for money, you have increased the demand by however many billion dollars, and that tends to make interest rates go up as the demand for money goes up, so that financing tax cuts by deficit financing works exactly against low interest rates.

Mr Jim Brown: But wouldn't you agree -- it seems that you know about the market -- that the market discounts the future and the market is a very, very all-knowing system, and wouldn't you agree therefore that the rates that we're presently enjoying discounted the future and have in fact taken into consideration whatever future we would have in terms of borrowing?

Mr Kuehnbaum: To tell you the truth, I don't have a clue what goes through the mind of the individual or individuals who set those rates. Sure, they make some speculation about the future. If you want to drive them even lower, prove that they're wrong about how you're going to finance your tax cuts. If you were to say, "No, we're not going to go to the market for billions to finance the tax cut," I think there would be an adjustment in the interest rates downward even more.

Mr Jim Brown: I think you don't understand how the market discounts the future.

The Chair: Thank you very much. We appreciate you coming in to make your presentation for us today.

CANADIAN FEDERATION OF INDEPENDENT BUSINESS

The Chair: Our next presentation is from the Canadian Federation of Independent Business, Catherine Swift and Judith Andrew. Welcome to the committee. We have 30 minutes together, and if you would like to start with your report, we will use up any remaining time in questions.

Ms Catherine Swift: Thank you. I'm Catherine Swift, president of the Canadian Federation of Independent Business, and I have with me Judith Andrew, our executive director of provincial policy with special responsibility for Ontario. Another one of our colleagues, Rita McCague, is here with us today to help us out.

We thought we'd have a slide presentation. The slides are contained in the back of the brief, just for your information. The kits that we distributed include naturally our brief here today that we'll breeze through as quickly as we can. It's pretty full of stuff, so we are going to have to go through and very briefly touch on most of the important elements, but we will unfortunately probably have to leave the odd thing out just in the interests of time.

We have in the kit, as you'll note, a very brief piece based on one of our surveys looking at the small business outlook for this year, 1997. We'll be touching on that briefly, as well as a copy of a very substantive study we did late last year on a national basis called On Hire Ground, which has breakouts for the provinces, so you can see how Ontario stacks up, as well as some coloured charts that pertain to the results in that study.

Thank you very much for the opportunity to appear before you today. As always, we appreciate these opportunities. As the data have shown not only in Ontario but nationally, but notably in Ontario, over the last 20 or 25 years small business does seem to be creating the lion's share of net new employment. A lot of what we have to say today will have to do with jobs and various aspects of that. Some of this initial data is coming out of our job study.

This first chart that you see here: There's been a lot of discussion often that in the small business sector there's a lot of turbulence in terms of job creation and job destruction, if you will, in that sector. This is true, it's not anything that we've ever denied, but we think it's worth pointing out that on a net basis we certainly see a lot more on the plus side of the ledger than the negative and that that turbulence indeed is perhaps not as orderly as we all might like things to be but it is very much a necessary facet of any dynamic economy.

When you look at other economies around the world that don't tend to have this kind of turbulence, what they tend to have is very stagnating economies. The European economies are classic examples of that right now, where they've been so burdened by taxation, regulation, legislation for decades that they have stagnated and they're not having that job creation.

So the small business sector does tend to be a dynamic sector and you do see job losses. As you can see here, there are proportions of things like layoffs, voluntary job leavers and so on, but you'll also notice that the new hires and the recalls -- this particular chart, for instance, pertains to the 1996 period, but the proportions there are much higher on the plus side. Just to explain those strange little dots, we compared our own data from our own survey to StatsCan data for the economy. The trend lines are virtually the same but you'll see it's a little out of whack on the zero to four, the very smallest of firms. That's because in our membership we actually overrepresent slightly larger small firms, if you see what I mean, the ones that are, say, in the five to 20 or the 20 to 49 employee groups, and slightly underrepresent the zero to four. So that's the reason for those differences there.

In the next slide, of course we've heard a lot about youth unemployment. The previous presenters were mentioning youth unemployment. What we found in the study that we found particularly intriguing, given that we have such a high rate of youth unemployment right now, is that smaller firms, and notably young firms -- and this particular chart pertains to younger firms that have been in business here one year, two to four years and so on -- disproportionately employ younger people; in other words, higher than the proportion in the overall economy. In the overall economy, for example, there's 14.9% you see off to the right, and you see all of these firms -- basically, young firms hire young people, so naturally, any policies that encourage the creation and the growth of new businesses are going to have a positive impact on youth unemployment.

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The next slide deals with the range of occupations. There have often been comments that these are all in certain sectors and what not, but what we found in our study was that it was very much reflective of hiring in the economy overall: executive management about 5%, which pretty much reflects the economy, and so on down the list. There certainly is a diversity of employment opportunities out there in the small business sector.

It's a little bit complicated with all those little blocks there, but you can see there that in terms of wages, the majority of employment during that period happened in wage ranges that were -- you see the largest columns in the $10- to $20-an-hour range and significant chunks in the over-$20-an-hour range as well. In other words, we certainly don't have a lot of minimum-wage jobs exclusively being created out there. In fact, it pretty much tracks the economy.

Overall, these data from the survey basically reflected what I guess we knew in terms of small business job creation being so very significant, but it gave a little more detail around things like, where was the hiring happening, what kind of wages were being paid and so on.

These are StatsCan data, the overall improvement in employment levels over December 1995 to 1996. What you see here is overall private sector job creation of about 90,000, and of course the government employees, the public sector -- that would be all levels of government lumped in together here -- knocking 20,000 off that. In other words, you've got a net of around 70,000 jobs created. Of course, that big chunk of self-employed is certainly worth noting because that's where we've seen the lion's share of growth in the last year or so.

In terms of our own forecast, we do a forecast every year among our members late in the year, and the 1997 forecast is quite optimistic. As you can see, 1996 wasn't a terrible year but it was spotty. The first half of the year was kind of slow and then it did pick up steam towards the end. By the way, I went back and checked our forecast for 1996 just out of curiosity to see how accurate we were, and our numbers were pretty bang-on with what actually happened. I think they do have a pretty good grip about what they see for their own business and their own local economy, so aggregated they give a pretty good picture of what's going to be happening across the board.

Here we see them notably more optimistic than they were for 1996, with a very small proportion of our members actually thinking that 1997 is going to be weaker than 1996. Our Ontario members, by the way, just to give a national comparison, were among the most optimistic in Canada. I think that reflects what we've been seeing also in some surveys that have come out lately on business confidence levels in Ontario. Our data very much support that.

Our members typically are cock-eyed optimists. I think you probably have to be if you're in small business in this country, and they do reflect that. As a result, their expectations for their own business typically exceed or are more optimistic than those for their economy, and this chart reflects that.

In terms of hiring plans, the last chart looks at where they expect to be hiring, whether it's full-time or part-time. As you can see, there's an increase in that full-time element this year. We're seeing in that StatsCan data too, that part-time jobs typically take place more in the earlier parts of a period of economic growth and upturn in the business cycle and those turn into full-time jobs. We have been seeing this not only in our own experience but also in the StatsCan labour force data. That's very much a trend. There's been a lot of concern over part-time growth, seemingly thinking that most of the job creation happening out there is part-time, but the data belie that contention. In fact, we see the part-time jobs turning into full-time jobs across the board.

I'd like to turn it over to Judith now to talk about some of our policy issues.

Ms Judith Andrew: Good morning. I guess I'm going to confuse everyone, hopefully not my slide-turner, by mixing up the slides a little. I'd like to turn to figure 10 if you're following along in the brief. This is a tracking of small business high-priority issues over the last while since 1994, and it's for the same period. It basically covers the last six months of each of the years involved, with the tabulation done in January. We're finding that these priority issues don't much change over the years, although the developments in each of them tend to affect the percentage of members, indicating that it's a high-priority concern for them.

What you'll find, of course, with the aberration of last year, where debt and deficit took the lead, is that now we've returned to the usual situation where total tax burden is the perennial number one concern of the small business sector. It's the cumulative burden of all the taxes and all the levies and fees which is so detrimental to small business and which robs them of their earnings and in some cases their capital.

I'll ask for figure 11 now. No taxes are ever much liked, but this is the lineup of the taxes that are of most concern to our members. You can see that workers' compensation premiums head the pack and then down the line property tax, business tax, employer health tax and so forth. It's quite significant, that the first few taxes that are of most concern to the small and medium-sized business sector are in fact profit-insensitive taxes. These are the taxes that are levied relentlessly, regardless of whether you make a penny of profit.

We have a little cartoon here. The humorous side of this is that essentially all three levels of government have small business surrounded and they're just waiting for the disposable income to be thrown out.

Back to figure 11: I'm not going to say very much about workers' compensation other than that we are supportive of the reforms coming forward from the Ministry of Labour. Our members would also go one step further in terms of reforming the workers' compensation system, and that is to move that system to a competitive system. They believe that a monopoly, government-run system is really out of touch with what's happening everywhere. They would indeed like to see private insurance options for workers' compensation insurance, and that's one area that we will press for in the upcoming hearings on Bill 99.

On the employer health payroll tax, our members are very appreciative of the relief that was announced in the 1996 Ontario budget. We're calling on about 1,500 Ontario members a week at their places of business and we're getting very positive feedback on that measure. That measure actually showed up in our surveys even before it began to be felt in January 1997, and of course our members are looking forward to the phase-in of the first $400,000 EHT exemption happening over the next two years.

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What's distressing is that as soon as some tax room is vacated, other levels of government tend to move in with new taxes to take up that tax room. That's certainly happening right now with regard to payroll taxes. We have Canada pension plan reform and some pretty significant increases coming down the pike. At the same time, the employment insurance system federally is overfunded in the sense that it's building up some pretty significant surpluses in that account in the order of $5 billion a year. We felt, and we certainly argued before the federal government, that more substantive EI reductions would be in order to counter what was happening on the CPP side. That didn't happen and we have this outcome where we have a counterproductive approach between levels of government in terms of lowering tax burden.

We call on the Ontario government to continue working with both the federal and local levels of government to have tax and other policies that are supportive of the job creators.

On the local property tax side, these are big, big issues, obviously ones that are being dealt with in the property tax reform that's to happen this spring. It's probably worth noting that Ontario is the world champion of property taxation. In terms of total property and wealth taxes, we extract something in the order of 5% of gross domestic product. This is the highest in Canada and well above the level of any of the developed countries in the world.

Apart from our taxes being high by world standards, there are also significant problems in how they're distributed, with huge distortions between classes. The issue of most concern for us is that businesses are shouldering, in the case of all Ontario, double the property taxes that residents are paying for properties of the same value. In Metro Toronto, it's even more acute; businesses are shouldering triple the taxes that residents are paying for properties of the same value.

Our recommendation in this area is that the reforms must indeed provide a guarantee of no more taxes on the business property tax base. We're worried about some of the announcements that have been made so far in terms of giving municipalities the power to use variable mill rates and so forth, and we will be making a major issue of this because this is a very big concern for small and medium-sized business.

Figure 9 comes from the survey that Catherine discussed in detail earlier, the Hard Facts survey. These are the conditions necessary for small business to hire more employees in 1997, beyond what their projections were. The number one condition is increased customer demand; 78% of our members said increased demand would indeed help them hire more employees. I think the other issue is less variability in sales; another 20% said that.

This is one of numerous pieces of data, and they're all described in the brief, that lend support to the personal income tax cuts. Our recommendation is to continue with the personal income tax cuts, maybe even consider accelerating them, given the consumption-dampening measures coming from the federal government. We certainly advocate a balanced approach of fiscal restraint and tax reduction stimulus to encourage job creation in the private sector.

The corporate income tax issue -- I'll get you to turn back to the tax table -- is a big one for about a third of our members. It's injurious to them. There is increasing concern by size of firm and so forth. When you look at the nationwide comparison of the small business corporate income tax rate, you see that Ontario now has the highest rate among all the provinces. At 9.5% it's only half a point shy of being double that of the lowest provinces.

Our recommendation in this area is to lower the small business corporate income tax rate by at least one point to improve our competitiveness with other provinces. We would also suggest that the whole CIT rate structure be reviewed for competitiveness on all fronts. We would also call upon Ontario to help press Ottawa to increase the small business deduction towards $400,000, as this deduction hasn't been adjusted in some time and has been greatly eroded by inflation.

The next few pages cover all manner of taxes, with recommendations on corporate minimum tax, sales tax, gasoline and diesel fuel taxes, corporate capital tax and so forth. In the interest of time today, we can't cover those, but they are important ones.

Turning now to deficit and debt reduction -- back to figure 10 in terms of the priorities -- this is the number two priority; 74% of our members say it's a concern for them. It subsided by a few percentage points this year, but still, three quarters of our members continue to place high priority on governments stringently controlling their spending to arrest the growth of debt and return the province to sanity.

It's pretty interesting and maybe I will draw your attention to figure 12. Ontario does get somewhat higher marks than the other levels of government in terms of their progress on controlling deficits and debts. In terms of an overall figure, 78% of the Ontario respondents say they're pleased with the Ontario government's progress. None of the other governments come close to that.

I think that's a pretty good snapshot in time in terms of how our members were feeling about mid-year last year. I think a pretty good start has been made at paring down the deficit but it's certainly premature to declare victory on the fiscal front, so we have some strong recommendations to continue balancing the provincial budget and to reinforce the need to do that with some balanced-budget legislation.

We've covered issues in the brief about unfair competition and re-engineering of government services. There are some recommendations about curtailing unfair competition in the brief.

I'd now like to turn to the third-ranked problem for small and medium-sized business: government regulation and paper burden. We have a little cartoon on this one. I know Jim Brown will appreciate this. The Red Tape Review Commission was launched last year and in our view did an excellent job at starting the process to help revise the regulations. Small business feels they're devoting so much of their time, effort and money to looking after government paperwork and complying with government rules, and really little too time at growing the business. It's very important that the government press forward with this. The report of the Red Tape Review Commission had some excellent recommendations which we support, and we've endorsed those recommendations in this brief.

The final issue I'd like to touch on is the availability of financing. This one tends to show up down the list of our members' priorities. At the present time, about 29% of our members put priority on the issue, and this is somewhat improved from about 36% over the same period in 1996. One might be inclined to believe that financing issues aren't acute or that in any case it's heading in the right direction, and that would be a wrong-headed way to look at it. For small businesses, these are particularly high numbers. These are up in the 30% range; that concern is at a very high plateau and it seems to be stubbornly there. During the 1980s, the number was only about 15% of smaller firms raising concerns about access to capital.

The other point about this is that capital access tends to be a live-or-die issue. For small firms, if they can't get capital their lifeblood is cut off. On the other hand, if the government passes another deleterious regulation, that's not going to drive anybody out of business although it's a big concern, but capital is a major issue. We were pleased when the committee on small business access to capital, headed by Rob Sampson and Joe Spina, released their report recently. There is some pretty thoroughgoing analysis in that report, and we agree with most of what's in there.

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Our recommendation in the financing area takes us back to the tax burden issue. It's important for the tax burden to be reduced to preserve the retained earnings as a key way of financing growth. There are some other recommendations in our brief dealing with labour-sponsored venture capital and other tax-supported venture capital approaches. These might have merit but they have to be proceeded with cautiously. This is an area that can very easily go the wrong way in terms of governments not getting value for money for the moneys they put into this kind of thing.

In conclusion, small business in Ontario is appreciative of the government's attention to creating a hospitable environment for them to grow and create jobs. The key to unleashing the job creation potential of our members obviously lies in reducing total tax burden, especially those taxes which are profit-insensitive, and squarely in that category are the payroll and property taxes, so you'll continue hearing from us on those.

We'll be happy to take your questions.

The Chair: Thank you very much. That leaves us with about one minute per caucus for questions.

Mr Pouliot: I wish we had more time. It has become a tradition where your organization pretty well sets the standard. We are pleased with the statistics. Your track record is accurate and you tend to give us some food for thought indeed. Philosophically, you will understand and appreciate that in a democracy there are groups that we can appreciate just as much by way of philosophy. Simply put, some of us attract another manner of humanity; those are the people we attract.

What is your forecast in terms of inflation for 1997?

Ms Swift: We don't see any evidence that inflation is going to be increasing above the current very modest levels. We seem to still have a lot of excess capacity, not only in terms of the obvious labour market, because we see that unemployment rate way higher than anybody wants it to be, but also we see it in our businesses too. We have to note that this last recession, particularly for Ontario businesses, was longer and tougher than even the early 1980s one. As a result there's still that capacity that shouldn't drive the inflation numbers.

Mr Tim Hudak (Niagara South): Thanks once more for an outstanding presentation. I always enjoy your being before this committee.

It's interesting. Throughout these two weeks of presentations we hear from economists maybe a bit on the left who believe in more of a government role, a spending role, and we'll hear more shortly; and then we hear from economists from the right who talk about the stimulus effect of small business and tax cuts. But what you bring to the table are the hard facts, as your survey says, what the ramifications are for small businesses.

I'm going to ask a question and try to make it very clear. The two competing paradigms you have are the Ontario government, which believes in cutting taxes along with deficit reduction to stimulate business, and then you have the federal Liberal government, which will just reduce the deficit. Sort of pulling the strings of our members across the floor, they believe in the same thing: "We'll leave tax cuts; we won't necessarily have tax cuts for some time." For job creation for small and medium-sized businesses, which paradigm would you recommend this committee to follow?

Ms Swift: Our members have been pretty clear because we have surveyed them endlessly on this subject. We were quite critical of the federal budget last week, the reason being -- we feel deficit reduction is important, no question; you can't mortgage your future forever, and we've done it a lot across this country. But we need some offsetting stimulus. We've seen downsizing in the public sector; we've seen large corporate downsizing. We see unfulfilled potential among our members to create jobs, so we feel there is scope for balancing fiscal prudence, if you will, with tax relief. We Canadians, not just small business but all Canadians, I think, know we're overtaxed. Look around the world: High-tax economies are high-unemployment economies; lower-tax economies are high-employment economies.

We don't think it's rocket science. Look at history in Canada in the last 25 to 30 years. We've seen our tax burden in all elements creeping up quite dramatically. In the last 15 to 20 years, we've seen our so-called structural, if you want to call it that, rate of unemployment -- I don't believe it is the structural rate of unemployment, but we've seen the rate of unemployment that it seems to get tougher to get below also creeping up.

Our membership isn't partisan. I think it's worth saying that. One can easily say, "This is Conservative or Liberal or whatever," but our membership actually covers a wide spectrum of political whatever. We are a non-partisan organization. But their views over the years have been very consistent and they favour something that contains both the public sector spending element, within prudent grounds, and there is a role for government as well, so it's not really a reactionary sort of thing. But the tax burden has to be relieved if we want to see jobs.

Mr Phillips: Thank you very much for another fine presentation. We'll have a chance to talk about the tax thing when we talk to the property tax legislation, but my real interest is in jobs. A lot of people are being asked to make major, major personal sacrifices to fund the tax cut. This is supposed to be the job creating engine; this is supposed to unleash 145,000 jobs a year over five years.

In the last five months we've lost 37,000 jobs in Ontario. We had 35,000 full-time jobs created in 1996, the worst year we've had in five years for full-time jobs in Ontario. The banks came in and said we will be lucky over the next two years to see 115,000 jobs created. My question to your organization is, what is your expectation about job growth over the next couple of years in Ontario and what sort of GDP growth do we have to have to hit the 145,000 jobs a year?

Ms Swift: We don't think any one measure is a panacea for job creation. The job haemorrhaging we've seen, notably in the early 1990s, came from a number of different causes, and a number of different things are going to have to happen to reverse that trend in an enduring kind of way. We have always focused on particular areas of tax cuts because that's what our members tell us they feel is most important to them and deserves focus. These fixed taxes that Judith was talking about that have no relation to whether you're making any money are certainly very worrisome. On the consumer demand side, we think putting money into everybody's hands to some extent will have a positive effect there.

I don't have a nice economic model that can link specific job creation to, say, a GDP number or whatever, but our members do. There are data contained in the report, just for what it's worth, on their projections of job creation. They're also basing it on the conditions that prevailed at the time, and if something else happens, naturally that could increase, decrease or whatever as the case may be.

But overall in terms of our members' numbers and the numbers we've seen come out of, say, some of the Ontario projections -- barring a shocking political development, which can always happen, such as some Quebec referendum again that puts the deep freeze on everything -- we see the targets as attainable. Our members are more optimistic now than they've been in years.

Mr Phillips: Which targets are attainable?

Ms Swift: The targets the current Ontario government has set for job --

Mr Pouliot: So 725,000 jobs over four years.

Ms Andrew: If you look at page 2 of our brief, you can see the forecast, based on our members' responses, is for 74,000 jobs from existing businesses to be created in 1997; that's just for this year. New businesses aren't in that number and new businesses tend to match roughly the same number of jobs, so that would be up in the 140,000 range in terms of what's coming from the small business sector. That's our number.

One issue that is a big concern for us is the fact that whenever there is some tax relief -- on January 1, we started to see the EHT tax relief, but at the same time we got front-end loading of the employment insurance premiums, and those premiums of course are way too high; they should be reduced to reflect the fact of the large surpluses in the employment insurance account. We also got the CPP increases, which are retroactive. The EI decrease isn't going to happen until next year. We've got the problem of personal income tax creep happening. So the effort that was made to give relief on EHT has been more than taken up. People's paycheques were actually diminished January 1.

The Chair: Thank you very much. Once again we appreciate your presentation to the committee. Time is always too short. We appreciate your coming in.

Mr Phillips: Did most of your members pass on the employer health tax savings to their employees?

Ms Swift: We have some survey data on that, for what it's worth.

Mr Phillips: That would be interesting.

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INFORMETRICA

The Chair: We now welcome Informetrica as an expert witness. Welcome back to the committee, Mr McCracken. We have an hour together. If you would like to make a presentation, we can fill up the remaining time with questions.

Mr Mike McCracken: Thank you very much, Mr Chairman. I'd like to make a few comments, although I would like to leave some adequate time for questions, because I think that's the real purpose of this exercise: for me to learn from your questions what really matters.

What I would like to do is make a few comments on the economic outlook and some considerations to keep in mind as you go through the task of deliberating on the pre-budget period. I'd like to step back a second and talk to you a little about some structural changes occurring in the Canadian economy at the present time that in my view are quite important in terms of the way in which the economy functions compared to what we thought it was even as recently as five years ago.

One of the outstanding characteristics is that we are now living in a much more open economy, both here in Ontario and nationally. Imports are roughly 40% of GDP, gross domestic product, and exports are of a similar nature. What this means is a number of things. One implication is that we, as you have seen, focus a lot of attention on the international competitiveness of Canada and on its current account balance and on stabilizing the foreign debt ratios, which have certainly been part of the federal strategy for some time. It also means that in a more open economy if we spend a dollar on consumption a substantial amount of that leaks out of the economy through imports, roughly that 40%. That's up from about 25% in the early 1980s and 30% in the late 1980s, early 1990s. It is a much more dampened economy, whatever actions one takes in government, whether that be tax cuts or expenditure hikes. The induced effects tend to be more modest.

There has also been a series of changes in the unemployment insurance system or so-called employment insurance system. "Reform" is the way it has been described; some people on the other end of the stick may use other terms. Essentially we have gone from a system in which roughly 100% of those unemployed participated and received some benefit during their period of unemployment to a system where now less than 50% of the people receive some benefit, the benefit they receive is less than it was before in terms of the share of their income prior to becoming unemployed, and it is for a shorter period of time. The system continues to be reformed; there will be increasing restraints over the coming years in that system.

So again the behaviour of the economy when there is an adverse shock is one in which that shock reverberates through the economy much more. The automatic stabilizer effect of the unemployment insurance system has been greatly weakened in the last five or six years.

We've also gone through so-called social assistance reform in a number of provinces, this one included. The net consequence so far has been substantially smaller payments to those who are on social assistance, again taking away the so-called automatic stabilizer effect associated with that particular program.

There has also been a major shift that you're no doubt aware of in the relationships between federal and provincial governments. The federal government historically was the entity that was supposed to sort of take the hits and provide that automatic stabilizer, to do something about employment and unemployment. More recently, however, it has shifted the burden increasingly on to the provinces, first with the cap on CAP and other restrictions in the late 1980s and early 1990s on the established program financing activities in CAP; and more recently with the Canada health and social transfer being turned into a fixed block grant and, as you are no doubt painfully aware, substantially reduced in size.

Again, the effect of this, aside from the difficulties it creates from a budgeting viewpoint and the actual dollar downloading that's occurring, is that it also removes the cyclical sensitivity of the federal government to increases in social assistance and pushes those down to the province. You might say: "So what? We're tough. We can handle that down here." But you just heard a few moments ago a comment suggesting that someone wants balanced-budget legislation at the provincial level. If it ever was appropriate, I would suggest you give careful thought before you jump on that bandwagon, now that you have and face an increased set of responsibilities in a cyclical downturn compared to what you had previously. You will find that your situation can now deteriorate much more quickly than it has historically and you will not necessarily want to be in a position where you're forced by a piece of legislation to make that situation much worse by your own actions.

Other characteristics of the economy are that we now have a much more risk-averse banking system. They've had their experiences in the 1980s of substantial losses both in some industries in Canada and abroad. They have taken a series of steps in their internal management that in my view have led them to be much more sophisticated in their risk management, but as a consequence you have a banking system which will not suffer large losses any more. They will move quickly to cut off loans in any industry that in their view is under threat. The consequence of that is that again you've lost another cushion in the system, of your large financial enterprises. The automatic stabilizer they provided in the past has been reduced substantially.

Other changes just to note in passing: The focus has been to reduce universal programs and move to targeted programs. There's nothing wrong with that, necessarily, but again a consequence of that is to put more variability of incomes into the system.

Indeed, we don't know yet the full dimensions of the health care changes that are occurring, but it will be interesting to keep track of that. I think it would be very useful to also broaden one's view on the home care side to include, in any estimates of what you're doing on the health side, the degree to which the time and hours of people who are spending their own time in giving care is going up substantially in that environment. In other words, the offloading that's occurring there may be much less visible than other forms but just as damaging to the social fabric.

There are some proposals going the other way. There is a proposal, as you know, to include pharmaceuticals as part of the public health care. That would be a move back towards universality in that particular area.

Those structural changes that are happening are also taking place in a world economy in which the three driving forces are a continuation of high real interest rates, weaker economic growth than in the past in most sectors and most countries of the world, and growing income disparity in Canada, in the US and in most other areas.

These driving forces each have their own implications. High real interest rates put any debtor in a very difficult position and make for rising debt ratios if people are running any kind of so-called operating deficit. These are compounded or made worse if that's done in a context of weak economic growth. Indeed, those same high real rates themselves may be causing substantially weaker economic growth.

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The outcomes of all this that we're observing are weak productivity growth in most countries of the world and in Canada, a continued focus on deficit and debt reductions triggered by the high real interest rates, slow growth, concern about private and foreign debt ratios as well as public debt ratios at the present time. The private debt ratios and personal debt ratios are also at all-time highs, and only recently have we seen a turnaround in the foreign debt ratio of Canada vis-à-vis the rest of the world in the last several years, and that, if we are able to continue with current account surpluses or balances, should continue. But in the same environment, we're also finding that the support for maintaining public services is declining, as an outcome of this, as governments move to cut back.

Based on that background the question is, what is the outlook for the Canadian economy as you prepare your budget over the next year or so? I will take the sector, as we usually think of GDP and can talk about whether it's going to be 2.5% or 3.5%, but it's not easy to work with that level of abstraction. GDP is an aggregate of a number of components. I'd like to look at the pieces of that first and give you a sense of the underlying strengths and weaknesses that we do see in the outlook and that might be fruitful for our discussion.

If we start with governments, that's the area where we expect the weakest performance in the national and provincial economies, with continued restraint resulting in declines in real spending on goods and services. As you are aware, the infrastructure program that was started up several years ago is now in the wind-down phase. There was a bit of a top-up in the last federal budget, but the net consequence even of that will still be probably a lower level of spending in 1997 and 1998 than occurred in 1996 and 1995. If you subscribe to the view that all that happened under the infrastructure program is that a number of projects were done that would have been done anyway and were perhaps brought forward in time, then you might be even more negative about a view of what the outlook in 1997-98 might be. I suspect that varies by jurisdiction and who participated in it.

Some governments will be spending and cutting taxes, but the general thrust appears to be continued restraint. Overall, we have a decline in 1997 of about 2% in the real goods and services used by federal, provincial and local governments in Canada.

The next-weakest sector is the consumer. The consumer in Canada essentially continues in 1997 and 1998 to have very weak income growth. Real disposable income is essentially flat per capita, likely to be declining. This results from a number of things, not the least of which, we sometimes forget, is that lower interest rates, for all the ballyhoo about what they are going to have happen out there and as welcome as they might be to us debtors, do take away the income from financial assets, which is the basis for a number of elderly people living on that income. They've had, of course, a good ride for a number of years, with very high interest rates, and so one can ask about time. But nevertheless, whatever moral judgement you wish to put on financial income, the effect is that with lower interest income many people will cut back on their spending, even though there are others who will, of course, at lower interest rates now borrow to spend more.

Net, the overall consumer or household sector has net financial assets, that is, they have financial assets in excess of their financial debts, and so the net effect on their income is usually lower income, and more so than they save on interest payments. A group within that, however, the people who borrow, tend to be more willing to spend on goods and services than those who are receiving the interest income. With a lot of the interest income, of course, net reduction doesn't affect people today but rather will have longer-term consequences, since it's affecting their registered pension plans and RRSP balances, the rate at which they may be building. That can be adjusted by higher contributions at a later point in time.

But the high personal debts are there. Personal debts currently in the household sector, as I mentioned a moment ago, are at an all-time high. The savings rate in the consumer sector, household sector, has been dropping throughout the last five or six years. It's down now to roughly 5.5% to 6% of disposable income. If you take out the committed funds in pensions and the savings portion of life insurance etc, what you find is that so-called discretionary savings remains negative and is expected to be negative again in 1997. Nothing, again, that says that can't happen, but it does suggest that there may not be room for substantial further reductions in the savings rate to keep things on a good hilt.

In that kind of an environment, although some confidence measures are showing some pickup, from work we have done we find that income and real interest rates have a lot to do with explaining consumer confidence, and we have not seen anything yet that would suggest a major improvement in that area.

In those two sectors, the first sector of government accounts for about 20% to 25% of the GDP in terms of the goods and services component, the consumer about 60%, so we're talking already about 80%. The other sector, exports, is more a net story, but on the export side, slowing US growth -- most forecasts are looking for growth in the 2% or 2.5% range for the United States in 1997, with the risk being that it will be less than that, particularly if the Federal Reserve moves to raise interest rates at some point in time this year. It's particularly expected it won't be substantially higher than that because of a fear that at an unemployment rate of 5.3% -- I believe was the last number -- it's very close to its potential growth or potential level of output.

We've also had a very strong export run in Canada, vis-à-vis the US particularly, fuelled by substantial depreciation of the Canadian dollar in the early 1990s. There is some question as to whether there is a substantial amount of further gains to be extracted in that particular sector. Our focus is almost always on the US-Canada exchange rate; the North American dollar has tended to appreciate against Japan and against Europe recently, and that tends to act as a damper against those sectors, although that only affects about 20% of our trade, at most. While the export side, in our view, will still contribute above-average to the overall economy in 1997, it won't be carrying quite the same bang for the buck or the same contribution that it had in 1996 or 1995.

In the housing sector, again some pickup expected. We're looking at about 140,000 starts, up from about 125,000 starts. That sounds great, and it is certainly welcome, but we should recognize that 125,000 starts in 1996 was the lowest level in about 35 years, so it is coming off of a relatively small base. Again, while lower interest rates are helping in that sector, weak income still remains a problem. Even though it's possible today to get a five-year mortgage at rates that are substantially below what they have been in previous years, people who enter into such obligations typically will also ask, "Will I be able to pay the mortgage at renewal in five years?" and that certainly, with the kind of income performance and uncertainty on the unemployment side, is not something that everyone can answer confidently.

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That brings us finally to business investment, which is an important component of the economy, some 18%-plus of the GDP. Lower interest rates will certainly help in this area. We are also seeing, in specific sectors, substantial intentions to invest more; the oil and gas sector is up, pipeline transportation. Unfortunately, you don't have much of that here, although you do make some of the equipment that goes into that and some of the pipe.

Essentially, what you see happening out there is business, in many cases, waiting for the other driver that is most important in the investment decision, which is that they have to see the demand for it.

There's a small typo here. The word "sight" should be there rather than "sigh," although that might be appropriate as well. You heard some of the sighing earlier from the CFIB. I would just point to their survey, actually. If you noticed in there, they said the one thing small business was waiting for, of all of the things, was a pick up in demand as the basis for making a decision about hiring.

The same story is there on the investment front, and it's head and shoulders above other reasons. In fact, some people often say on the business investment front that the only three things that matter are demand, demand and demand and everything else, in some sense, accommodates that investment decision, is not triggered by itself. The consumer, in particular, is acting as a brake on any expansion in the retail space side. One need do no more than walk through any of the major cities around Canada and this province and notice that there's quite adequate retail space ready and available, often with the fixtures still sitting in there that can be bought.

Taking all those pieces together, one comes out with a view -- we're at the low end of the forecasters in the year 1997; this is not always our position, although unfortunately it has been for the last couple of years -- of about 2.5% growth, which will be up from the 1.5% growth in 1996 that we had forecast. We have continued modest growth into 1998.

The other constellation of forecasters tend to be in the 3.5% range, the primary difference being the optimism about the consumer. I don't know if you've had other model-based forecasters coming in or not, but the model-based forecasts have tended to be at the lower ends and the banks at the higher ends.

Let me very quickly just cover a couple of other points. In this outlook I gave you, there are some provincial fingerprints, as I call them, that should be noted. There are cutbacks, as I mentioned, in some of the transfer payments, particularly social assistance. There are layoffs of people. This directly affects employment outlooks and incomes in some provinces. Indirect taxes are rising where user fees are increasing.

The number of jurisdictions' uncertainty is up. Basically, uncertainty simply acts as a delay. An investment delayed a year or a decision to hire delayed a few months all have their consequence in terms of slowing down the pace of economic activity. I think the last time we met we talked about the package that had been offered in the last budget and the associated tax cut. The point made there was that the tax cut does improve the number of jobs but it's only a very partial offset to the job losses associated with the rest of the program.

That brings me to the next chart, which is the so-called multipliers. The simple point I wish to make here is that there is some sense in which we do know the relative effectiveness of different actions by government in terms of their impact on the GDP, both nationally and provincially, and also the number of jobs created per million dollars, or if you want to think of these as thousands of jobs per billion dollars.

The actions I've shown you here represent what one finds after two years of a particular change being in place. In the first year, you sometimes get an initial impact that will be somewhat less than this, but then as the subsequent income goes through the system you obtain a level which is roughly higher.

The way you read this, for example, is that increasing purchases of goods and services by government would result in roughly 1.6 times that amount of spending being added to the gross domestic product and would result in roughly 28 jobs per million dollars spent on that activity, or roughly 28,000 jobs per billion dollars. These are national multipliers. The provincial effect for the direct spending activities is roughly 60% of these numbers, and for the income effects, the tax changes, and if we had transfers in here, it would be a similar story: About half of that sticks to the provincial GDP. This varies by province. If any of you are interested, we can go into further detail at some subsequent time on that.

But the point to take away from this is that even if you had the same number of dollars, say, being taken out of employing people and delivered back in a tax cut, the net consequence of that action, while it may leave the initial effect, direct budget unchanged, is likely to be a substantial reduction in GDP and a substantial reduction in the number of jobs.

There are one or two other charts. The unemployment rate is something we focus on from time to time, and the course of what's been occurring there is perhaps interesting, although interesting in sort of a bitter-melon way. When you have that dish, someone once described it as interesting.

Canada's unemployment rate versus the US unemployment rate: On this chart I've given you, the thick black line with squares is the US unemployment rate, and the square turned on its side, the top line, is the Canadian rate. Essentially, we tracked with the US rates very closely back prior to 1981. Indeed, if I'd run this back another two or three decades, you would have seen a similar pattern. However, in the recession of 1981-1982, Canada opened up about a 2% gap with the United States, and that gap essentially persisted throughout the 1980s up through 1990, at which time we also went into a recession, again one longer and deeper than in the United States, 1990-92 here in Canada. As a consequence, we came out of that roughly 4% higher on the unemployment rate, which is roughly where we sit today. We're at 4.4% or something like that at the moment, but that's the kind of story, and that has persisted up through to the present day.

So we've had these two tranches of structure between the two countries. There are lots of discussions about why. The simplest discussion is that we have chosen, first in the 1980s and again in the 1990s, to run our economy with substantially more slack than the US and, as a consequence, it's not surprising that you come out with a substantially higher unemployment rate.

But I thought what might be interesting to you in Ontario is that until 1991 Ontario tracked very closely to the US unemployment rate, in fact, in some years being below it. From 1991 on, essentially it has now moved to a position in which the unemployment rate is now tracking very closely to the Canadian rate, of which of course it is roughly 40%. The behaviour, if you will, or the setting is now much more one in which Ontario is also running about 4% higher than the US rate and is a more recent history but nevertheless represents, if you will, some sense of the room for improvement in Canada. I'm not going to run around trying to explain who we fault on that, because there is in fact a variety of causes.

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The other characteristic, which is partly reflected in that unemployment rate story, is the so-called employment ratio, what fraction of people are working out of the people 15 years and over who aren't in jail or aren't in the armed forces. That's this bottom line in this chart labelled "Employment Ratio."

One of the things that has happened in Canada in the 1990-93 period was a substantial decline in the employment ratio. What has happened subsequent to that, through 1996, has been almost no recovery of that employment ratio. That's what's notable or noticeable. The decline occurred back in the 1981-82 recession but, as you notice, it turned around and we clawed back on that employment ratio to new highs by 1989-90. That has not happened this time around, and I've tacked on to here our forecast for the next four years from a recent forecast, suggesting that there will continue to be some problems in this area.

The other thing that has happened in Canada is that the labour force participation rate, the top line in this chart, fortunately for some in terms of the visibility of the unemployment rate problem, has declined as well over this period, from 68% down to about 65%. If that had not happened, the unemployment rate would have been substantially higher than it is presently and the magnitude of the shortfall in the economy would be apparently much larger.

Pierre Fortin, in a recent presidential address to the Canadian Economics Association, has been describing this period since 1990 as the "Great Canadian slump," and indeed suggests that this slump of the 1990s exceeds everything we've known since the Great Depression, with cumulative losses already 30% of the corresponding losses of the 1930s. The culprits, in his view, are the monetary and fiscal authorities pursuing restraint to eliminate inflation. The only thing Pierre and I disagree on is the magnitude of the current shortfall. I think it's larger. It doesn't necessarily mean that this will continue out to 2000, 2005 or 2010. That is the prognosis with currently policies continued, and of course that's up to you.

Let me open it up for your questions. Thank you for your attention.

The Chair: Thank you very much. If we could start the questions with the government side, Mr Rollins.

Mr E.J. Douglas Rollins (Quinte): I believe I had the pleasure of listening to you on Monday night on television. You appeared on Monday night on the television that I was looking at, I believe, whether that was live or not. I enjoyed some of your comments.

Mr McCracken: Just some?

Mr Rollins: Some; some I didn't agree with. The federal government, in coming up with as good a job as Paul Martin has, there's no question about it that one of his biggest helpers was his interest rates. They have certainly helped.

Another contributor that has basically hurt Ontario is the number of dollars left in the unemployment insurance fund, or employment fund, whatever you want to call it -- a large portion of that comes out of Ontario. How do we get that back into Ontario? How do you see that coming back? If that were to come back into Ontario, it would certainly have put us in a lot better balanced budget position than where we are at the present time.

Mr McCracken: You're referring to the current $5 billion surplus, roughly, that's there, yes. If, of course, it had come out and it had been paid by a reduction in the benefits, say, down to $2 per hundred from $2.90, then the consequence would have been positive for income of consumers and wage earners. The consequence would have been one of positive effects on consumption etc and all provinces would have benefited, but in particular Ontario tends to pick up a little bit extra when the consumer does well because you have a lot of consumer producing and supporting sectors here in Ontario as well.

The issue from the federal government's viewpoint, I suspect, is that if that were to happen, they would be running a $5 billion larger deficit because the unemployment insurance account is integrated with their public accounts and national account. The issue then becomes, does that dampen the magnitude of interest rate reductions that are possible or do the provinces keep urging them to get their house in order and they then go to other vehicles to do that? If they went, for example, to a personal income tax increase for $5 billion to pick up the slack in their fiscal position, then what you gained on the one hand you would see yourself losing on the other.

If instead they had said, "No, we're going to cut more employment to make up that $5 billion," more program spending, then to the extent that there's a disproportionate number of those hits occurring in this province among federal employees, you would have lost it there and that would have more than offset the gains you might have gotten from the unemployment insurance side.

The only caution I'm giving you is that before one insists that the unemployment insurance premiums should be reduced dramatically, make sure in that discussion you have a good, clear idea of what they're going to do on the other hand because you may find that does even more damage to you or to the province than the unemployment insurance premiums themselves.

By the way, I would also note that unemployment insurance premiums affect you in another way directly and that is, as an employer, this province pays them. So you'll find your supplementary labour costs affected by the employer portion of these premiums, and to the extent that they are higher than they otherwise would be, this costs you directly as well.

Mr Gerry Martiniuk (Cambridge): I was just curious about your negative stance on the fall of interest rates. You say that is a negative. I would have thought it would be a positive. Debtors tend to be younger, spending more, the export of debt. Is it a positive or a negative overall?

Mr McCracken: Thank you very much, Gerry, for the opportunity to correct the record. I have been arguing for lower interest rates for so long that I don't think anyone would expect me to say other than that it's great to see it happening. The only consequence I was trying to make clear to us all is that in that euphoria for lower interest rates, we ought not to forget that the consumer, that sector in specifics, is not getting any help on the income side from those lower interest rates and that while the debtors among us -- and those do tend to be the families starting out and the younger groups -- will tend to get a positive effect out of lower interest rates.

The creditors who also happen typically to be combinations of older and/or wealthier --

Interjection.

Mr McCracken: Yes, some of you would recognize that condition I know -- that group will have less income.

But the big beneficiary of lower interest rates are federal, provincial and local governments, which tend to be large debtors, and the fiscal room that provides to governments is quite substantial.

If you look at just the simple example of the federal budget, when they look at reconciling how things changed between this year and last, they had much weaker income growth, revenue growth, because the economy grew much more slowly than they had anticipated, but that was more than offset by a substantial reduction in interest payments on their debts. They saved some $3.2 billion. That's why in the final analysis they came out in a much more favourable position than they had originally anticipated. So interest rates are great.

The key thing for that to benefit the economy is that the fiscal room that governments now find they have with lower interest rates gets cycled back into household incomes and business incomes etc, in my view. That's where sometimes we depart in terms of either how to recycle it back or whether the best use that we can imagine for a windfall from lower interest rates is to lower the deficit, and some people put more emphasis on that on the basis of some mental model that is quite different from mine.

The Chair: Mr Grimmett, do you have a one-minute question?

Mr Bill Grimmett (Muskoka-Georgian Bay): Yes, I can make it brief. I'm quite curious. You seem to have a lot of enthusiasm for the income tax cuts that we're bringing in, but you repeatedly mentioned in your brief the weak incomes of the consumer. I wonder how you can reconcile those two.

Mr McCracken: Oh, not at all. I'm very pleased to see that you are doing something for the consumer, but you're also hitting that same consumer with direct job losses and with cutbacks in services and with reduced transfer payments under social assistance, so it's not clear, net, whether the consumer is in fact a beneficiary of your whole package. It's only in that context that I raise the issue. They may have been better off, for example, if you hadn't cut personal income tax but had left in place social assistance or some of the employees in government.

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The other thing to note is that, of the things you do, the bang for the buck -- in terms of either job creation, GDP -- from personal income tax cuts tends to be quite modest, in the same ballpark as payroll tax cuts, which is what the UI is, compared to other kinds of tax cuts or other direct programs that one can look at doing. That's the only context within which I would criticize it.

If the option was to do nothing and run a smaller deficit versus having the personal income tax cut at the time, I said that the personal income tax cut is a good device for at least taking some of the sting out of the other package, so it was welcomed in that sense. That's what we said in our report. We got about half the jobs back or a third of the jobs back, as I recall, from the study we did of your package last year.

The Chair: Mr Phillips, eight minutes.

Mr Phillips: The area that I'd like to focus on is jobs because I happen to think that's --

Mr McCracken: I think I've heard this before from you, Gerry, your interest in jobs.

Mr Phillips: I must say I very much appreciate your two charts on page 5. I thought they are very helpful to illuminate the problem and make me even more concerned about the issue. Just in terms of what is reasonable to expect in terms of job growth over the next two to three years, I did say that just in the raw numbers, Ontario has had over the last three years -- 1994, 1995 and 1996 -- an average of 3.4% real growth, which is better than what anybody is predicting over the next three years. I don't think there's anybody, including the bank economists, who will predict an average growth of 3.4% over the next three years. Over those three years, employment grew in Ontario by an average of about 1.4% a year.

My first question is, can you give us any advice on what is reasonable to expect? How should we think about job growth and what's reasonable to expect over the next couple of years in Ontario?

Mr McCracken: The simple rule of thumb that we use, and it goes back really to the early 1960s, is something referred to as Okun's law. This is essentially an observation made in the context of the US economy, that you need roughly 3% growth in order to lower the unemployment rate by one percentage point. If you were at 9% and wanted to get to 8%, you would need roughly a three percentage point improvement in economic growth. Tuning that to the Canadian circumstances, it looks as if the number is more like about 2% or 2.5% additional growth to lower the unemployment rate one percentage point.

The reason I'm trying to be a little cautious for you and to help you is that if you think about that process of what happens and just think of the last several years, obviously it depends on whether what we're observing is full-time or part-time growth. It depends on what happens to that labour force. Does it come back in all of a sudden when the economy starts improving in terms of its outlook? Do people who say, "I've given up," suddenly say, "Well, maybe I should come back in and look for a job again"?

If that happens, you may find that your progress on the unemployment rate is much less than what I indicated and you need much more growth in order to make the progress that you would otherwise think.

You could conceive also of programs that, let's say, focused on hiring youth and where the emphasis was more in getting the body count of employment up. It could be done perhaps much more cheaply and with much less impact on GDP. A lot of that would depend on the nature of the policies.

If I were trying to give you some rules of thumb, what I would suggest to you is to take 2% GDP growth in the province as a conservative measure of what we call the "potential growth rate" in Ontario. If you get 2% growth, there's a good chance your unemployment rate won't change from wherever its current level is. If it's less than that, you're going to have that unemployment rate going up; if it's more than that, then you'll make some progress going down. Then, relative to that standard, ask yourself how much additional growth you can get. For every 1% of additional growth over and above 2% that you get, you might anticipate something like about 0.5% decline in the unemployment rate coming out of that. That would be another way of putting it into your minds.

If this is of interest to you, I can update something we did on this nationally a few years back and apply it specifically to Ontario.

Mr Phillips: That would be helpful.

Mr McCracken: It might give you a sense of it. I think these rules of thumb are helpful for all of you, because I think you'll find you have a shared interest in having a sense of what the magnitude of economic growth is.

Mr Phillips: The finance officials said to us that employment growth will occur at about the rate of real GDP minus 1%. I've looked back for at least the last 10 years, and the employment actually has been less than GDP minus 1%.

Mr McCracken: What they're basically looking at is the productivity effect, how much would productivity be, and that would be the difference. Then the other complication brought in by the change in the unemployment rate is what happens to that participation rate out there.

Mr Phillips: That's my second question. The bank people also said they're predicting GDP growth at 3.3% in 1997 and 3% in 1998 and employment growing at 2.2% and 2%. So they confirm that, real GDP minus 1%.

Mr McCracken: Yes, the 1% rule.

Mr Phillips: I have a couple of questions on your employment ratios. What's your feeling on where those people have gone? The participation rate, you indicated, in 1990 was around 68%, I gather, from your chart. Those are national numbers, I guess.

Mr McCracken: Yes.

Mr Phillips: Now it's down to, if I'm reading this right --

Mr McCracken: To about 65%, 64.6%.

Mr Phillips: What's happened to those people? Where are they now?

Mr McCracken: It's interesting, if you take those numbers and break them up -- you can break them up all kinds of different ways. But one way that's very interesting to break them up is by age and sex. What you find is that the 15- to 19-year-olds is the group where that participation rate has dropped the most, from 70% down to 50%. I'm going to tell you that's good news. The reason it's good news is that we think a lot of them are staying in school or taking further education and not jumping out into what is a very hostile job market.

I say it's the good news because they will be better trained. The bad news is that they're going to come out saying, "And where's my job?" They're going to want to participate even more than they might have earlier in the labour market and in society. The only good news is that you haven't trained them in using small arms in that period; otherwise, they would be very unhappy when they come out.

The other group which we observe having a substantial decline in the participation rate are those over 55. There's a substantial decline particularly among males in their participation rate. This generally goes under the euphemism "early retirement." The problem with early retirement is that for some that's exactly what they wanted and they're extremely happy. From society's viewpoint, we say: "God bless you. Enjoy. Spend. Stay healthy, and if you get sick, don't spend a long time in the hospitals."

But a number of people are saying that they're retired because they have given up. It's that number, the so-called discouraged worker, that is a real concern for us, because you're taking people who have had 30 years of experience, broad-based sense, perhaps remain still with some major family responsibilities and they've essentially given up. In some cases, we see them using up their RRSPs at a rate that they will be all gone well before they even get to 65. It is a matter of substantial concern.

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The other group is modest adjustments but in groups which are very large, and that's prime age male participation rates dropping from 92% down to 90% in some areas. That's a group which is, again, the breadwinner in many families. Also, female participation rates, which were growing quite rapidly, particularly in the prime ages, up until this recession, have essentially stopped, with the exception of the 20-to-24 groups, which are still rising; and stopped at a level that's significantly still below the male rates. That's the other place where it's happening.

That gives you at least a sense of it. Some of them you see are problems; some of them you see are adjustments to a hostile labour market, where people say, "I've got to go out and get more training." Others may be signs of despair among the older group.

The Chair: Thank you very much. We move to Mr Pouliot.

Mr Pouliot: Thank you very kindly. It's so interesting and insightful indeed that it generates a series of questions; maybe we can do so in a broadly summarized form. There are two issues I would like your opinion on. You've mentioned the rising income disparity, and I think that's been emphasized more so over recent years. I have, I must confess, somewhat of a bias vis-à-vis interest rates, because we find they're catalytic, they're so important in the overall performance, the money supply and its relationship with the money on account. I would like your opinion and some comments on that.

Mr McCracken: On income distribution, we have seen some changes in income distribution in Canada; not as severe as in the US. But the rich are getting richer and the poor are getting poorer in some sense. In particular, what you're observing is that much of the wage growth that's been occurring in earned incomes has been occurring in the top 20% of the income distribution and that it has been falling in the bottom 20% and the bottom 40%, or stable in the middle group. So there is a growing wage disparity, if you will, or wage gap between those who are doing particularly well and those who are doing poorly.

If you do it by education, you also see a similar story coming out: those who have college or university doing relatively well; those with only high school or, even worse, no high school having lower wages.

The other thing you see happening is large groups in our employment side working part-time, working shorter hours, and another group working longer hours, so again a disparity that's opening up in terms of the hours of work reinforcing, if you will, the wage side.

We take all of that earned income, and of course high real interest rates will make creditors have explosive growth in their income in the same way there are explosive interest expenses for the debtors in a period of high real interest rates. That tends again to cause a schism, although the very low part of the income distribution typically don't have any debts, because they can't find anyone to lend them money. It tends to be that second and third quintile where the debtors will be and then the highly leveraged among the young gamblers maybe at the high end of the income distribution. But overall the high end tends to be net asset holders and earned. So real interest rates being high causes more of an increase in the disparity as well.

On your point on the money supply, I'm not quite sure of the point you're getting at. Basically one can look at interest rates and the determination of interest rates by just saying, "What is the outcome, what are the real interest rates and what are they relative to other countries?" and so on, or one can try to look at the supply and demand of funds by which those interest rates are regulated.

In Canada, with the number of changes that are occurring in the financial institutions, the variability in what we call the velocity of money, the turnover of money, and the different M1s, M2s, M3s that we have, I find it a much more useful device to simply ignore what the bank is doing in terms of the money supply movements and focus in on what matters, which are the real interest rates and the distribution of those interest rates.

I remember once sitting in 1980 among a group of labour union leaders in Ottawa -- 1979, I guess it was -- who were all somewhat upset with what was going on. I asked them all: "You're talking about your wage bargaining. What about M1 growth?" and then I made some comments about it. This guy came out and said, "What's this M1 you keep talking about?" I said, "People in this town think that's a determinant of your wage bargaining habits."

Of course they said, "We don't know what the hell it is, so it's not clear to us how it works." It became clear subsequently when we talked about real interest rates that they understood what the realities were.

So in particular I would suggest that until they're willing to give you some responsibility for running monetary policy, you focus on what they deliver for you, which is the real interest rate story, and those remain high in Canada at this particular point.

Mr Pouliot: They're not about to give us that responsibility, not our lot.

Mr McCracken: Just a quick footnote on that, Gilles. There is a proposal on the table that's been made now on several occasions, most recently by Pierre Fortin, that there be deputy governors appointed from the regions, with their own independent staffs, the point being that they'd be there in order to give a bit more feeling in the Bank of Canada on the difficulties and performance in the different parts of the country and the realities of this country, so it's not totally hopeless.

Mr Pouliot: You've mentioned that real interest rates were still high and yet, by your presentation, in the near future we don't see the possibility of interest rates getting substantially lower. In your tone I discern that we would be fortunate if we were to experience 25 basis points in the next eight to 12 months. On the other hand, with high respect to you and to one Mr Greenspan, words for me to renew in my vocabulary, such as "rational exuberance," keep going. I'd love to have a bottle of Scotch with that man. But where do you see interest rates going?

Mr McCracken: A very quick story: A man died and went to heaven and as he came through the gates he was met by Albert Einstein, who was sitting there and saying, "What did you do on earth?" The guy said, "I was a physicist." He said, "Oh, good, let's go talk about the theory of relativity."

The next guy came up and he said, "What did you do when you were on earth?" He said, "I was a philosopher." He said, "Oh, good, let's go talk about moral philosophy."

The third guy came up and he said, "What did you do on earth?" He said, "Oh, I was an idiot." He said, "Oh, where do you think interest rates are going?" So the problem is, no one knows.

What we do know is the debate in the United States at the Federal Reserve is, do they or do they not raise interest rates? It's not a debate about whether they should lower them. It is either do nothing or raise them, and they'll raise them 25 or 50. Raise 25; if you want to do another 25, sort of death by a series of strokes. You might do 50 right off the bat as sort of a shot across the bow and then sit back and say, "For the time being that's all we think is necessary."

Of course, this is like a guy running around with a pin pricking at some balloons and saying, "How hard should I push?" Because the fear of course at the same time is that if you prick it with a 50 basis point, then you may have a stock market crash on your hands. That's of course why he's been trying to talk down the market rather than exercising it with a shock.

Mr Pouliot: With savings at a 20-year low -- I think it's 5.3, personal savings, or 5.4; with the credit cards or personal debt at an all-time high; factor in that you have roughly 9.7% unemployment; there's been a transition between jobs and jobettes; you have the not-so-mythical Freedom 55 where people are exiting --

Mr McCracken: With or without income.

Mr Pouliot: -- where is the money going to come from when you have an economy that is export-driven, as opposed to having a blend between export and internally driven? Where's the money going to come from?

Mr McCracken: Of course, export-driven tends to be good-quality jobs, high-wage jobs, so those in turn can create consumption and demand in that area. The question is, are there enough of them and can they sustain? Because that's also the sector, if you go back as recently as 1991-92, where there was a sharp drop in those jobs. It's a highly volatile sector and not one where you necessarily want to put all of your eggs. That's the problem, the potential exposure we have.

I was down in Washington a couple of weeks ago, including meeting with Mr Greenspan, but the shock I got that was most bothersome to me was a comment from someone in the US treasury who said, "We've noticed, by the way, you're running a current account surplus up there in Canada." Of course, the last time they noticed that was back in 1985-86 when they began putting lots of pressure on us. They felt we had gone too far in depreciating and taking advantage of the poor US and the pressure was to try to talk up our currency and get us back into a deficit. I explained to him that this was just transitory and I wish he would ignore looking at Canada for the next five years. We hope he will do so.

We may find the same problems that Japan has found. A substantial current account surplus is attracting a lot of US trade actions and these may not be to our benefit.

The Chair: Mr McCracken, thank you very much for your presentation before us today. We certainly appreciate the time and the effort that you've put into this presentation.

That concludes our morning session. I remind the subcommittee that we will have a meeting in this room immediately following question period, prior to 3:30, time permitting.

The committee recessed from 1213 to 1531.

BANK OF MONTREAL

The Chair: We welcome the Bank of Montreal, Mr Tim O'Neill, joining us this afternoon, an expert witness. I believe we'll have one hour together if you'd like to make a presentation. Hopefully, you'll leave some time for questions.

Mr Tim O'Neill: I would be delighted to do that, and I'd like to introduce my colleague David Hall, who is our expert on fiscal matters within the department and was very much involved, for example, in not only the production of the presentation that you have in front of you but also all of our evaluation of fiscal matters.

Thank you for the opportunity to meet with the committee. Three things essentially we wanted to talk about: one, the forecasts for the Ontario and Canadian economies; two, some comments on the deficit reduction targets within the context of those forecasts; and three, at the end, to talk a little bit about a longer-term issue, which is, when we achieve that wonderful world of surpluses instead of deficits on an ongoing basis, what do we do, if anything, with the debt?

As you can see from the table in front of you and from the commentary that is attached to it, we are and have been very bullish about the Canadian economy and also about the economy of Ontario. That bullishness is of course in quite striking contrast to the actual performance that we've seen in the national economy since the recession. With the exception of 1994, we could hardly argue that the economy has functioned in a robust manner, but I think we're beginning to see some clear evidence that that environment is changing.

You can see the specific forecast numbers and the dramatic shift in 1997-98 from what we saw last year when we're looking at growth of over 3.5%. The Canadian economy's long-run potential or trend growth is about 2.75%, so we're talking almost a percentage point above that in 1997 and certainly 0.75% in 1998. That will bring the unemployment rate down. We'll still be operating in a low-inflation environment, and certainly in terms of long-term interest rates, we'd expect those to be tracking down rather than tracking up.

Those of you who follow the central banks of various countries may know that Mr Greenspan caused a bit of excitement in the financial markets today with his Humphrey-Hawkins testimony, and there's some speculation that perhaps it's an indication that the federal reserve is about to tighten. I'm not of that view, but it certainly would have potential implications for Canada.

Let me just say, though, that it's our expectation that with the kind of growth we're expecting to see, it may well be that in the second half of this year, the Bank of Canada will begin to move very, very moderately away from a fairly easy stance that it has established over the last year and a half, sort of tighten slightly. My expectation is that we're looking at a quarter point in the short-term rates as a consequence of that in the second half of this year and maybe another quarter point in early 1998.

Whatever tightening the bank may feel is necessary I think they'll largely allow to happen through what you can see, as we expect, a tightening Canadian dollar, that is, an appreciating Canadian dollar, rather than through higher rates, and because our long-term rates are above the levels that are consistent with both the kind of growth and economic performance we're expecting, we think those rates will come down.

The risk almost always there in one form or another is what happens in the US. Our expectation is that the US economy will, after showing fairly strong growth late last year, moderate again to that so-called glide path or soft landing or trend growth pattern that it has really averaged over the last couple of years. The concern is that an economy operating at full capacity is at risk of inflation accelerating, and that's why the markets were nervous today, as I suggested. But I don't see that happening, and therefore, although the risk is there, I don't forecast that we're going to end up having a significant impact coming from that source.

If I can switch then to Ontario, we expect very much the same sort of thing. Growth, as you can see: fairly substantial growth in 1997, and in 1998, in fact, above the average for Canada, a growth of about 4%. We do talk in the document about the risk, which is more significant for Ontario than for Canada as a whole, and that's the auto sector reliance. It's clear that we are currently benefiting from the strength in that sector. As long as the US economy is reasonably strong, that will continue to be the case. A slowdown there, of course, would have negative implications for Canada and, in particular, for Ontario. The relocation of Japanese manufacturers obviously is a positive, but with the much stronger yen that we've seen, it may well be that that will have a dampening influence on that investment flow.

Finally, we have benefited from producing the more popular models, especially the minivans. The question that one always has to ask about any very strong trend in consumer spending is when it is likely to slow down, and if it does, what implications does it have, and of course, it may very well be that we will see a moderation in that increasing degree of popularity in minivans. Those are risks. I wouldn't put a high-risk rating around that, but I suggest it's something that we have to be aware of.

If I can turn to the more direct issue of moment here, which is the fiscal situation in Ontario, we start first with the revenue side, especially as it flows out of this forecast. As you can see, we're anticipating that with own source revenues growing at about the same rate as nominal GDP, and let's use a price inflation number of the GDP deflator of about 2%, real growth of 4%, you're talking about nominal growth then in GDP, and therefore in revenues, of 6% over the next couple of years since we would be faced by the end of 1998 or early 1999 with moving into the same sort of situation as the US economy, getting closer at least to full capacity. You have to be looking then at an economy that would have to moderate itself to that trend growth. That's more likely to be something like 2.75%, so if the real growth slows to that rate and we continue to use that 2% deflator, then you're talking about a moderation in revenue growth to about 4.75%.

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We've given you a table showing the forecasts out to 2000-01. I won't go through all the details. Obviously, recently revenues have been running ahead of projections. That's obviously extremely helpful and, as well, the interest costs on the debt have been lower than anticipated because the interest rates have fallen more than anticipated. However, someone wiser than I has suggested that one should never mistake a bull market for intelligent investment decisions. We shouldn't allow ourselves to be lulled into thinking that kind of strong economic environment which creates pleasant surprises is always going to be creating pleasant surprises. It's for that reason that we, in forecasting out beyond the next couple of years, raise a flag about the capacity to generate revenue at the rate warranted in, I think, the government's own estimates.

As you can see from table 2, our expectation is for revenue growth from 1998-99 on to be lower -- I'm sorry, in 1999 and 2000 -- than the Common Sense Revolution documents would have expected it to be. Also, I think you can see that the debt interest charges are, in our estimation, going to be lower than anticipated, so the two just about wash out. But I don't think we should be overly sanguine, as I think some recent comments have suggested, about the possibility that the government can significantly backtrack on its expected spending cut program. In fact, it's our view that the government will keep on track to its target of a balanced budget only under the assumption that the spending cuts as set out originally in the CSR are implemented. So we get to a balanced budget, but only by maintaining the program originally set.

I think it's important then to make the following recommendation: that the government should attempt to get back on to the planned spending track. Should that prove, for whatever set of reasons, to be unworkable or unlikely, then we would have to suggest, to be consistent, that the remaining portion of the tax cuts be delayed. We're already publicly on record as having been concerned about the timing of the tax cuts. I want this committee to understand that we're not in any way philosophically opposed to tax cuts as a consequence of achieving the target of deficit reduction. We've never been of the view that that ought not to be one of the rewards, if you will, of achieving fiscal discipline. I used to tell people, however, when my children were younger, I rewarded them for achievement, not for promise. Of course, now that they're in university, I reward them, and that's I think typical for children who are in university.

It's the timing issue, not whether there ought to be a tax cut. It's when it ought to occur. We need one of those two things. I think to ensure that the target which we agree is a critical one is actually achieved, either the planned spending cuts originally envisaged ought to be maintained, or the alternative is to delay the tax cuts. The risk of course is, the farther you go out into the future, the greater is the chance that reality will unfortunately not meet expectations.

We've had that experience in this country in virtually all of the key issues related to public policy, but in particular, if you go back over the period of the 1980s and early 1990s, fiscal problems emerged because expectations were optimistic and reality unfortunately didn't match those expectations and, therefore, targeted reductions in deficits turned out to be in fact, in reality, increases in deficits. It's our view that it would be unfortunate if that experience were to emerge again.

Let's turn to what may be a happier subject then, assuming that reality meets expectations with respect to deficit reduction, and I think it will. What happens when the hoped-for balanced budget is reached? Three options, and you are as familiar with these as I am: One can use surpluses to reduce the debt, to reduce taxes or to increase expenditures. The choice may very well be in various jurisdictions to use a combination of all three of those.

As I said, we're not opposed to tax cuts. In fact, I would hope that when that happy day has been reached, we will see further tax cuts. As far as program spending is concerned, it's highly unlikely that anybody could envisage in a growing economy that program spending would not grow as well. Now whether it grows in line with or slightly slower than is a matter of choice, but the fact is that that will happen. I would expect that the high-priority items that have always been in the purview of the government, health care and education, will be a focus of that activity.

With respect to reducing the debt, as I say, you've heard this issue of choice before. What we'd like to do, and I'll actually, with your permission, turn the microphone over to my colleague David Hall, is to talk to you about something I don't think is typically part of the debate. That is, if we do want to reduce the debt, and there are good reasons for doing that, how fast and what should our ultimate target be? We can be agnostic about how certain we are about specific numbers but I think we can say the debt should be lower than it currently is, and we think that should be part of the long-run target of this government.

I'll turn it over to David to finish our presentation and then hopefully open it for questions.

Mr David Hall: Our hope is to put on the table essentially a new idea that might be open for discussion, because you've probably heard before the three-way choice between cutting taxes or increasing spending or reducing the debt when we finally do find ourselves in a balanced budget situation. What we thought we'd do is present a way to look at the question of what is the optimal debt-to-GDP ratio. Obviously the debt-to-GDP now in Ontario and in most Canadian provinces is too high and it needs to come down, but what should be the goal? Where should we be heading for?

What we've done is tried to put this in the context of a question that can be debated. I think the way we need to do that is to look at the question of what is the optimal level of net public investment. Net public investment is in some senses an allowable expense for governments to borrow against because it provides a benefit to future taxpayers, and therefore it's reasonable for future taxpayers to be paying future taxes.

Of course, government borrowing to cover day-to-day operations of the government, in our view, would not be acceptable because it does not provide a benefit to future taxpayers, and therefore future taxpayers should not have to pay the cost. The rationale for this type of thinking is basically identical to that of a business borrowing to finance a new plant or borrowing to finance a new building. The future benefits from that plant or the future profits from that building will justify the borrowing.

What I'd like to do is sort of stretch our imaginations a little bit and assume that in the best of all possible worlds the optimal level of net public investment would be equal to the deficit. If that's the case, we can simply kick out through a nice little bit of arithmetic, which, if you choose to consult the footnote of our presentation, you'll find. I won't go through that. You can calculate what the optimal or appropriate net debt-to-GDP ratio is.

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Just to give you an example, suppose we were in this room all to decide that the optimal level of net public investment is 1% of GDP. That would imply that an appropriate debt-to-GDP ratio for Ontario is about 20%. Currently, Ontario's debt-to-GDP ratio is about 32%. I'll leave it up to you to decide whether or not 20% is an appropriate amount. I would suggest maybe something in that ballpark is appropriate, but clearly it needs to be lower than the current 32%.

Of course, the hard part is agreeing on the optimal level of net public investment. That's something I'm sure various people around this table could have many disagreements about, but it is at least something we can debate. It's much more difficult to say whether or not 32%, this abstract number, as the debt-to-GDP ratio is appropriate.

Some caveats I want to make about this way of approaching the question of an appropriate debt-to-GDP ratio are as follows: First of all, it may sound from what I'm saying that I would be willing to tolerate small deficits. I suppose that over the course of a business cycle, on average, small deficits might be appropriate. The problem we have of course is that we see deficits rising over the course of the business cycle in recessionary periods. It's easy for the deficit to rise by 3% of GDP in a recession, so what we need are small surpluses in the good times, and this is what I think government should be aiming for, so that when you average that off with the rather large deficits in the bad times, you get a small deficit on average. Of course, small deficits on average will lead to small debt-to-GDP ratios.

The other caveat I have is that some of you may be thinking that what I'm saying is that deficits are okay as long as they're spent on new capital projects, and that's not what I'm saying at all. Notice that I've used the word "net" -- capital spending or public investment -- all the way through. The distinction is that to get from total capital spending down to net capital spending, we have to deduct off the cost of maintaining the current amount of capital held by the government or we have to deduct off the depreciation of the current capital stock. We're talking about a much smaller dollar value of net capital spending.

To take this argument a little bit further, some of you may be thinking that because education represents an investment, it would be okay to finance the day-to-day operating expenses of education out of the capital budget. I will point out to you that first of all, I disagree with that notion, but secondly, if you were to make that argument consistent, you would have to deduct from day-to-day education expenses the costs that have essentially been incurred in the past of those people who are leaving the labour force.

The bottom line of all of this and what I'm suggesting to you is that I don't think we should be thinking about what is the optimal level of debt to GDP for Ontario or for Canada so much as what is the optimal level of net public investment. I'm fully aware that many of you around this table will disagree about what that is, but I hope that's at least something that can be discussed and debated.

I think that's all we have to say. On behalf of Tim, I'd like to thank you for making the opportunity available to us to make a presentation. We're available for any questions you may have.

The Chair: Thank you very much. We have a significant block of time, about 35 minutes. Would you like to do one round of 12 minutes each or would you prefer to do two rounds of six minutes each? We'll do two rounds of six minutes each then, starting with the opposition.

Mr Monte Kwinter (Wilson Heights): Thank you very much and as always I welcome the presentation of the Bank of Montreal. The reason I welcome it is because it's usually quite balanced. You get the impression that we as opposition members don't want Ontario to be a great place economically and that we're very critical. That just isn't the case; we all benefit from an economy. But I have some concerns and we've expressed those concerns, and I'm pleased to see that you have some of the same concerns.

For example, you talk about the revenue forecasts and the higher-than-expected revenues and you make a point that my colleague Mr Phillips makes constantly about this $578-million adjustment for the 1995 calendar year plus the fact that government spending has gone up by $2.8 billion. I think even my colleagues to the left recognize that the deficit is a problem.

Where I have some concern is that at the present time there are projections that sound pretty good, but there are also lots of potential clouds on the horizon. Mr Greenspan today put out a caution about possible inflation, possible increases in interest rates. I have to say that the government is fond of taking credit for the great economic results, but it has been the beneficiary primarily of interest rates. I'd like to get your comment on that, but I think a great deal of what has happened is as a result of the very favourable interest rates and what they've done to the public debt servicing cost.

The other thing I want to talk about is this $2.8-billion program in capital spending over and above what was set out in the Common Sense Revolution. Today in the House we heard the Minister of Health say that he's going to be looking at health cuts in year three because he's under intense pressure. I can tell you that as the expression goes, he ain't seen nothing yet. As these hospital closures take place, as these horror stories come up, politically he is going to be under intense pressure to try to respond, which means he's going to have to spend more money than they had anticipated. That is going to happen with this downloading of the megacity. There's already talk, and you see it in the papers, where the government is reconsidering, which can only mean one thing: They're going to have to curtail some of the downloading because politically it's going to be unpalatable.

Just as an aside, I think the amalgamation issue is one that could have been sold in a minute. It's very simple to tell people: "You had seven duplications; you're going to have one. You had six city halls; you're going to have one." People could buy that. Where I think the government has lost its compass is when it tried to dump everything on it. The major concern is this downloading. The reason I'm giving this background is that I think these are the pressures that are going to be on the government to deviate from its deficit reduction plan, to spend more money than it had contemplated.

Also, there is this looming situation out there where everybody thinks things are going great and the economy is going to grow by 4% in Ontario. But when you actually pinpoint the buts, what happens if the Japanese decide that they no longer can build cars cheaper outside of Japan than they can in Japan and start to pull back production into the Japanese market? There are trends showing that the RVs, the minivans, that market may be cresting. We have Chrysler, the plants in Windsor, the plants in Brampton that are churning these things out like crazy. What happens if that changes? What happens if inflation does go up? I notice in the last report there were signs of inflation creeping up -- not a lot, but it is creeping.

Could you elaborate on some of those things that you have actually highlighted in your analysis, just so that we have an idea of where the pressure points are and are going to be?

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Mr O'Neill: Sure. First of all, any regional or provincial economy obviously will be influenced by national factors. The rates of interest are national; they're not regional, they're not provincial. They're controlled nationally and they have an influence nationally. Certainly I think it's fairly clear that we are seeing, and saw in the second half of last year, some substantial positive impact which will continue from the lower interest rate environment. That has influenced all provincial economies right across the country in a positive way and I think will continue to do so. In particular, I think it will be a positive for Ontario because of the particular influence it can have on the housing market directly, and I think also the impact it can have on consumer spending on durables, of which automobile purchases are one. In that sense, there's a national reason and a provincial reason for being optimistic here.

In terms of the risks, I'm not sure whether it's because economists are naturally pessimists -- and as you know, H.L. Mencken once argued that a pessimist is someone who when he smelled flowers looked around for the casket. I don't think we're naturally pessimistic, and we have, as an economics group, been fairly high on the optimistic side for the Canadian economy. But I think it's not unreasonable, especially when we're engaged in this kind of activity, that is, dealing with government deficit problems and government fiscal problems, to be very cautious in actually rolling out programs of spending reduction or tax cuts or whatever they are, to do what I think has been done in other jurisdictions, and that is to continue to look out to the future, continue to underestimate the growth in the economy and overestimate, within the projections, what interest rates are likely to be.

The federal government has made virtually a theology of this, and I think it's worked. It's worked very well for them and I think financial markets have responded to that. I think it's appropriate, and I'll get to the specific risk that you referred to and that we referred to in the document. Generally speaking, it is preferable to be cautious, to underestimate the potential revenue growth, to overestimate the potential cost from the debt service side, and then you get pleasant surprises in life, and pleasant surprises are obviously preferable to unpleasant ones.

I didn't want to overstate, and I don't wish to now, the risk specifically to the auto sector. I simply point out that it is a sector of significance in the economy of this province, and a changed economic environment or a changed economic environment outside of North America, like in Japan, can have an influence and can have unexpected influences, can have influences that we weren't anticipating, and we should be prepared for those.

I have seen estimates. To take the third risk associated with the auto sector, not the Japanese yen and not the US economy, but the tastes and preferences of consumers, I have seen competing forecasts on what's going to happen specifically to the market for minivans, one suggesting this is going to go on for the next four or five years and another saying the market is about saturated now and it's due for a slump. I'm not sufficiently expert in that particular part of the economy to say confidently it's going to be this one or that one, but I say -- and that's the reason we put it in the document -- that risk is there and we ought to be aware of it.

We shouldn't count on as important a sector as the auto sector continuing to be as robust as we've recently seen it, and we should be prepared for the possibility that it won't be and therefore make our plans accordingly. I'm not trying to create any kind of feeling of impending doom here, but just let's be cautious where it's reasonable to be cautious and in so doing make our plans accordingly. Does that respond to your question?

Mr Kwinter: Yes.

Mr Pouliot: Gentlemen, welcome and congratulations on yet another spectacular quarter. We've watched the Bank of Montreal over the years lessening its exposure and more and more becoming what some have quoted as an investment company while respecting their responsibility to be a lender and to encourage and promote the marketplace.

You're not, in my humble opinion, pessimistic in the least. I want to share, and I want your expertise to reflect on what I will mention to you, and to help me put things into the Bank of Montreal's perspective.

On your page 2 in table 1, "The Economic Outlook," your forecast, you have for the country as a whole 3.4%; CPI, consumer price index, 1.1%; your unemployment rate is at 8.7%; your three-month bill, I would like to see what your forecast is on the spread, but we're talking three months, so it matters less here, it's not as impacting; your 10-year bond is 5.7%; your US/Canadian dollars you have 79.1. Then there's the one line and it says, "Ontario: Real GDP growth." Not only in 1998 do you forecast 4%, but you do so also for 1997. That is two consecutive years of forecasting 4% per year. You give us a 79.1 Canadian dollar and 1.1% inflation. I don't wish to see what it will mean for 1999.

Do you feel that some of your friends at Cirque du Soleil, the people who walk that very thin line -- I have some difficulties, because you're still export-driven. Look at your job forecast. You don't see any pressure on jobs, because again, look at the numbers, so you don't see any inflationary pressure. You see a very bullish export market not being impacted by the higher Canadian dollar. You also forecast low commodity prices, a low futures market. That's a lot of minivan to pick up at the domestic level. Those are the revenue side. It's always a difficult item with government. It's like your own affairs perhaps, with respect, because you never make as much or seldom make as much as you hope you will, and you spend more. Things happen. You reward your sons and daughters, for instance, for good deeds, so it costs a little more money. Table 2, in my humble opinion, will attest to that.

I see that in year 5 -- and you quote the Common Sense Revolution, but the year 2000-2001 is already one year past the first commitment of the Common Sense Revolution. You're so confident that you match their forecast in terms of balancing the books that you're offering options as to what to do with the debt. They still have an $8-billion deficit. These people are politicians. They're there to be elected, for the most part, and once they're elected, phase 2 of what they wish to do is to get re-elected. They don't trust my friend Mr Kwinter or myself, people like us, our colleagues, to administer the province. They claim all kinds of track records and reasons. That puts pressure.

The population is getting older. Demographics are an important factor, more so than ever before. Each and every month, you have between 7,500 to 8,000 or 9,000 people who enter the drug plan. Of 11 million in the province, about 110,000 per year go from 64 to 65. They are not all on the dole, but they enter the drug program, so it's open-ended.

When I see that your revenue will increase, especially from the year 1999-2000 to 2000-01, that's a lot of money. Your deficit conveniently goes from -- you see, from 1998-99 to 1999-2000 you go from $4.8 billion to $2.6 billion. We know that the debt is structured long-term, therefore less favourably impacted by interest rates. It matters less because it's spread over a period of 30 years. Then you go from $2.6 billion to zero two consecutive years. You're cutting $5 billion at the end of a political mandate? They'll speak very highly of them, but they will become members of the first brigade. It's like a death wish.

The very people who support them at this point -- because this is a government, people say, that does what it said it would -- might be the very same people who will not forgive them if they go for the last $5 billion in a short period and refuse to take maybe a year and a half or two years more. Mr Kwinter has mentioned, not in those words, but there will be many "Ms Jones, 74 years old and living in a small apartment -- "

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The Chair: You are coming to a question?

Mr Pouliot: Yes, I'm coming to a question. What is your view on that? How confident are you? What burden, by your forecasting, are you placing on them, while we welcome your presentation? I hope you're right. I truly do. I mean, a bull market is genius, but at one time we're going to have to start factoring that, hey, there's a lot of hype and things like irrational exuberance. You might not agree with Mr Greenspan, but I'm not Mr Greenspan.

Mr O'Neill: I think the first question was, how could we sort of with consistency say we'll have low inflation, a stronger dollar and an unemployment rate coming down?

Of course, two of them are directly linked. One of the key reasons why the Canadian dollar will appreciate is precisely because we have a lower inflation rate than the US. The US is our major trading partner. If you look at it in terms of the proportion of the GDP influenced by the US, it's about a third, because 40% of our economy is dependent on exports, 80% of it with the US. So the arithmetic is pretty straightforward in that context. Therefore there's no question that the two economies are very closely linked and if you're running an inflation differential of the size that's implied here, because we expect about 3% inflation to continue in the US, it's inevitable. It has to happen that you have your currency appreciate in that context.

We have a very undervalued currency. I think the other side of that implication is that if you get a currency appreciating gradually, not only is there time for exporters to adjust, but keep in mind they're adjusting in the context of an economy whose costs are growing less quickly than in the major competitor.

So there's nothing inconsistent about arguing that you can have a stronger dollar. As long as you maintain that inflation differential and we don't go wild with increasing other costs of business, it's quite conceivable that our exporters would do very well, thank you, in that kind of environment.

The question that may be implied is, how can we get that low an inflation number? I think there were a couple of comments about recent increases in inflation rates in Canada. I won't go into the technicalities, but in fact we have so much slack in the Canadian economy built up over the last five years because we've grown well below our potential that the likelihood is that the inflation rate will come down rather than go up because of that.

For technical reasons associated with, for example, changes in auto insurance costs, it hasn't done that, but my prediction would be that come late fall of this year, we will see the measured inflation rate, the one that we all watch in the papers and wait for StatsCan to tell us about, coming down into that sort of range.

With the kind of growth I expect in the economy then and without that potential negative impact on our export sector from a stronger dollar, it's quite conceivable that the unemployment rate will come down in the way that we've described here. In fact, we may even be understating it, but let's again be cautious; economists are paid to be cautious. So I don't see an inconsistency there.

With respect to your second question, how and why elected officials make the choices they do at particular points in the political cycle I will leave to them to describe. I don't think I have the appropriate expertise to suggest what may or may not be the decision of a government coming up to a renewal-of-mandate situation, what they may or may not do. I can relate, if you will, or draw a parallel perhaps with the current situation of the federal government which, faced with what seems highly likely to be an election this year, came down with a budget that maintained the program that they had set out a couple of years ago. I can't predict, any more than I suspect anybody sitting here can predict, what the position of public opinion will be two years from now or three years from now in Ontario, and I can't predict what the current government will do in response to that.

What I can suggest is that if the program originally designed for constraining spending is maintained or restored, then we can see that kind of happy day emerging. Whether different choices are made -- I find it difficult enough to make economic forecasts. I don't want to guess about political forecasts.

Mr Joseph Spina (Brampton North): Thank you, gentlemen. The bank has come through again with what my colleagues call a good balanced approach; we always respect the fact that economists are cautious.

I want to draw your attention to page 3, where you said that the balanced budget is achievable provided that spending cuts in the order of those set out in the CSR can be implemented. I'm trying to reconcile that with what you said earlier about recommending that there should be a possible delay of the tax cut. I'm trying to come to grips with the fact that in spite of your recommendations to delay those tax cuts, you state that the government can balance the budget provided it maintains its spending reductions.

I guess perhaps being overly simplistic, spending increases, taxes get increased; spending is reduced, therefore taxes can be reduced. That's fairly logical and fairly simple. So I'm just going to ask you to try and reconcile that for me if you would. That's the first question.

The second one is regarding the automotive sector. You indicated that there's a possibility the automotive sector could leave the province if there was a downturn, Japan could take its production back etc. Yet at this point we have Honda and Toyota, specifically, putting in investments. The Honda plant will be opened next year; the Toyota plant will be opened next year. In the Brampton Chrysler plant, as an example, even if minivan took a downturn, they are fully anticipating opening a third shift, which is another 1,000 or 1,200 jobs at the Bramalea plant.

That being said, the IT, the information technology sector in this province, is currently running third behind the other two industries, the leading of course being the automotive. It's predicted, albeit by the IT sector, that that will be the leading industry in this province within three to five years. Do you feel that this could be very much a reconciling factor in maintaining a more balanced base in the strength of this Ontario economy?

Mr O'Neill: As to the first, I think what we were saying was, if I can make the points perhaps more straightforwardly than I was able to in the presentation, there is a risk that given our expectation that revenue growth will not be, in the later years, as strong as had originally been forecast in the Common Sense Revolution, the government may find itself unable to meet its targets if it does not either provide for the spending cuts originally called for in the CSR or, failing that for some reason, the alternative would be to then slow down the pace of tax cutting. In other words, you either allow more revenue to come in by not doing the tax cut as soon or you maintain your deficit reduction target the other way, which is by lowering spending as originally had been planned.

In terms of the auto sector, again, I don't think we meant to suggest that it was going to leave the province. What we were suggesting is that if the yen, in strength, were to continue at its current level -- and I think there are reasons to suppose it might not, but if it were -- it's not that investment will be hauled out. It's just that production would be shifted to Japan and away from North America. It's not just Canada that would be affected by that because it would be easier for the Japanese with a very weak yen to sell into North America from production sites in Japan or in other parts of Asia.

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My frank view is that the yen is not going to be as weak as it has been recently. I don't want to get into a lot of details. I'm quite happy to talk about it, but I think the fact of the matter is that the Japanese economy is in process of turnaround. The Japanese government has taken steps, for example, to assist with the recovery in the financial sector critical to Japan's recovery.

Our own expectation is that growth will pick up in Japan. At the same time, if the US is faced with moderating growth, but at risk of, as I think Mr Greenspan's comments today suggested, an interest rate increase, if that moderation isn't fairly soon appearing on the horizon, that would certainly tend to maintain the weakness in the end by strengthening the dollar. But because our forecast is that the US economy moderates and the Japanese economy picks up, our expectation is that the recent weakness in the yen is going to be reversed.

Is it later this year or early next year? I would think it's more likely to be early next year. Consider what that then means. If you are a Japanese producer, you don't want to be making long-range decisions on the basis of what is a short-term or expected to be a short-term phenomenon.

Mr Spina: Which they've done, the investments here.

Mr O'Neill: No. What I'm saying is that the expectation that the yen will continue to weaken or that it will remain as weak as it has recently become, if you were to plan on the basis of that, of course it would suggest that you're going to move production back to Japan. My expectation is that's not going to be the case.

Remember that one of the key reasons why the Japanese moved to North America as significantly as they did, apart from the issue of tariff barriers or trade barriers, was that steady improvement in the value of the yen over a 10-year period. It forced them in fact to move production not only to North America but to other parts of Asia.

A temporary weakening in that pattern is not, I think, sufficient to cause them to substantially change their long-run planning. I say it's a short-term risk, but I don't see it as a situation where we're facing chaos or we're facing a significant reduction in the role of the Japanese producers in Canada or in the US.

The Chair: Mr Martiniuk, do you have a short question?

Mr Martiniuk: Pretty short. We have a few presenters who have panaceas. One is monetizing the debt: borrow from the Bank of Canada. That's the way it's worded. I'd like you to comment on that. Also, what would happen if the governor of the Bank of Canada decided to set interest rates 1% below the market demands? What would occur? That's the second panacea: Just lower interest rates.

Mr O'Neill: From whomever a government wishes to borrow and has the right to borrow, ultimately deficits have to be paid for with higher taxes. Whatever is the current method for financing deficits, they can't permanently be sustained. I think the general rule is, the arithmetic is, that deficits ultimately cost taxpayers. So it's not a solution. We can't monetize the problem away or borrow the problem away from the Bank of Canada.

On the second question, I have to try and interpret your question -- and if I'm wrong, please correct me -- to be asking, could the governor of the Bank of Canada lower interest rates even further than they currently have been reduced and sustain that? First of all, of course, the governor and the Bank of Canada can do whatever they wish with interest rates. They could in fact reduce them as low in real terms as the federal reserve did back in the early 1990s to actually a zero real rate of interest for short-term borrowing, which was a 3% nominal rate because the inflation rate was 3%. We haven't done that in Canada. We could do that, but frankly I don't think there's any particular necessity to do that.

If you look at the cost of borrowing in real terms -- that is, inflation adjusted -- take inflation out of it, and look at something like prime lending rate, the prime lending rate right now, which is very important to overall costs of borrowing in Canada, is 4.75%. The real rate is probably under 3.5% if you take off inflation. We have averaged over the last 30 years a real prime lending rate of about 4.25% to 4.5%, so we're already a percentage point below what that long-run average is. We already have a lot of stimulus in the system.

It was a short question and I'm giving you a slightly longer answer, but the answer would be, finally, I don't think there's a particular need for additional stimulus. It does take time for that stimulus, were it to be put in place, to work on the economy. We still haven't seen the impact of the cuts that the bank made in the fall. I think those are still to come in the spring of this year, and what we might risk in that case is overstimulating. In other words, we could lower it another point, but if we're going to get the kind of growth that I think we will this year, that would then force the bank to much more quickly and perhaps much more sharply raise rates again. Why go through that sort of significant further reduction only to reverse it in the near future? I don't think that would be necessary in the current environment.

The Chair: All three caucuses have extended their six minutes by about an equal time, just about double, but we do have time perhaps for a two-minute round and I would ask for your cooperation. Mr Kwinter.

Mr Kwinter: Mr O'Neill, I'd just like to get back to the projections that you show in the Common Sense Revolution. If you take a look at the program and capital spending, 1997 to the year 2000, they're virtually the same. It starts out at $41.8 billion; then it's $41.4 billion, $41.4 billion, $41.4 billion. We have already seen in the projections for this year that there is a shortfall of $3.3 billion as a result of the $2.8-billion program overspending and the $578 million which is a one-time 1995 windfall that will not be included and if it hadn't been there, it would have increased it to this $3.3 billion.

We have a regime where transfer payments are going to be reduced over the next years from the federal government and we also have cuts that are built into the Common Sense Revolution to get to these numbers.

My question is, what kind of drag is that going to have on the economy with all of that happening? Because the only way they're going to meet their targets is to cut even more than they had planned in order to make sure that this $2.8 billion that they already have to make up for doesn't get compounded next year in all of the things. Have you done any projections on what kind of a drag that will be?

Mr O'Neill: I was just asking Dave because David has done the estimates there. The estimate is that it is approximately 1%. So if you think about either at a national level what happens when the federal government is building in restraint or at the provincial level with the provincial government doing the same, you would expect to see growth rates, with the current stimulus from monetary policy, to be more like 5% rather than the 4% that we're projecting. So it's worth about a percentage point.

The longer-term issue, and this is more germane at the national level, is that if you decided to backtrack from that, what would be the consequences? Of course our concern all along has been that the gains that you get from lower rates get offset because the financial markets say this is not viable, they're reversing position, and rates will go back up again. Some of that kind of impact could conceivably occur here in terms of the rating and the rates that the government might have to pay on its borrowing.

Fundamentally, the answer is yes, there's no question there's drag, but if you believe that deficit reduction is essential, for all the reasons we've historically and today talked about, then it's a necessary cost of achieving that result.

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Mr Pouliot: I listened intently to the questions, Mr O'Neill, vis-à-vis the interest rate, and I checked and reminded myself that on the short term presently we're slightly lower than the US and the spread of the long term has been narrowing; I think it's 30 or 35 basis points at present. Nevertheless, traditionally we have run in tandem with them while looking at our ability to service our debt.

In terms of the near future, we need money to hit the marketplace to ensure growth. I read, maybe in one of your publications, sir, that consumer debt, el plastico, the credit cards are at an all-time high. The same article also mentioned that consumer savings were very low at the present time. People were still paying for the consumer-supreme attitude or the excesses, if you wish, of yesteryears, of the 1980s.

I talked to some of my constituents. They're not rich, those people. They were busy building the country, of course, but they're on fixed income, like GICs. They've noticed, as they mature and roll their GICs over, that it's not as lucrative, in fact it's not half as lucrative if they had long term. For instance, people have had strip bonds, a little more sophistication and so on. Then I looked at some of the phenomena that are still hitting us, like the restructuring, the re-engineering of the workplace, if you will.

I look at the possibility -- because I too have learned to know the meaning of exuberance or irrational exuberance and maybe a market correction. I look at the NASDAQ index, and I see some price-earning ratios that are catastrophic, they're very exaggerated. If I factor all these things, without being negative, where is the money going to come from to justify 4% growth?

Mr O'Neill: I'll try to be very brief, Chair, because I know you're running out of time. Remember that with consumer debt you also have assets, and the net asset base of the household in Canada has grown over the last five or six years. One of the areas in which it has grown, of course, is those people who participated in the exuberance of financial markets. They've gained significantly as a result of that.

Secondly, consumers are also faced with a significant amount of pent-up demand. They've gone a long time with cars that are getting older and rusting and all the rest of it. So there's a desire to spend there.

Finally, I think what will unleash that, and this is really what we mean by confidence, along with the better prospects for low-cost borrowing and the reduction of existing debt charges, because interest rates are lower and you can roll it over and gain significantly from that, will be the kind of employment growth that's imbedded in that unemployment rate falling. We're looking at probably 350,000 new jobs this year.

Mr Wayne Wettlaufer (Kitchener): Gentlemen -- Mr O'Neill, I guess, especially -- we're talking about Ontario's debt-to-GDP ratio of 32%, and Mr Kwinter was talking earlier about the concerns about future inflation. I think you would agree that all government spending is inflationary, and you would probably also agree that deficits are in themselves inflationary. They create higher interest rates or certainly they are one cause for higher interest rates, which of course is inflationary. I look at that debt-to-GDP ratio, the possibility of inflation, and I say that we have to get our spending under control. We have to reduce our spending. We have no choice. Would you agree with that?

Mr O'Neill: I would certainly agree with the conclusion that deficit elimination is a sometimes painful but necessary pain we have to go through. I might give you different reasons than you're suggesting. I'm not sure that spending per se is inflationary or even that deficits necessarily are inflationary, but certainly it has been true that the steady rise in the debt levels, relative to our capacity to repay them and relative to GDP, has been a cause for investors, domestic and foreign, to say, "We don't think this is a sustainable path, and we're going to demand that you pay a risk premium on your interest rates as a consequence of that." So certainly it has been a function in generating a higher-rate environment than we necessarily should have had.

The Chair: Thank you very much, Mr O'Neill. It's been a fascinating hour. We appreciate you making a presentation before the committee this year.

ONTARIO RESTAURANT ASSOCIATION

The Chair: We now welcome the Ontario Restaurant Association, Mr Paul Oliver. Welcome to the committee, Mr Oliver. We're pleased to have you before us today. We have half an hour to spend together. If you would like to make a presentation, we'll fill the remaining time with questions.

Mr Paul Oliver: Good afternoon. My name is Paul Oliver, and I'm president of the Ontario Restaurant Association. On behalf of the association, I'm pleased to participate in the consultations leading towards the 1997 provincial budget. We view this consultation as an opportunity to discuss a number of serious issues which are of importance to Ontario's hospitality industry and in particular to customers of the hospitality industry.

I'll attempt to make my comments as brief as possible to facilitate as much time for questions as possible. I will briefly make a few comments regarding these issues. However, rather than discussing all of the issues affecting the Ontario restaurant industry, the ORA has focused our submission on the one area of provincial reform which has yet to be tackled in any meaningful way by the current government of Ontario, and that is the reform of Ontario's beverage alcohol sale, distribution and tax system.

In our submission, the ORA highlights three areas that are critical to reforming Ontario's beverage alcohol system:

First, reform the dual monopoly system so that licensees of restaurants and bars can purchase beer from both the BRI as well as the LCBO. This initiative, we believe, will generate approximately $30 million to $50 million in new revenue for the treasury of Ontario.

Second, require the LCBO to permit licensees to purchase beverage alcohol on credit as all other customers of the LCBO are already permitted to do.

Third, eliminate the volume- or price-based licensing fee that's applied to restaurants and bars as it functions as an indirect tax on consumers.

While strongly supportive of a comprehensive reform of Ontario's beverage alcohol system, we believe that the three issues addressed in our submission are required in the short term and are critical to the continued sustainability and viability of the hospitality industry. Without these changes, it will be difficult for our industry to continue to make the large contribution it makes to Ontario's economy presently.

Ontario's beverage alcohol distribution and retail system is dominated by two monopolies: a publicly owned monopoly, that of the LCBO; and a privately owned monopoly, that of the Brewers Retail Inc or BRI.

BRI is owned and controlled 99% by the two breweries which dominate Ontario's beer industry. Ironically, both of these companies, which own and control the Brewers Retail Inc, are themselves majority foreign owned. This creates the ironic situation that one of the two monopolies which dominates Ontario's alcohol system, controlling close to $2 billion in sales, is indirectly foreign owned.

It is not, however, the foreign ownership issue which concerns the ORA but rather the lack of competition, service and fair pricing in Ontario's beer market that has been entrenched as a result of the dual monopoly system, which prevents competition even between the two monopolies.

Over the last several years, the LCBO has begun to enter the beer retailing sector, first with imported beer and more recently with some limited domestic brands and package sizes. This has no doubt added to the profits of the LCBO and its contribution to the provincial treasury, as well as substantially improved customer service.

Unfortunately, licensee customers are not permitted, even today, to purchase from the LCBO any beer listed for sale in the BRI; retail customers can, but licensee customers cannot. This inequity exists despite the fact that the restaurant and bar industry collectively purchases over half a billion dollars of beer annually from the BRI system. The ORA strongly believes that more competition and improved service is required relative to Ontario's alcohol duopoly.

By preventing competition even between the LCBO and the BRI for the sale and distribution of beer to licensee customers, the government is entrenching an unacceptable level of poor service, unfair and irregular pricing and forgoing the potential for $30 million to $50 million in additional revenue for the provincial treasury.

Think of the inconvenience and red tape faced by a small restaurant operator who is forced to go to two separate and distinct locations to purchase beer and wine, even though the LCBO sells both.

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By opening up the beer distribution system so that the BRI and LCBO can and will compete directly for licensee business based on service, quality and convenience, small restaurant and bar operations will see a dramatic improvement in the quality and level of service not only for beer purchases but also for wine and spirits. As well, the people of Ontario will enjoy more revenue profits from the LCBO in the area, as we noted, of approximately $30 million to $50 million a year.

The BRI maintains that its beer distribution system is the best in the world, and in fact they have recently hired well-known American actors to tell us so. If this is indeed true, they should not fear competition from a government-controlled monopoly. But with competition, it will be the marketplace that tells us whether BRI is indeed the best in the world, not BRI itself.

The next issue is that of credit for licensees. The LCBO should be given credit for many of the changes it has undertaken over the last several years to better serve retail customers. These changes include extensive and costly renovations to many stores, better product knowledge and, most importantly, the introduction of alternative payment programs, including credit cards and debit cards.

Unfortunately, while the LCBO has worked hard to implement these changes to combat the growing competition from over 300 private wine stores, wine-making stores, private beer stores and other legal and illegal distribution channels, the LCBO has ignored the needs of its other major customer category, that of licensee customers. It has continued its outdated programs and poor quality service for customers.

Collectively, licensees purchase in excess of $280 million in wine and spirits annually from the LCBO, but since licensees are a captive market, they are not accorded the same payment or service options as retail customers. This is because, unlike retail customers, licensees are obliged to make purchases from the LCBO regardless of how poor or outdated the service they receive is.

A glaring example of this poor service is the LCBO's means of payment required for long-term licensee customers: cash, certified cheque or, if you're really good, a regular cheque at the time of ordering or before delivery; no debit cards, no credit cards, no commercial credit; payment in advance, no alternative. It's hard to believe that in an era of electronic purchases, with the explosion of the debit cards and eventually the creation of a cashless society, the LCBO remains entrenched and clings to its payment system from over 50 years ago, but this is what licensees face today.

This treatment is in stark contrast to the flexible payment options provided to retail customers. You or I can walk in off the street, purchase wine and spirits on our credit card and pay for it at the end of the month when our credit card bill arrives. However, if you're unfortunate enough to be the operator or proprietor of a restaurant who has been a steady and loyal customer of the LCBO for more than 20 years, you have no choice but cash in advance or you get no product.

Even operators of for-profit events held under special-occasion permits, which compete directly with many restaurants and bars for customers, can make purchases on their credit cards, but not the restaurateur or the bar operator, because they are a captive customer and, as the LCBO says, there's no incentive to make improvements when they already get all the sales because they have a captive customer.

It is this complacent approach by the LCBO to licensee purchases which this committee should and must address. The ORA estimates the cost of permitting credit card purchases by licensees to be neutral or even represent a cost savings for the LCBO through the reduced cost of head office administration. Credit cards will also mean a sales increase of premium wines and spirits which licensees previously could not afford to stock.

For licensees, the introduction of credit card purchases will open up a new source of short-term capital financing. The restaurant and hospitality industry, over the last few years, has faced massive difficulties in securing operating capital and financing. For many establishments, capital simply has not been available, due to the reluctance of major banks to finance our industry. For many operators, the use of personal credit cards has been the only alternative that has enabled them to continue to survive. Since wine and liquor purchases are often one of the largest supply purchases made by a restaurant operation, the use of credit cards by the LCBO will help in assisting in this short-term financing need.

It is important to note that the use of credit card purchases from the LCBO by licensees has been endorsed by other organizations and groups, including the Ontario Liquor Board Employees' Union, and by the government's own Red Tape Review Commission.

Finally and most importantly, a tax is a tax is a tax. Currently, operators of restaurants and bars, known as licensees, pay two separate and distinct licensing fees. One licensing fee is a fixed annual licence fee; the other is a variable volume- or price-based fee which applies to the purchases of wine, beer and sprits made by the licensee. Two licensing fees, but only one establishment.

It is the view of the ORA that the volume- or price-based variable fee paid by licensees is in practice and design an indirect tax imposed upon consumers or customers of restaurants and bars. It is also the view of the ORA that this fee, as it acts as an indirect tax, is outside the scope of provincial constitutional powers and thus must be eliminated.

According to regulation 719 of the Liquor Licence Act, licensees pay a variety of fixed annual fees, including $815 as an application fee, $240 upon the issue of a liquor licence and an annual renewal fee of $300. These fees as well as the transfer fees generate over $3.5 million in revenue for the Liquor Licence Board of Ontario.

In addition to these fixed fees, section 103 of regulation 719 requires licensees to pay an additional licensing fee of $2.64 per hectolitre of beer purchased for sale and an amount equal to 12% of the purchase price of all wine and spirits, including the price of the containers. These volume- or price-based fees generate approximately $35 million annually for the provincial treasury. It is these volume- or price-based fees which should be considered an indirect tax on customers or consumers of LLBO licensed restaurants and bars.

It is interesting to note that the indirect tax issue, as well as the ancillary regulatory argument outlined in our submission, are the same arguments used recently by the government of Ontario to justify why under Bill 26, the omnibus legislation, municipal governments could not impose local sales tax through a regulatory licensing scheme. The government of Ontario said that these types of indirect tax or regulatory schemes were not permissible under the Constitution. During Bill 26 committee hearings, the government was very clear in stating that indirect taxes hidden as a volume- or price-based licensing fee were not constitutional, yet today the restaurant and hospitality industry faces that very type of tax.

Under the Constitution Act of 1867, provincial governments are limited to imposing direct taxes and are excluded from imposing indirect taxes. From past court rulings and the application of the John Stuart Mill test as well as the general tendency test, both used by the Supreme Court in recent rulings, it is clear that the volume- or price-based licensing fee is indeed an indirect tax on consumers and exceeds provincial powers.

The courts have, however, held that provinces may impose indirect levies under subsections 92(9), (13) and (16) of the Constitution Act. However, the courts have held that these levies must be ancillary or adhesive to a valid provincial regulatory scheme and the fees raised from the indirect taxes are to be used to administer the regulatory scheme and are limited in amount in accordance with this purpose.

It is commonly accepted that the LLBO is indeed a valid regulatory scheme. However, the fees collected by the LLBO and directly remitted to the provincial treasury far exceed the cost of administering this regulatory scheme.

Annually, the LLBO collects over $55 million in annual licensing fees, while its total operating budget and cost is less than $8.5 million. This means that the LLBO regulatory scheme, in our view, is in fact generating over $45 million annually through the imposition of indirect taxes imposed on Ontario's consumers.

It is incumbent upon this committee to address this serious breach of provincial taxing power by eliminating the volume- or price-based licensing fee and pursuing an annual-fixed-fee licensing system which more adequately reflects the real cost of the regulatory scheme.

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In conclusion, it is undoubtedly time to get on with reforming Ontario's beverage alcohol distribution and tax system with priority and emphasis on addressing the glaring inequities in the existing system as well as identifying potential sources of new revenue for the government of Ontario. The three priorities which we outline in this submission begin to do this process and fulfil these criteria. It is now time for action. On behalf of the ORA, I would urge this committee to embrace these recommendations and strongly push for their adoption.

Mr Pouliot: I was surprised -- not appalled or shocked -- at the very size of many establishments, like 10,000 in Ontario. As a matter of consultation, simply put, what would you like, what do you think would benefit and why, in the next provincial budget, which will be some time in late April or more likely May? Many organizations come and put their best foot forward and they're mostly balanced. They seek an equilibrium because they know the government cannot live without some taxes. By the same token, they know their field so well that they come up with some positive suggestions. As I read this, and you tried very hard, there's no love lost between the LLBO and the restaurateurs, people who run bars and restaurants in the province of Ontario, is there?

Mr Oliver: This isn't between the LLBO and ourselves. The money we are talking about actually flows directly to the provincial treasury.

Mr Pouliot: I understand; big time too.

Mr Oliver: Yes.

Mr Pouliot: I see here, "A tax is a tax is a tax." If I invite members of the committee here -- and I don't have an expense account any more so I have to pay for myself, so I'm conscious about the price of Scotch -- and we go out for a drink, as a client of yours, is it not a concern that a lot out of a bottle of spirits, of Scotch, three quarters of it, is taxes? Is that not a concern in attracting customers in the marketplace?

Mr Oliver: Taxes on beverage alcohol, as we've discussed before this committee on previous occasions, is very much a concern of ours. I think that's led to the massive underground economy we see in Ontario as well as in other jurisdictions in Canada. What we tried to do this year is focus on one glaring example, of not only high taxes, but what we believe is wrong taxes or taxes that go beyond the scope of provincial responsibility. What we are trying to present is the view that you can call it a licensing fee, you can call it a regulatory fee, you can call it whatever it is, but at the end of the day it is a tax, and it's a $35-million tax on customers.

Mr Pouliot: I have to ask this question. You will forgive me but I know so little; I appreciate the fact that you come and help me. Four thousand five hundred people, it's tax after tax after tax. Governments seem to be insatiable, they never have enough, so bingo, they go after you. Out of 10,000 establishments and so on, I read the other day there was something like, I don't know -- how do you say in English? -- the black market, booze that flows --

Mr Oliver: The underground economy.

Mr Pouliot: It's a difficult question for you because you represent those dues-paying members here, but would it be 5%, 10%, 15% that are on the take? Because at one time you have to satisfy the banker and so on. If there were only you and I here -- and you have immunity at this committee, right? You have immunity. Nobody's going to sue you here, sir. How many of your clients --

The Chair: He could express an opinion if he had an opportunity to do so.

Mr Pouliot: How many of your clients are bypassing their responsibility towards revenue Ontario and Revenue Canada? Is it 10%, 15%?

Mr Oliver: I think it's dramatically lower than that but I think it's probably reflective of the total underground economy, which is reflective of consumers out there. Part of what is generating the underground economy is not the small business operator who wants to avoid taxes, but the customer who walks in and says: "I'm not going to pay you that. This is what I pay you. Do you want the business -- yes or no?" The industry is so competitive, the same as the retail industry, the used car market, all these large sectors that have underground economies, because the customer can say, "If I don't buy my used car here, I'll go down the street and do it," or, "If I don't do my consulting business here, I'll go down the street."

Mr Pouliot: The distillers were here yesterday --

The Chair: Thank you very much, Mr Pouliot. We'll move on to the government side.

Mr Douglas B. Ford (Etobicoke-Humber): Mr Oliver, if the present conditions were changed, as you see it, would there be an increase in job creation?

Mr Oliver: We did an economic impact analysis of eliminating the gallonage tax and it said that the immediate elimination of it over the next two years would generate 5,000 jobs and would be revenue-neutral for the government of Ontario after two years.

Mr Ford: Do you believe that?

Mr Oliver: Yes, I do, without a doubt. What we've done is look at price markups in other jurisdictions, and the savings that the operator would have would directly flow through to customers and go through into increased wages.

Mr Ford: Whereabouts in the province would these 5,000 jobs be created within your industry?

Mr Oliver: Everywhere in Ontario. The 15,000 liquor-licensed restaurants and bars and hotels are located in every riding in every part of Ontario.

Ms Bassett: Thanks, Mr Oliver, for your presentation. Nice to see you again. How has the reduction in the employer health tax helped to create more jobs in your industry?

Mr Oliver: As you know, it's just kicking in; I guess January 1 it kicked in. We're estimating about 75% of our establishments or maybe a bit more than that are actually now or will be exempt completely as a result, because it is predominantly small business. For smaller operators it means a lot less paperwork and more flexibility. I actually just noticed the reduction on a recent budgeting for the association and we're translating that into creating a part-time job this summer.

Ms Bassett: So it's a positive?

Mr Oliver: Yes.

Mr Martiniuk: Thank you, Mr Oliver. I believe you appeared in front of the justice committee on the VLT bill. In any event, that was about a year ago or shorter.

Has there been any change? I think you related at that time that the hospitality industry was not doing that well, especially since 1991. Have you noticed any change, speaking generally, in your industry during the last year or so?

Mr Oliver: Industry-wide sales have increased this past year about 1.8%. It's not strong growth. It's stronger than the rest of Canada. The rest of Canada had 0.5% growth but the previous two or three years they had had less of a decline than Ontario had. But the real sales per store continued to decline last year. We've seen seven years straight now of same-store declines. This is the problem we're facing, that a lot of these small business operators have seen profit margins shrink from 8% to 10% in the late 1980s to 2% on average now, recognizing the average business does $400,000 in sales. You can't even survive. The owner-operator's not making minimum wage at that level. The problem is that we're actually now seeing an edging up again of bankruptcies.

Mr Kwinter: As always, I enjoyed your presentation. Have you considered a judicial challenge on these Ontario taxing powers?

Mr Oliver: We have considered it. We are looking at it. We've actually commissioned two outside legal opinions on that and our board met on this issue a week and a half ago and directed staff to commission a third outside legal opinion of it. We would expect it to be very similar. Then the board will look at the cost of launching a legal challenge. They've dedicated the funding for the initial legal research on this, which has brought us to the point we are at today.

This is a relatively new issue. The gallonage tax is nothing new. It's been around for 35 or 40 years. It originally predated the introduction of the provincial sales tax. It was there to collect an alcohol tax before PST was collected on the resale. When the resale was brought in, it just became a double tax. We pay 10% when our customer buys it at the retail level and there's 12% buried in it. The Bill 26 hearings, as well as some of the changes we were looking at in Alberta's alcohol system, stimulated us to look at the constitutional issue of this. We're continuing to do that but we haven't made a decision yet as to what we do with the research we've developed.

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Mr Kwinter: I'd like to talk about your proposal about credit cards. I used to be the Minister of Consumer and Commercial Relations and I had responsibility for the beverage alcohol business, so I want to play the devil's advocate. It actually happened during my watch that we allowed credit cards for consumers, which was to stimulate purchases in an industry where the sales were going down. We had people come in and tell us that the spirits industry was really suffering and that the distillers were closing down and that kind of thing and that because it's an impulse purchase on behalf of consumers, if they were in there, if they knew they didn't have to worry about it, if they had the money right in their pocket or could put it on their credit card, it would stimulate sales.

I'm just being the devil's advocate, because actually I'm sympathetic to your concern, but I think the problem you have is that the issue -- correct me if I'm wrong -- is that they want to be able to use that float and the credit card to give them credit to buy this thing so they get a chance to turn over their stock before they really have to pay the bill. What is happening is I think philosophically that's something the LCBO has a problem with. Secondly, they have the cost of what they have to give up to Chargex or Visa or whatever it is. I would think that with the Mondex system you'd have no trouble at all. That's a cash business. You want to pay by Mondex? Be our guest. That I don't think solves the problem of the restaurateur. I'd like to get your comment on that.

The other thing that I'd like to comment on is you mentioned that you would like to see normal commercial credit. I think that's a non-starter. I'm sure you'll admit that the restaurant industry probably has one of the highest failure rates of any commercial enterprise and for a public entity like the LCBO to get involved in extending credit where there's going to be a good chance that they're going to have a pile of bad debts, I just don't think that's on.

Mr Oliver: I quite frankly don't think commercial credit is a starter either. That was the idea actually under the previous government. When credit cards were extended to retail customers, the minister at the time committed to allowing licensees to use credit cards. The LCBO's response was, "No, we'd rather give them commercial credit." We said, "Maybe that's not the best management decision," but that was the view they wanted to do. We think it was more designed by them to delay or to create smokescreens, whatever.

Relative to credit card purchases, about 1.4% for a credit card processing fee is what Visa or MasterCard charges. Those savings can actually be brought forward by reducing the number of people you have to have manually processing cheques at the LCBO, by the number of people you have to have picking up those cheques, and more importantly, the number of orders made by licensees will decline substantially. You now have a lot of licensees ordering, "I'll have one bottle of Scotch, two bottles of wine. Oh, I've got a big dinner party, make that three bottles of wine," and they're making these orders on a day-to-day basis. If you made a threshold and said, "Okay, all orders over $1,000 could be put on credit cards," the person is encouraged to take a month-long purchase of maybe 10 or 15 different purchases, where 10 or 15 different staff people from the LCBO are required time-wise, compress it into one purchase, one delivery. The savings there become far more than the 1.4% it costs to process a credit card.

Mr Kwinter: I notice that you haven't mentioned it at all in your presentation this time but it's something that has come up a couple of times and I know you have a very strong position on it and I think it would be useful to get it into the record. We've had the Canadian manufacturers' and exporters' association advocate a blended GST and PST. We've had the agricultural sector doing that. I know that you don't exactly have that point of view and I think it would be useful if you responded to that just so that we would have it on the record.

Mr Oliver: Our industry, our federal association, the ORA, as well as every provincial restaurant association across Canada, as well as the industry at large, have been opposed to the harmonization of the GST and PST. They've strongly opposed it in the Maritimes because of the cost transfer to the customer. Our industry suffers when that happens. It not only increases the retail price of a restaurant meal or a basic food purchase, but more importantly, it creates a greater difference between ready-to-heat food that's in the grocery store and heated food that's in the restaurant, that's being delivered to your front door.

Most of all, it reduces disposable consumer spending because as the GST and PST are expanded to services, household heating, all the necessities of life, the reality is that our customer or the consumer at large simply has less money at the end of the day. If their total spending goes down only 1% as a result of a blended tax, because we don't get true flow-through in all cases, then the disposable income or disposable expenditure probably goes down 4% to 5%, and that comes straight out of foodservice sales. We saw sales for the restaurant industry when the GST was brought in decline greater than the 7% that the tax was itself.

The Chair: Mr Oliver, we appreciate your attending the committee and your presentation today. Thank you very much.

CANADIAN MENTAL HEALTH ASSOCIATION, ONTARIO DIVISION

The Chair: We now welcome the Canadian Mental Health Association: Ruth Stoddart, Glenn Thompson and John Kelly. Welcome to the committee, ladies and gentlemen.

Mr John Kelly: Thank you very much, Mr Chair. Just as an aside, I might make a comment after the last presentation that we'd like to move your thoughts from food to food for thought.

My name is John Kelly. As the past president of the Canadian Mental Health Association, Ontario division, I am pleased that you have provided the opportunity for our organization to make a presentation to you concerning the 1997-98 provincial budget.

I would like to introduce to you Glenn Thompson, our executive director, and Ruth Stoddart, who is the manager of policy, planning and development at our provincial office.

The Canadian Mental Health Association, Ontario division, known as CMHA, is an incorporated, registered, non-profit charitable organization chartered in 1952. Approximately 4,000 volunteers are active in direct, board and committee service in a network of 36 branches located across Ontario. CMHA, Ontario division, and its branch services and programs are funded through government grants, local United Ways and supplementary fund-raising activities.

Since our founding, the CMHA, Ontario division, has made significant contributions to the development of mental health policy in Ontario. We have consistently advocated for community mental health services which would allow individuals with mental illness to remain in their home communities, close to their families and other natural supports.

In each of our pre-budget submissions over the past several years, the CMHA, Ontario division, has recommended that a central target for the government be the reduction of the provincial deficit. It is our view that major transformational changes are still required in the health care system, especially in that part of the system with which we have the most experience, the mental health system.

We believe it is important that the government and this committee have a conceptual framework within which the potential impacts of the 1997-98 provincial budget may be examined. The New Framework for Support document prepared by the CMHA national office provides that frame of reference. This document has been widely circulated and is in active use in other parts of the world. A copy of the community resource base portion of the framework has been attached to our submission as appendix A.

The New Framework for Support indicates that to live a fulfilling life in their community, persons with a psychiatric disability need more than the formal mental health services provided by hospitals, community agencies and private practitioners. They need to have at least the same opportunities to access basic socioeconomic support as other Canadian citizens, namely, "jobs or other productive activities, good housing, appropriate education and adequate income."

Dr Fraser Mustard and others have argued that traditional health care may contribute 25% to a sense of wellbeing for the average citizen, while 50% of our sense of wellness comes from socioeconomic conditions. The prospect of job loss, with the potential of no longer being able to afford decent housing, adequate food and other necessities and reasonable educational and recreational opportunities for oneself and one's children, is a frightening prospect for most people.

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For someone with a serious mental illness, the situation is especially daunting. Not only can their illness separate them from basic socioeconomic necessities such as the ability to work or maintain a home, but the lack of those necessities in their lives has a direct and damaging impact on their mental health and thus their prospects for recovery.

The community resource base contained in the framework document demonstrated the ideal range of resources that should be available to persons with serious mental health problems if they are to live a fulfilling life within the community. The basic socioeconomic conditions of income, housing, work and education make up the foundation of this model. If people with serious mental illness do not have access to these fundamental supports, their ability to benefit from other services available to them is severely diminished.

Use of the framework model will ensure that decisions are made which facilitate the integration and coordination so needed to improve mental health care. We encourage the government to ensure that the 1997-98 provincial budget includes provisions which provide the authority and impetus for positive change for the mental health system in Ontario.

I would now like to turn to Glenn Thompson, who will present our views concerning the mental health reform process in Ontario. Ruth Stoddart will then summarize the advocacy activities of our organization in several other areas which are of great importance to persons with mental illness.

Mr Glenn Thompson: Mr Chair and committee members, it's good to be here with you again and to have you spend a little time to give attention in a budgetary sense to mental health issues and problems. I want to touch on four different areas in my remarks and I'll be fairly brief so that we'll have an opportunity for Ruth to speak and for some discussion, I hope.

I think the important thing to recognize in the mental health area relative to other health problems we have in Ontario and indeed in society generally is the very high incidence of mental health problems relative to the expenditure on mental health, so that surgery and many other kinds of mental health care of course traditionally have gotten a very high level of attention, as they should, but we haven't given the proportionate attention in dollar terms and generally in social terms to mental health.

We'd like you as legislators to think about that imbalance within the system. This is not a plea for more money to be spent but for the balance of expenditures within the health system to be rebalanced and sorted out. Indeed, that's happening this very day in some of the dramatic changes that are happening through the instructions of the Health Services Restructuring Commission.

Underfunded relative to need, I guess I would say, imbalance within the system, having an institutional bias. I worked, some of you know, for a long time in the correctional services system here in Ontario. Ontarians have a great attraction to institutions, it seems, and we've had that attraction certainly in the health system generally. That bias is shifting day by day now through the work of the Health Services Restructuring Commission and we applaud that.

At the same time, we're more than concerned that in a budgetary sense the transfer of resources to community mental health programs, which is our concern, happens, because if it doesn't happen we'll have a repeat of some of the difficulties of earlier years when psychiatric hospitals were closed and the follow-up care didn't occur in communities and great tragedies occurred as a result of that.

There seems to be every evidence of good intention certainly in the Health Services Restructuring Commission reports in that regard, but they can only order the shifting of resources in the hospital side and recommend what happens on the other side. It's more than important that you as legislators try to ensure that other follow-up activity in a fiscal sense occurs because if it doesn't, we'll be back here, all of us, year after year lamenting what we did in 1997 in terms of major hospital downsizing, and certainly from a mental health point of view we will.

I'd like to say as well that there's now a very rapidly growing amount of research available in our field that suggests that if we don't attend to early childhood development, we pick up the pieces later on in all sorts of human service areas, from correctional services, where I once worked, to the mental health care system. That seems so self-evident to any of us who deal a lot with children or who have children in our own families. But in terms of the proportion of expenditures, we haven't attended to that area very well.

Again I say this is not a plea for more money to go into the health system, but for a rebalancing of that and a consideration of the money we spend on children's services, from the education system through the mental health system, to say, are we spending the money within the health system and within the child care system in the right way, in the right proportions? Probably not; for sure not, I think we would say.

Just to give you a few of the actual mental health numbers that might be sort of riveting to you, if you haven't heard us say them before, it really is surprising to most people that one in five of us in our lifetime will suffer a serious mental health disorder and that one in five people in Ontario between the ages of 15 and 64 in any year will suffer some sort of mental health distress. A very high number of us suffer those kinds of difficulties, just as we do many other kinds of health care difficulties, but we tend to not attend to that area very well and most of us keep those events in our families and in our personal life quite a secret compared to incidences of other kinds of illnesses.

Approximately 118,800 Ontarians suffer from a severe mental illness which may chronically impair their ability to function in day-to-day life. Mr Kelly has indicated the kind of community support model we see as most effective in trying to balance income support, employment, actual mental health care and the other supports people need.

In Ontario, about 1.8 million days of productivity at work, home or school were lost per month by people with mental disorders. This number is nearly twice the number of days lost by an equal-sized group of the healthy population. So you can see the costs in society if these problems perpetuate themselves and aren't given early enough attention.

About 986,000 informal caregivers, that is, family members and friends, provide care to, among others, people with mental illness. These caregivers reported higher rates of mental and physical disorders than non-caregivers. So the impact on families who are the caregivers themselves more than half of the time is quite dramatic.

As you can see from the foregoing data, we have a very high incidence of need in the province. We have a high incidence of expenditure, as you well know, in the health care system, with $17.8 billion being spent on health care, nearly 30% of the government's expenditures. But in terms of the expenditure on mental health, excluding OHIP services, that runs at about 3.6% of the total provincial health care budget. Is the balance there the one that you would ideally see in terms of need? We don't think so.

In 1995-96, approximately 75% of the mental health budget was spent on institutional care and 25% on community services. As I've mentioned, the Health Services Restructuring Commission we think is moving rapidly to change that imbalance and we'll have to be attentive.

In 1992, in a survey we did, over 34,000 active registered clients of ours were being served in community health programs on the survey date. Over 50% of housing, social rehabilitation, vocational and case management programs had long waiting lists during that time. These programs in the community had a majority of their clients who were much the same as those individuals who were in provincial psychiatric hospitals.

Our submission to you is that most individuals who are in need of psychiatric care can be handled in one form or other of psychiatric care in the community, nearer to their homes and certainly equally economically, and often more so.

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Much has been done in the Putting People First document to move mental health reform ahead, and I'm not going to recite all of that to you. The Ministry of Health talks about it in its 1996 business plan. There's a major plan available to be implemented, but we're five years into that 10-year plan and we're going very slowly. The shift of dollars isn't happening at the rate that it was intended to, and while the Health Services Restructuring Commission is going to give that an infusion, we're way behind in the kind of moves we should have been making and could have made much more rapidly. I'd ask you to consider those needs and the potential for accelerating them as you look at the budget for this year.

In terms of the provincial psychiatric hospitals themselves, each one of those costs about $40 million to operate, and so the available funds to shift is quite substantial and we're encouraging that those funds be put to good use in the community.

I'm going to stop at that point. I think we've made the point of need and of potential to shift. Ruth Stoddart now can follow up with some of the particular advocacy work we're doing.

Ms Ruth Stoddart: Mr Chair and committee members, there are various items listed in the written submission we've given you dealing with some of the areas where we do a lot of advocacy work. There were two I wanted to touch on particularly today.

To begin with, it was almost exactly a year ago that I sat in one of these committee rooms and made a presentation concerning Bill 19, which was the bill that repealed the Advocacy Act and changed the substitute decisions and consent to treatment legislation. At that point, our organization said we were very concerned about the lack of any sort of independent advocacy services available for vulnerable adults; over a year ago, and that's still the situation. There are no independent advocacy services for vulnerable adults, with one exception, that being the advocates in the psychiatric hospitals.

As the government continues to downsize services and decrease such things as social assistance and get out of housing and various other things, we believe it's going to be increasingly important that people who have trouble making their own wishes and needs heard have someone to help them make those wishes and needs heard. We just wanted to reiterate once again that we think there are three very important advocacy functions that should be carried on by some sort of independent body in this province, the first one being rights advice, so that people know what their rights are and can act on them; the second one being individual advocacy, to help people who have trouble with their landlord, who have trouble getting social assistance, all those others things; and finally, systemic advocacy for system-wide issues that create a lot of problems for people. I think that once some sort of independent advocacy system is in place, people could be helped to help themselves and wouldn't in a lot of cases have to rely on more costly services.

The other thing I want to talk about that's of large concern to our organization is changes to social assistance and income maintenance programs. Just to give you some more numbers, 1994 stats from the Ministry of Community and Social Services show that there were about 717,000 people receiving family benefits allowance at that point in time, and of those 717,000 people more than 16% of them were getting benefits because they had a disability. Of the people who were disabled, 25% of them reported having a psychiatric disability and that was the reason for collecting family benefits allowance. Right now the CMHA is quite concerned because there are various initiatives going on both federally and provincially that may change people's entitlements or the availability of various types of income maintenance or social assistance programs.

Quickly, federally, there were reports in the newspapers last week that Canada pension plan changes are going to increase the amount of time someone has to work in order to get disability benefits. On the provincial side, changes to workers' comp legislation may prohibit any kind of compensation for chronic stress claims. Finally, the Ministry of Community and Social Services has plans to change what is presently the general welfare assistance program into the Ontario Works program, and the family benefits allowance to -- I think the last name we heard was the income support program for people with disabilities.

There are concerns with all these programs, both federally and provincially, that the definition of "disability" is being narrowed and that in an attempt to save money with these programs people are not going to be eligible who would previously have been eligible.

The final announcement from the provincial government in January was that fiscal responsibility for social assistance is going to be cost-shared 50-50 with the municipalities. This has caused even more concern in that if municipalities are unable to fund various services, those services could become substandard very quickly and possibly, in the worst-case scenario, unavailable. We just want to urge the government to consider the needs of people with serious disabilities and vulnerable people to receive such things as social assistance or income maintenance programs.

In particular, people with mental illnesses, their illnesses are often cyclical in nature. They're able to work at various times and not able to work at other times. Certainly the economy is better off allowing people to work when they are able to work and not narrowing eligibility criteria or definitions so that those people are forced, in order to get benefits part of the time, to be declared eligible for benefits all the time and not be able to work at all. I'll turn it back to John.

Mr Kelly: I'd like to leave you with four important thoughts: The CMHA, Ontario division, supports the principle of deficit reduction; the government's key goal should be to preserve the protection afforded to the most vulnerable in our society; there should be a single point of accountability within the government for children's mental health services; and finally, in order to maintain the overall health budget at $17.6 billion and retain the mental health envelope, there must be efficiency and economy in spending, and the reallocation of funds from institutions to the community should occur. Thank you, Mr Chairman.

The Chair: That leaves us with time for a quick round of questions from all parties, about a minute and a half.

Mr Wettlaufer: Thank you all for coming today. I have a great deal of interest in mental health. My own area is severely underserviced in this respect. You have suggested in a couple of places -- let me just find it; I highlighted it while you were going through it. "The CMHA, Ontario division, is concerned that without immediate emphasis on data research and evaluation, fiscal restraints may be implemented with the goal of short-term monetary and economic gains rather than improving the health care system." I don't want this to sound critical. Do you have evidence that this is going on?

Mr Thompson: There is no doubt that there is a lack of adequate data in the field, and that certainly makes everybody vulnerable to decisions that are not necessarily going to be the best ones. In the mental health field the Ministry of Health has tried on various occasions to put together a data system, not very successfully so far, but they're at it again, fortunately, and I think that will help us in our field anyway to make decisions in a much more businesslike way.

Mr Kwinter: I want to ask you a question about the funding. The minister uses the figure $17.4 billion, your document says $17.8 billion and you just said $17.6 billion. It's somewhere in that range. The government has said that they're going to maintain this level of funding over the next four years. What they don't take into account, I don't think, because if they do, they have a problem, is that we've heard that inflation in Ontario is going to be about 2% a year, so you compound that, which means that every year you're getting less real money; you have a situation where the population is growing fairly dramatically, so that gives you less money; and you have a situation where the demographics are changing quite dramatically in that we have an aging population, and the aging population draws far more on the health dollar than the younger population.

All these things compounded will mean, notwithstanding that the government likes to say they're maintaining the funding -- they're maintaining the dollar amount but they're not maintaining the funding, because every year they're providing less per capita for the people of Ontario for health care. Do you agree with that or do you feel that's a problem?

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Mr Thompson: It's a problem that people are moving quickly to try to counteract by shifting out of the more expensive resources into community services. I think there's a move in the right direction to use the money better.

Mr Pouliot: You ought to be in the diplomatic corps, you're so nice. I fully agree with Mr Kwinter. If you spend the same money, you spend less per capita because of the reason -- it's so clear -- that if you have more people, you spread the dollars available a little thinner, and as the population ages also.

You come here and say, "Look, you see our end. Don't forget us. We don't have a very strong voice." When you use words like "poor," "vulnerable," "challenged," "advocacy," "minority," you must be aware that there are people who can run faster than that, that deliberate and systematic choices have to be made, that there is some emphasis. You either give more to these people, you reward, and therefore you don't kill, but you give less to another group. If you have a $5-billion tax cut over four instalments, somebody will pay the price. If you cannot defend yourself because you're challenged, if you're not rich, if nature forgot a little bit about you, if your circumstances have changed your lot, you can expect to be deprived, to pay. If anyone else says, "I will pray for you -- "

The Vice-Chair (Mr Tim Hudak): Your question, Mr Pouliot?

Mr Pouliot: I'm coming to that; thank you, Chair.

When I do that, that's all I do, you see, and I want to wish you well. Do you feel confident that the needs of the people you represent, which are the most acute, will be in short order addressed by this government during these days of a recovery? What do you think your chances of success are?

Mr Thompson: I guess I'd comment that when I was a young fellow growing up, people in the village I grew up in in Ontario wouldn't use the word "cancer" because there was such a negative attitude about it -- amazing in the 1940s. I think probably in the 10 next years we'll see a shift, just as there has been with some of those illnesses, about mental disorders, so that people will be much more open and accepting and less stigmatizing.

The Vice-Chair: Thank you very much for your presentations. Have a good evening. We hope to see you again soon.

ONTARIO GOOD ROADS ASSOCIATION

The Vice-Chair: The 5:30 deputation is from the Ontario Good Roads Association. I believe Ms Richardson and Mr Merrall are here. Good evening, folks. Welcome to the standing committee. You have 30 minutes with us.

Mr Denis Merrall: Good afternoon. I'm Denis Merrall, and with me is Sheila Richardson. I have recently been elected as president of the Ontario Good Roads Association, and I work as county engineer for the county of Middlesex. Sheila is our long-serving executive director.

For those of you who are unfamiliar with OGRA, let me say that it is the largest municipal association in Ontario and represents the roads and transportation concerns of over 750 municipalities across our province. Our members range from large urban regions to small rural municipalities. Our board of directors is comprised of eight elected representatives and seven senior municipal staff. Our annual conference -- this was our 103rd -- concluded at noon today. It was attended by over 1,400 municipal delegates from Ontario, and these delegates gave us a clear message to bring to you today.

OGRA has appeared before this committee on several occasions, each time coming forward with concerns and suggestions for your consideration in the pre-budget consultation process. Keeping in mind the general direction the current government is taking, we would like to offer the following comments for your consideration.

We know that the funding and administration of the provincial transportation system has changed. OGRA has come here today to offer recommendations on additional changes that we believe are required to allow municipalities to effectively meet the transportation needs of Ontario's economy and its residents.

A major issue we are bringing forward is that of highway transfers. As recommended by the Who Does What panel, the provincial government plans to divest itself of an additional -- and we're estimating -- 3,000 to 4,000 kilometres of roads that are to be deemed to be of local interest. We would like to be part of the team that sets the criteria that will determine the highways to be transferred. We'd also like to know whether the transfers will be completed all at one time or whether they will be staged over a longer period. We would like to see financial forecasts on the anticipated capital and operating expenditures that will be necessary to maintain the adequacy of the transportation system. Let's set aside the funding issues and contemplate the future of our economy and the part roads will play in it.

Provincial roads that become local roads will predictably and inevitably fulfil local needs. As the number of local trips increase, so too will the travelling time, with the result that the traffic-carrying capacity of the road will decrease. Yet there's going to be no alternative route, no provincial two-lane highways to provide faster travel. Once completed, and I emphasize this, the transfers will leave less than 10% of Ontario's roads in the provincial highway system. Our membership will be responsible for 90% of Ontario's roads that provide the services to our people and our economy.

Much has been both written and spoken about the costs of congestion and cost of disrepair of our roads and bridges. Believe it.

Ontario's businesses require an adequate transportation system to move both raw and finished products. A congested transportation system in poor condition results in insufficient capacity, increases the cost to move goods and thereby decreases productivity and competitiveness. Neglect of roads increases the amount of congestion on the existing system that costs much and produces nothing but frustration. The end user has to pay for these costs and receives no benefit. They must also witness the reduction in competitiveness of Ontario's business sector.

A neglected road system adds to the costs that road users must bear through additional wear and tear on their vehicles, which results in higher vehicle maintenance costs. There is also an increase in fuel usage, which affects the environment by depleting our resources and polluting our atmosphere. Without a good transportation network, it is much more difficult to attract new business and in some cases to retain our existing business. A safe and seamless transportation network is also vital for other services such as ambulances and school buses.

I want to also address the Who Does What panel recommendation that was not accepted by the government. It says in part: "[M]unicipalities should be given access to a new revenue source, such as a portion of the gasoline tax, to help offset future maintenance costs. This would give municipalities greater control over land use and development along these roads."

The provincial government points to the removal of education funding from the residential property tax as providing tax room to free up municipal tax revenue for expenditure on infrastructure and to pay the municipal share of the provincially mandated income redistribution programs, as well as the additional services that will now fall within our expanded mandate.

The government has also stated that revenue from parking and speeding fines will help offset the increased cost to municipalities, as will access to the proposed community reinvestment fund and the capital and operating fund.

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The community reinvestment fund and the capital and operating fund will be available to assist municipalities with their new responsibilities and with transition costs. It seems to us to be a return to supplementary funding. Obviously, large capital projects such as bridge replacement cannot be financed from the property tax of smaller and rural municipalities and extraordinary funding will be necessary. It does, however, put municipalities in the position of coming cap in hand to request funding. OGRA recommends that municipalities be provided with a long-term financial commitment in the form of allocated provincial fuel tax revenue.

OGRA believes that a dedicated, responsive and consistent source of revenue is required by municipalities to allow them to maintain the public investment in our infrastructure. We further believe that such a source is an appropriate portion of fuel tax revenues and/or other sources of revenue that relate directly to the usage of the transportation system, and that revenues from transportation user taxes should be invested in the municipal transportation system.

The Ontario Good Roads Association strongly supports sustainable expenditure on the operating and capital programs of our transportation systems. Municipalities are currently finding themselves with many new responsibilities and municipal budgets will reflect these changes. The fact that the province is removing itself from direct involvement in the municipal transportation network does not reduce the provincial importance of the municipal transportation system.

Ontario's transportation system represents a major capital asset. By not performing needed maintenance activities today, we create future public indebtedness. Inadequate maintenance of roads and bridges erodes the value of the public asset and increases the future liability, wherein costs increase exponentially if maintenance is not done at the correct time. A dollar not spent today on maintenance becomes hundreds of dollars when reconstruction becomes necessary due to lack of care. Spending on transportation infrastructure has declined substantially over the last several years and is no longer meeting Ontario's transportation needs.

The long-term financing of Ontario's transportation system requires stability with a comprehensive and multi-year plan. OGRA is recommending that to accomplish this, a joint provincial-municipal task force be struck. The first issue will be to determine the sources of revenue to be made available to municipalities. The task force must also determine the total level of funding that our infrastructure network requires and must also determine the formula that will guide the distribution of funds. It is OGRA's recommendation that the formula be based on a life-cycle costing model for infrastructure.

As well, the responsibility of the federal government to maintain the health of our national highway system needs to be advanced by the province to the federal Minister of Transport. I am encouraged that the province is close to negotiating its participation in the extended tripartite infrastructure program. We urge this program be targeted to transportation infrastructure projects.

We want to thank you for this opportunity of appearing before you. We know your job is not an easy one, and we wish you well in your deliberations.

The Vice-Chair: That leaves us with about five or six minutes per caucus for questions, beginning with the official opposition.

Mr Kwinter: In your presentation you say that when this transfer of roads is completed, the province will be left with about 10% of the roads. I would assume those are the 400 highways and the Trans-Canada Highway and virtually everything else will be transferred to the municipalities. Is that about it?

Mr Merrall: We haven't seen the final list -- I understand the list hasn't come out yet -- but we have seen some preliminary maps the Ministry of Transportation has done to look at their future strategic planning.

There still would be a number of two-lane roads that I saw on the map, such as Highway 6 up to Owen Sound or Highway 10, but yes, this will leave major holes in the provincial network in Ontario -- not holes in the road network, naturally; there'll be somebody left there to look after them. But it is a fundamental change in the transportation system for our province.

Mr Kwinter: I met with representatives of the clerks and treasurers association of Ontario and they issued a press release last week -- I'm sure you saw it -- saying they have no guidelines on which to set their mill rates; they have no idea what these costs are going to be.

When I was the minister for economic development, virtually every town I went to in the north said, "If you could only give me a four-lane highway, all our problems would be over." What happens is that maintenance and repairs on these highways are done on a cyclical basis -- they're done three years from now, five years from now -- which means when they transfer these roads, some municipalities are going to get highways in relatively good repair and others are going to get highways in relatively poor repair.

Notwithstanding that, has there been any provision made to compensate those municipalities that are going to be given the responsibility of maintaining those roads with a differential in the type of expenditure that will be required for the particular units they take over?

Mr Merrall: We haven't seen anything in that regard yet. We have heard talk just this week about how these two capital funds would be allocated, and we certainly did receive a promise through these first three days that there will be capital funds transferred with the additional round of highways, but we don't know the details and the extent. The capital is part of it, and there's talk about four-lane highways. We're not talking about four-lane highways; we're talking about enough money to maintain what's out there now. What's out there now is starting to fall apart. Hopefully there will be money.

This one-time funding may be good to help the initial transfer, but we are looking for long-term sustainable. You're right, a lot of roads need a series of repairs, a fairly good rehabilitation, after 18 to 20 years. We need to have a resource so we can sustain these roads to meet the needs of the traffic.

Mr Kwinter: What about the issue of bridges? Some municipalities will be given roads that have no bridges and others will be given roads that have bridges. Obviously, the cost of maintaining a bridge is a lot more than maintaining a road. How is that going to be addressed?

Mr Merrall: We haven't seen that yet either, and again we're hoping that when these things are transferred there will be assets attached. These highways will be a liability, and I hope these capital funds will be considered some assets to be transferred along with them, similar to the divesting of the OCWA plants, where we inherit the assets as well as the debts on them, which are the liabilities. It's a two-fold thing. Hopefully they will get the same connection in this regard.

The bridges are a very big concern. Again, it's a long-term issue. A bridge, as you know, can be a $5-million or $10-million project and the tax base of many municipalities may not support that.

What's happening is that in the definition of what a local road is, for the provincial government a local road is a road that carries vehicles travelling less than 200 kilometres. To me, as a municipal person, my idea of a local road is a road that is used predominantly by people who pay taxes in my municipality. In essence, we have a different definition. We have a lot of people travelling across many municipal boundaries to get their goods and services to their customers. Then there are related issues. If a bridge is a low priority for my municipality but a very high priority for three municipalities down the road, what happens to the economy if that bridge isn't maintained or has load limits and the heavy trucks that are carrying these goods to market or to customers have to take a different route?

Mr Pouliot: Transportation: Denis and Sheila, it's a renewed pleasure. I do miss the annual pilgrimage -- well, not really a pilgrimage, but the annual event which is Ontario Good Roads Association. I trust that no one is driving to or from some of the meetings. It's a place where people like to congregate, and I want to wish you well.

You've been the official voice of municipalities in their relationship with transportation. Quick facts: 3,000 bridges, most of provincial jurisdiction; 136,000 kilometres of municipal roads; some 23,000 kilometres of highway, each with its rules and regulations; transfers -- without getting a penny of federal money, money that flows from the province to different municipalities to help Harry Smith plow the road and also to help fix the street.

The Common Sense Revolution: It's not a criticism. Times have been difficult. We were during a recession; they're experiencing the good fortune of a recovery. Nevertheless, they see fit to withdraw $300 million out of capital, but that's for highways. The supplementary relationship has been all but eliminated and transfer payments have been reduced. I'm not going to cast the first stone because, let's face it, they have to pay the banker, they have to pay the debt. It's not easy.

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They are not getting too much from the federal government. We're the only province who doesn't get a penny from the federal government in terms of the national highway system. It's the Ontario highway system; there's no such thing as partnership. Ontarians also give about $2 billion at the pump, the seven million motorists, and the feds take all. They take their portion and they don't give it back because that's the federation in which we live. That's the reality we face.

The thing is when you listen to people -- that's what it's all about -- the people I listen to are scared because they don't know; anxiety. The fears might not be justified but they want to know what's going to happen next year, two years from now, three, four years, because they have to go to the taxpayers on January 1. They're saying: "What am I going to do? I can only go to the interim tax levy for so long. At one time I'm going to have to show the cards."

What are the one, two or three issues that the people are most anxious about at this time as you make your recommendation to this committee on the eve of tabling the provincial budget? If you were to say one, two, three, what would you say?

Mr Merrall: They're all the same issue, and that's the sustainability of the system. I think municipalities are willing to take on responsibilities, but the concern is, will we have the resources there to continue to provide the service our economy needs? They're our ratepayers, they're provincial taxpayers; all of us are serving the same people. Our big concern is, will there be enough money there and appropriate distribution of that money so we can continue to provide the services that are needed?

Mr Spina: Thank you for your presentation. I'm glad the former Minister of Transportation addressed the issue of the federal taxes. That sticks in all our craws, I guess.

I just want to give you a little glimmer of hope, by the way, without giving you anything official, because it still has to be incorporated in the spring budget. But I'm parliamentary assistant to the Minister of Economic Development, Trade and Tourism and I know there's a commitment on the part of our ministry to continue with the Canada-Ontario infrastructure program. That will be retained. There will be some continuing involvement of the province with regard to those kinds of things.

With regard to the crumbling infrastructure, I respect your comments on taxation and the amount of investment. I'm also trying to look at it from another perspective; that is, the reason we also have, besides lack of repair, a more rapid deterioration of the road system.

You're an engineer, Mr Merrall, and I'd be interested in hearing your opinion on the GVW of trucks. The gross vehicle weight of this province is the highest in North America. Vehicles are generally developed or designed for the American market, and you know that the jurisdictions in the US usually do not exceed 90,000 or 100,000 GVW. Ours is 130,000 GVW in Ontario, right? Not only that, they've extended the truck lengths to 90 feet. I believe that happened somewhere around 1988 or 1989. I'm wondering if those extensions made a severe contribution to the deterioration of the road system.

Mr Merrall: There are several contributions to the deterioration. The one thing I've noticed is that our pavements out there are older, a lot older, and things just weather and we are getting environmental damage. I certainly see it. There's nothing on the GVW there.

But there is concern about trucks, and our newly elected second vice-president, Ed Metzler, the alderman for Thunder Bay, just retired from the trucking industry and he gives us some pretty good background. Their problem of course is that they look to hauling out west and hauling in the US. They can't compete in Ontario and they buy trucks to serve the rest of North America.

But what we do know is that to get these high GVWs you have multi-multi-axles. You see them on the 401: six, eight axles. And you notice when they go around a corner they don't steer; when they go around a corner they skid. As an engineer -- they just rip our intersections apart. You're talking this heavy weight and you can just imagine that rubber going.

There's another thing that was done to increase fuel mileage. It's one of these green things that's green but not so green. To increase fuel mileage in trucks we developed new truck tires years ago when the high fuel costs came in. We had low truck tire pressures. We've got now truck tires running 130 psi. These truck tires do put far more stress on pavements. These high pressures exist North America-wide.

It was explained to me when we complained about the increased wheel rutting on our pavements that the cost to rehabilitate the pavements is small in relationship to the economic benefit to reduce trucking costs. I guess we can accept that if that's a true analysis, but the trouble is if the benefit goes to one party but the cost of rehabilitating the roads goes on the property taxpayer, that has nothing to do with --

Mr Spina: Or even to all taxpayers.

Mr Merrall: Yes. But you're getting to the point that the people carrying the cost of the load are not the people who see the economic benefit. We really want to get a true economic -- and my master's degree is in applied economics as well as engineering. You have to attach the cost and the benefits to the same thing because that's where you get your true efficiencies. Where one party pays the cost and the other party enjoys the benefits, what you'll get is that marginal benefits will be enjoyed where you have great increase in costs.

It may be a true economic analysis that these high tire pressures are the right thing. Certainly I got that message at the Transportation Association of Canada and the Transportation Research Board. I have to accept the analysis of these experts, but somebody's going to have to find a way to deal with the damage costs.

Mr Ted Chudleigh (Halton North): Thank you very much for your presentation. We hear there are only two certainties in life: death and taxes. However, I wonder if an appropriate corollary to that might be that the two certainties are change and the resistance to it.

The transfer of highways has already begun, of course. In my own riding, Highway 25 has been transferred to the municipalities. That highway was upgraded. In fact, the upgrading wasn't actually completed last fall; it was scheduled to be completed, but it will be completed this spring. It was upgraded to provincial standards before that transfer took place. I understood that would be the standard that would continue. The section of Highway 25 north of Milton, north of the 401, was not transferred because there are some standard problems, I understand; that transfer will take place perhaps some time in the future when those standards have been met.

Did you not understand that the highways transfers would take place on this basis, those that will take place?

Mr Merrall: No, we don't understand. In our own municipality we are receiving a number of highways that are not going to be upgraded. We will be receiving a capital allowance for two thirds of those repairs in the first five years, but most of us are receiving highways without repair. We would love you as our member, but we do have a very excellent member so I'm not going to disparage our member.

I don't want to criticize the highway transfers. We've been working with all of the governments on reforming transportation funding, and we're not going to stop working with any government on reforming the transportation system; we're trying to find the appropriate way. Some of that working maybe led to the highway transfers. When I worked with the previous government on disentanglement and we started going into costs, we found that certain municipalities were delivering very high service levels at a cost substantially less than what was being delivered by the provincial transportation system. Unfortunately, maybe that message got through to a number of public servants in the province and they said: "Hey, there's a way to save money. Transfer these highways. If the counties and regions can do it cheaper maybe the taxpayers will benefit." Yes, if you do an economic analysis, the issue is that I'm cursed with the fact that we deliver a very high level of service on our county roads at a substantial cost savings over the provincial highway system.

Mr Chudleigh: The 1996-97 budget for highway repairs was higher, substantially higher, than it has been in the past, however. There is a strong commitment from the province to maintain those highways and bring them back into the condition that Ontarians deserve.

The Vice-Chair: Thanks very much to the Ontario Good Roads Association for your presentation. Have a safe, smooth trip back home.

Mr Merrall: Thank you very much. We always enjoy coming.

The Vice-Chair: Any final business for the committee tonight? Very good. This committee stands adjourned and will reconvene tomorrow morning at 10 am, same place.

The committee adjourned at 1801.