Assemblée législative de l'Ontario

PRE-BUDGET CONSULTATIONS
MINISTRY OF TREASURY AND ECONOMICS

CONTENTS

Thursday 7 November 1991

Pre-budget consultations

Ministry of Treasury and Economics

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

Chair: Vacant

Acting-Chair: Wiseman, Jim (Durham West NDP)

Vice-Chair: Sutherland, Kimble (Oxford NDP)

Christopherson, David (Hamilton Centre NDP)

Jamison, Norm (Norfolk NDP)

Kwinter, Monte (Wilson Heights L)

Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

Stockwell, Chris (Etobicoke West PC)

Sullivan, Barbara (Halton Centre L)

Ward, Brad (Brantford NDP)

Ward, Margery (Don Mills NDP)

Substitutions:

Cooper, Mike (Kitchener-Wilmot NDP) for Mr Hansen

Poirier, Jean (Prescott and Russell L) for Mr Kwinter

Also taking part: Carr, Gary (Oakville South PC)

Clerk: Decker, Todd

Staff: Anderson, Anne, Research Officer, Legislative Research Service

The committee met at 1012 in committee room 1.

PRE-BUDGET CONSULTATIONS
MINISTRY OF TREASURY AND ECONOMICS

The Vice-Chair: This is the beginning of the pre-budget consultations process and we are here in committee room 1. This morning we are going to have a briefing by the Ministry of Treasury and Economics. We have from the ministry Bryan Davies, the deputy minister; Phyllis Clark, the assistant deputy minister and chief economist of the office of economic policy, and Tony Salerno, director of fiscal planning, policy branch. Would you like to come forward now.

My understanding is that two documents are being presented this morning, one on the economic outlook and another one on the fiscal environment and overview of major transfers, and that the presenters have agreed to take questions along the way as they go through the presentation. We will try to help facilitate that. It might be best if those questions were simply questions of information rather than any of the other types of questions, things you do not understand, and then we will divide up the time afterwards. We will work on the basis of going for about a full hour altogether, if we could keep it to that time line. If we need to go a few minutes more, then maybe we will. I would like to call upon you to begin.

Mr Davies: Thank you very much, Mr Chairman. As you have already indicated, in response to the clerk's letter we have prepared two documents we thought would be useful as a focal point to assist the committee in its deliberations. We understand the committee is concentrating its early hearings on the major transfer payments to the so-called MUSH sector, so in the second document we included an overview of the major transfer payments. Hopefully that will be of some interest and use.

The way I am proposing to proceed, if it meets your satisfaction, is to ask Phyllis Clark, to whom you are already introduced, who serves as the chief economist in the ministry and the assistant deputy minister of the office of economic policy, to present the first document, which is called Ontario's Economic Outlook: 1991-1992 and Medium Term. That really summarizes what is in there. The short-term outlook, as we call it, is this year and next. Medium term, which is always very difficult to try to forecast, is the 1993-95 period. So you will find that this document is broken into those two parts. Phyllis will start, however, with a page or two highlighting recent developments, which gives a good lead-in, I believe, to the rest. Then at your pleasure, you may want to devote a certain amount of time to that, or when Phyllis is finished I will be calling on Tony Salerno to go over the fiscal environment and major transfers piece, which is the second piece. If that is okay, we will just start like that.

Ms Clark: I am going to go through the recent developments in an on-the-one-hand on-the-other-hand fashion, since that is how they train us in economics. The first thing I want to talk about is the signs of recovery, and then, having given you that, I am going to talk about the weaknesses that persist in the economy.

On the first side, Ontario's real growth output went up 7.6% in the second quarter of 1991. That was one quarter earlier than we had expected the recession would end in Ontario and the growth was very strong, so that led us to revise our budget forecast upwards slightly. You will see that when we get to the forecast section.

Since the February trough, employment has increased about 46,000 in Ontario. That compares to 77,000 in Canada. Our unemployment rate has eased from its peak of 10.2% to 9.2%. Tomorrow both the Ontario and Canadian labour market numbers will be released and we will probably see that unemployment will continue at that pace or maybe even be slightly higher.

Mr Davies: That is for the month of October.

Ms Clark: Yes, sorry. The release tomorrow is for the month of October.

In August the Canadian leading indicator went up 1%. This was the second month only that every single component of that indicator, all 11 components of the index, went up.

In the United States -- and we always look to the US economy because that is one of the prime movers of our growth -- real GNP rose 2.4% at annual rates in the third quarter. They always release their GNP numbers fairly quickly and then revise them each month, so we will see what happens exactly with those numbers in the coming months.

Despite those signs of economic recovery we do have certain weaknesses persisting in the economy. The first thing is that we expect that both job and GDP or output are going to continue to grow at a much more moderate rate, especially when we compare it to the growth in 1983, when we came out of the 1981-82 recession period.

Also, we have the Canadian real GDP number which was released for August, and it fell 0.3%. That is the first output decline we have had since last March. Retail sales, which is a very major factor in any growth we have in the economy, were down 2.1%. This was primarily due to auto sales, another very large component of the economy. The outlook for retailers has not been very good and they seem to have lost a lot of confidence in their expectations in the next little while. Finally, in September, year-over-year unit auto sales in Canada rose 10.6%, but this followed an 8.5% drop in August. So you can see there is a confluence of circumstances, some indicators up and some down, which leads us to look at our forecast with not a jaundiced eye precisely, but a careful eye.

At the same time, we have interest rates declining while our dollar is strengthening. This is unusual. Usually these two move in opposite directions. The prime lending rate is now down to 8.5%. This is the lowest level since early 1978. What we have, though, is nominal interest rates easing, but real rates are remaining high by historic standards and the Canadian dollar is just continuing to strengthen. All economists are wondering how it can stay so high, but obviously expectations about the Bank of Canada's policy are the prime factor in the strength of the dollar right now, and it is around 89 cents.

On the good news side we have the CPI inflation rate at 4.6% in September. This was down from August and it is down from the peak of 5.7%. That was the GST peak that we experienced in January. Wage settlements are also starting to moderate in Ontario. They averaged 5.4% in the second quarter as compared to 6.8% for the whole of 1990.

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Now I am going to turn to the short-term outlook after giving you that brief overview. The first thing we have are the numbers. When we say "current for 1991-92," we are talking about the revision we did following the release of the second-quarter GDP numbers, so these numbers were produced in September, and the contrasting numbers in the shaded area are the numbers we produced for the budget. You can see, because of the one-quarter-earlier-start growth, that we were able to revise our real growth numbers up. As compared to a decline of 3.3% in real GDP, we now expect GDP in 1991 to decline only 1.9%. We have higher export numbers, better housing starts and better-than-expected consumption to account for that increase. At the same time, we expect inflation to be slightly more moderate in 1991 than we previously forecast. Rather than 5.6%, as we anticipated in the budget, we now see inflation for the year averaging 5%.

In job creation, we are also more optimistic on that side, although a loss of 162,000 jobs is not a great cause of optimism. Nevertheless, we see the unemployment rate dropping to 9.6%. We thought it would be around 10%, from the peak of 10.2%.

Similarly, for 1992 we are more optimistic, with real growth up to 3.8% and CPI down to 3.2%, from our 3.7% expected increase before. We are also expecting stronger job creation: about 101,000 as compared to the 84,000 we had forecast in the budget. This flows through into a decrease in the unemployment rate down to 9.3%. Nevertheless, you can see that this not very strong or robust growth. In 1983 again, when we came out of the recession after 1981-82, we had extremely strong growth, around 5.5% to 6%, and unemployment was much lower.

What we do have underpinning growth are lower inflation due to the higher dollar and lower mortgage rates. That is what we expect to be reflected in the 1992 growth number. This improvement is really consistent with other forecasters, and what we provided you with on page 4 is a survey of other forecasters' projects for the Ontario economy. This is for the 1991-92 period. When we get into the longer, medium-term outlook, you will see that there are fewer forecasters. But they also have about the same results as these ones show, and we are in the middle of the pack pretty much in terms of forecasts.

If you look to the bottom, you can see what our forecast as of October was for 1991 and 1992 for the major indicators like GDP growth, job creation, unemployment and CPI. What we are doing is coming about midpoint in the range. We have very high growth in 1992 from Informetrica -- this is a forecasting firm -- as compared to its very low forecast for growth in 1991 of -2.5%. Actually, their numbers were done in July and they have not updated their forecast based on the second-quarter numbers, so they probably will be coming out with some update soon on that one. Nevertheless the 5.7 is extremely strong, given what the outlook was like at that time.

On page 5 what we have done is broken down real GDP into key sectors. You can see that recovery is under way, but it is uneven across our major sectors. First, the rebound in the auto sector is driven by auto exports to the United States, but we do not have a uniform recovery pattern there, so that might not be as strong as it looks at this point.

Other manufacturing factors are improving, but fairly slowly. This is an area where we have lost a lot of jobs during this decline and where we do not expect the rebound to bring us back to the level we had before.

Construction also remains weak. There is an improved housing picture, but on the non-residential side we have a very large capacity in office space, especially in major urban areas, and we do not expect strong growth in that area.

The retail sector: The recovery is modest. Signs of weakness remain in the sector and expectations are not very good. Profits are still far below recent levels. In fact, they are down around the levels that they were in the 1930s. The hit on corporate profits through this recession was tremendous, so business confidence is understandably mixed.

When we turn to the labour market, we can see that the recovery does not have a great deal of impact on the labour markets in Ontario. Our peak-to-trough job loss during the recession totalled 260,000 people. Central Ontario was especially hard hit. The GTA bore a disproportionate bulk of the job share loss this time. The Toronto area accounts for about two thirds of the Ontario workforce, but employment fell in that area. The unemployment rate practically doubled. It fell 6.1% during this recession, and that was the largest drop in any region. The unemployment rate has continued to rise since the second quarter. It went from 9.6% to 10% in the GTA, and 41% of Ontario's unemployed are in the GTA at this point.

Also, unlike other recessions, losses were disproportionately high in the males and youth sector. The reason is manufacturing and construction -- and these are male-dominated occupations -- lost a great deal of employment during this period. Women are primarily in the service sector, so although their unemployment losses were high, they were not as high as males and youth.

We do not expect employment to reach its pre-recession peak until mid-1993, but it will be up 101,000 people, or 2.1%, in 1991. To date, manufacturing and service employment are showing the strongest recovery, but we see the unemployment rate as coming down gradually. This is common after a recession, because what you have is the encouraged-worker effect. At the beginning of recession, you have a discouraged-worker phenomenon where people just drop out of the labour force and the unemployment rate can paradoxically drop, but as you move into a recovery, people are encouraged, come back into the labour force, and what happens then is you get a slow drop in unemployment even though people are getting back into work. That is what we expect to happen over the next few quarters.

I referenced the manufacturing section earlier, and you will see on page 7 that the recession has been particularly deep in that area and the recovery will be slower. What we have shown here is the peak percentage of employment in manufacturing in 1982, then what happened in the trough -- again, the peak from 1983 to 1989, the trough and the recovery to date -- and you can see how the percentage of unemployment is gradually declining in that sector overall. The manufacturing employment fell as quickly and as far in 1989-91 as it did in 1982-83. In fact, we had a two-year recession for manufacturing, as compared to a one-year recession for the economy as a whole. Employment is now recovering, but more slowly than it did in 1983. There are about 150,000 jobs lost in manufacturing alone.

The Ministry of Labour also does data based on permanent job loss or factories that close -- these are factories above a certain size -- and those permanent job closures in 1990-91 exceeded those in 1982-83 by about 15,000 jobs. Manufacturing is declining as a share of our total economy. This is one of the structural changes we can see happening in the economy today.

When you look at CPI on the next page, you can see that there is a GST spike in the beginning of 1991. That is about 1.5%. Nevertheless, inflation has moderated from the 5.7% we had in January and it has now fallen to about 4.6% in September. We expect it to go down to near 3% in the beginning of 1992. That is because you are doing the year-over-year comparisons and you see the GST influence drop out.

This reflects a great number of factors, and these are all macroeconomic factors. The Bank of Canada's target for the end of 1991 -- this is not really a target; this is a milestone, as it calls it -- is 5%, and it is going to be pretty close to that for the economy as a whole. For the end of 1992 -- and this is a target -- they want 3%, or a band to 4%, and we expect that to happen. By mid-1994, they want to be at a range of 1.5% to 3.5%, or a target of 2.5%. At the end of 1995, they are looking for a target of 2%, or a band of 1% to 3% inflation. That is very low inflation.

We also have continuing high real interest rates. These are nominal interest rates less the rate of inflation. We have an appreciation of the Canadian dollar, and this always helps us on the inflation side.

Wage increases are moderating, and that is due to high unemployment. Continuing high unemployment has had an impact on the private sector and we have decelerating inflation, which has worked through into the moderate wage increases.

We have looked at that in detail on the next page. What we have here are the quarterly percentage increases for wage settlements, and you can see that we are dropping in that area. We have gone down to 5.4% in 1991, second quarter. We do not have the 1991 third-quarter results yet, but we think it is going to stay in around that range or drop. The public component of the first two quarters in this year were 5.6%, which corresponds to the 6.5% for the economy overall, and 5%, corresponding to the 5.4%.

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Mr Sterling: Can I ask a question here?

The Vice-Chair: Sure.

Mr Sterling: When we look at your estimate of inflation as going from I think 5.5% or 5.6% to 5%, and then we look at the wages, 6.5% to 5.4%, you are saying the next quarter is going to be 5.4%?

Ms Clark: We expect it to be around or below 5.4%.

Mr Sterling: So it is going to be half a point better than inflation.

Ms Clark: The wage settlements, yes.

Mr Sterling: Does that mean we become more unproductive? Is that a fair conclusion to draw?

Ms Clark: I think it is a little more complicated than that. First of all, when people make wage settlements, they generally look back at inflation and they want to do catch-ups. They do not look forward. So the question of competitiveness is not based solely on labour costs; it is based also on the question, can you sell your product abroad?

Mr Sterling: But our gross domestic product was negative in August, was it not?

Ms Clark: The Canadian GDP was negative in August. That does not necessarily mean the Ontario GDP will be negative, but it will probably be down from the 7.6% it was in the second quarter. In the second quarter, Canadian GDP grew at 4.1%; we grew at 7.6%. If Canadian GDP was down 3%, our GDP growth will probably be slow and maybe close to negative, but it is not necessarily going to be negative. We are waiting for those numbers.

Mr Sterling: But if our GDP is down, the inflation is down and the wages are up, does that not tell me -- no?

Ms Clark: Those are the percentage increases, and they are based on a small sector of whoever is bargaining at that particular time, which does not necessarily mean that wages as a whole through the economy are up.

Mr Sterling: Okay, thank you.

Mr Jamison: To try and answer your question in a little more depth, Mr Sterling, from my understanding, traditionally wages have lagged on the way up, when inflation increases and settlements lag on the way down, probably in the area you are talking about. That is history and the way settlements go. What we are saying is that there is a decline in wage settlements, and I think that is what is being pointed out here, subject to the pressures that are there and the moderation in inflation.

The Vice-Chair: Would you care to continue?

Ms Clark: Sure. Are there any other questions on the wages?

If you look at corporate profits, you will see that they are the lowest since 1983, and in fact they are very low. We have had a record 63% fall in profits over the last two years; that is, since 1989. Profits have been squeezed by the cyclical decline, and also in the exporting industries by the high value of the Canadian dollar or the appreciating Canadian dollar.

Cyclical profit recovery has now started. Nevertheless, we do not expect during the recovery that we are going to reach the pre-recession levels during the period we have forecast. What we have is a lot of pressure from the wages and prices, international competition and the high dollar that are going to restrain growth in this area.

I am now going to turn to the medium term, which is 1993-95, unless there are any questions on this year and the following year.

Mr Carr: Just a quick question. Last month Canada had the largest export it has ever had to the United States. How did Ontario fare last month?

Ms Clark: We can get those for you. I will get back to you on that.

Mr Carr: I just wondered if Ontario was leading or following the rest of the country.

Ms Clark: Generally we lead, but we will get to those specific numbers.

Mr Carr: We might not this time, though.

Ms Clark: Again, we are going to be comparing to the numbers we had for the budget outlook. You will be able to see those in the shaded columns on the right-hand side. We do not have very much change from the budget, and this is because as we get further out with forecasting, we become less sure of our accuracy and therefore do not change numbers quite as much, based on current events. But we do expect increased immigration to lead to stronger domestic demand, and that is going to help us generally across the economic indicators, but it will keep unemployment high. We will also have higher dollar and smaller wage gains to reduce inflationary pressures over the medium term.

What we have is a revision down in real growth in 1993 and 1994, from very moderate levels in any case, so we are going to continue to grow moderately with low inflation in the medium term. Job creation will be relatively good, but still not enough to bring our unemployment rate down below approximately 8%.

We have looked at what other forecasters have said for the 1993-95 period and have done those comparisons on page 12. Again, you can see that our moderate growth is about the middle of the group of forecasters that do go out in the medium term. There are some people who expect very strong growth in the near term, tapering off, but most forecasters for this recovery expect moderate growth, easing up through the period.

What we have looked at on page 13 is a comparison of the major sectors of the economy in the recovery period after the 1981-82 recession and after this recession, just to give you some idea of the comparative growth from the various sectors. Also, the message of this chart is how moderate the recovery is going to be during the period of expansion this time.

What we have is a recovery now, led by housing and business --

Interjection.

Ms Clark: I am sorry?

Mr Sterling: I am just saying, the nice light stuff, the good old Tory years when we had --

The Vice-Chair: If you have questions about information, the editorial comments can come afterwards, okay?

Ms Clark: Let's look at the individual components of growth. What you have here is consumption growing at about half the rate, or even less than half the rate, of what it did during 1984-86, and this shows the slow income growth people are experiencing in earnings, as well as the high debt, and we have also got a relatively low savings rate during this period.

The government sector does not include the transfers or public debt interest. This is our expenditures on real goods and services. That is staying about the same as it did in the other recovery during this -- I am sorry?

Mr Wiseman: I have a question about consumption. I read somewhere just lately that credit cards out there are at about $13 billion in terms of debt. Are you able to put that into any kind of perspective? Is that part of your projection, people paying off their credit cards, as opposed to using them?

Ms Clark: That is part of the normal reduction in debt loads that people usually go through after a recession. No, we do not break it down just based on a specific kind of debt.

Mr Wiseman: I am wondering if the psychological factors around this recession, which is deeper and wider and more structural than the previous ones, is going to have a longer-term effect on these consumption patterns. Are you able to measure that?

Ms Clark: What we do is look at people's expectations and consider what is going to happen based on changed consumer confidence in the economy. Also, this is a period when we have had really a lot of problem disentangling some of the structural changes that are happening and people's attitudinal changes. So those kinds of things are factored in, plus the changing debt load, just the hard numbers we can get on household debt as well as household assets.

What you had in addition this time was a very big change in people's asset values due to the values of the houses they held, due to the change in prices. But we do look at that.

I cannot answer you about the specific components. Models have a difficult time factoring in very specific slices of things that are so ephemeral in a sense.

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Mr Davies: If I could just add, though, as Phyllis pointed out, I think it is always difficult to forecast three years hence. It is difficult enough to forecast one year hence or even one month hence. I think it is becoming more complex because of the structural changes in the economy now. Most of our forecasting is based on models that have been developed over time that are based on an accumulation of data that has been integrated to identify, if this goes up, then historically that goes up or that goes down.

A number of us, and I think all of us at this table, are starting to appreciate that those models, based on historic patterns and relationships, will probably have to be fundamentally altered in the future because of the fundamental changes that our economy in this province, and indeed in this country, is experiencing.

It makes forecasting all the more difficult when you are having such a sea change in activity.

Mr Poirier: Were you listening this morning to Newsworld? They were discussing that particular point. They had a whole panel on this morning.

Mr Wiseman: I am an original thinker.

Mr Poirier: Fair enough. Why? Because your credit cards are up to their full load. You are helping to contribute to that $13 billion. Is that what you were thinking? I think Jim has a point. I listened to this debate with Garth Turner and others, left and right, being interviewed by Don Newman.

The whole thing about this consumer debt, what is happening; discussing this with some of the bank people in my riding where in the spring they had to hire a whole bunch of other loan agents because they could not cope with the loan demands; talking to some of my friends who have to shut down a number of jobs in their businesses; looking at the type of personal debt that people put on their shoulders through this year, only to lose their jobs in the fall -- it really boggles the mind.

I have a feeling that because of this non-traditional period we are entering right now, we will have to have a much closer look at that as an indicator of what is happening out there. With this $13-billion debt load on credit cards alone, at the rate of interest -- and they were really complaining about that, because the House of Commons claimed it was being asked by consumers, the taxpayers, to look at why the banks are charging these ridiculously high interest rates.

What is happening to this personal debt load? Is it moving? Is it not moving? Is it increasing? Is it stable? Is it decreasing? I have a feeling this is going to be a very critical factor for a lot of households in Ontario. With the jobs disappearing -- I do not give a damn what the figures say about their increasing -- a lot of the people are going to be faced with such a ridiculous personal debt load, including the credit card debt at that type of percentage still today, that this is going to make it or break it for a lot of households.

Just from what I have seen discussed in my riding, this debate this morning from members of the House of Commons -- very, very worrying, believe me -- to have this kind of debt load, and if it is going to stabilize on the cards and with the interest rates and the jobs being lost, this might say a lot more than we have been able to see from that before.

Ms Clark: That is true. I do not know if economic theory is any help in these instances when people are experiencing that kind of pain, but there is something called a lifetime income hypothesis that says people accumulate debt at the beginning of their life because they can pay it down as they move into higher income categories and as they age. A typical example is people acquiring mortgages when they are young and paying them down as time goes on.

What is happening now with the quintiles of population that are moving through the aging process is that we have the baby boom in the 35- to 44 range that is working its way through. They are at periods where traditionally and theoretically people would expect to have very high debts, but that does not change the fact that at high interest rates, and having lost value on their assets on the other side during the recent cycle, or their jobs, that it is a very difficult time, yes.

Mr Carr: Yes. The government sector is the only one that is increasing over some of the previous years. Could you explain why that would be? Page 13.

Ms Clark: It is a very small increase. What has happened here is that the government sector has increased in terms of size. That is true. We are spending slightly more of the GDP, but we have held relatively constant given the increase in demand in the economy on the government sector. But yes, the expenditures are up slightly in that sector.

Mr Carr: That would be things like housing, government --

Ms Clark: It would be our purchases of goods, our payments to people, salaries, so goods and services generally.

Interjection: It includes capital too.

Ms Clark: Oh yes, and it does include our capital expenditures, which we have been increasing gradually.

Without going into the other sectors in great detail, I want to point out again how strong housing is. This is driven partially by our expectations of, not increasing immigration, but immigration to the levels that the federal government is now going to permit, and also increasing expenditure on the machinery side for the business investment sector of the economy.

Exports and imports remain at about the usual relationship between the two that they usually have.

On page 14, we have looked at some of the major risks that you expect in any economic forecast. All forecasts are driven by their assumptions. As soon as you make major assumptions, you can go through to the results fairly clearly; but once those major assumptions are altered, all your results are alterd as well.

What could happen here that would improve everything in our economic outlook is that if the federal government eased its monetary policy slightly, this would cause interest rates to come down even more quickly. Real interest rates would probably drop. The dollar would ease. We would have an increase in exports, overall GDP growth would be up and the unemployment rate would be down. Of course the CPI would probably be up. Also, if we had stronger than expected recovery in the United States, this would boost our exports and generally make our growth higher. We do not expect either of these to happen, nor do we expect the downside risks which we have listed to occur.

We do not expect the dollar to continue to appreciate to a much higher level, which would hurt us on the exporting side but help us on the importing side. Also, if we had a decline in the United States recovery -- and that is something that is extremely unusual as you move into a presidential election year -- that would stall our recovery.

Mr Wiseman: The projection, when we did these hearings back in January, I guess, was that the dollar would start to fall, that we would be looking at an 82-cent or an 83-cent dollar. The dollar has defied --

Ms Clark: Gravity.

Mr Wiseman: It is grave all right, but it has defied what was expected. What are the components that led to the dollar continuing to increase when logic predicted that it would decrease?

Ms Clark: It is primarily the Bank of Canada's policy. The federal government's policy on interest rates has kept the dollar high; the targets and Mr Crow's determination to maintain the value of the dollar. Foreign exchange markets have believed this. They say he is committed to getting price stability. That has made Canada and Ontario a very good place for foreign capital. We have had large foreign capital inflows which have kept the value of the dollar higher than economists, who look at the purchasing power parity or the comparative value of goods in various economies, think the value of the dollar should be.

Yes, our forecast was for the value of the dollar to come down to 84 cents. I would be willing to bet that almost every other economist who is looking at the real flows or the real production factors in Canada or Ontario compared to the rest of the world also expected the dollar would decline.

A lot of economists and a lot of forecasters about exchange rates are amazed by the value of the dollar now. The only factor that we can think of is the credibility of Mr Crow and the Bank of Canada's policies about inflation.

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Mr Jamison: Coupled with what you are saying, most of the manufacturers I have talked to, especially the primary manufacturers -- I am talking about steel, the people who cannot get up and move or change that quickly in a process -- have been saying to me that it is one of the gravest impediments to them to really export. Of course our economy is designed on that basis, to export. For example, in basic steel it has been a tremendous aggravation in market share alone, where we have seen the American share of our steel market go up tremendously and our share of the American steel market decline, even though we have the ability to produce in a very efficient way, such as at plants like the Lake Erie works, at Nanticoke or the Stelco plant; Dofasco is continually upgrading. But their message to me is one that really zeroes in on that.

I wonder how that will affect the ongoing state of recovery, in your mind.

Ms Clark: A higher dollar always makes exporting more difficult and that makes the GDP growth rate slightly lower than a lower dollar would, that is true. I think on the question of import penetration into markets, the dollar is a factor there and also product mix is a factor, those two things together. The other resource sectors, like pulp and paper, have also felt the value of the high Canadian dollar.

Mr Carr: I just have a question. As you know, the federal government set the target of between 2% and 3% inflation rate. I think you just said that the credibility is there. I think everybody believes they will force it, no matter what, to get to that. In order to do that -- and I notice you are predicting inflation at 3% -- where do you see the dollar then? Looking at all the statistics and knowing they will not let up, that they will get it to 3%, where do you see the dollar?

Ms Clark: We do not forecast the dollar. We have also done some evaluation of what happens when you do forecast rates in dollars and it is best just to put a ruler down. I am not going to get caught in that game.

Mr Davies: Perhaps I could add that virtually every other forecasting body -- and the banks really try to forecast the dollar because it affects their bottom line. Qaid Silk, who is sitting behind me, follows these matters for us and may be able to elaborate, but I think I am correct in saying that all the banks and the big investment dealers have concluded with some reluctance that the strong dollar is here to stay. Almost all of them were saying at the beginning of the year that it was going to be coming down to the 84-cent or 85-cent range. Every one of them I speak to now says it looks like it is going to stay up there in the 88-cent or 87-cent range. I did not hear anyone arguing that it would break 90 cents, but anything is possible these days, it seems. Qaid says I got it right.

Ms Clark: What we have also provided you with is an appendix of historical data. You can just flip through this at your leisure. It is a comparison between performance in Canada and Ontario on major economic indicators, along with the percentage changes. We thought that might help your discussion.

Mrs Sullivan: I have a couple of comments that I really think we should have further expansion on. I think I should say to the committee that the people from Treasury indeed served the government well in its projections in the last budget. It appears they are within one or two points of where they anticipated, through their analysis, the government would be at this time of the year in terms of economic trends. I think that is useful.

One of the areas that I think we need to explore a lot more relates to the corporate profit table you have on page 10, the relationship of that to capital spending projections in virtually all sectors. I note that Statistics Canada indicates that its projections from the major corporations report that capital spending is likely to increase by 1% next year and that the year after there would be a real decline of more than 7% in capital spending. Part of that is a direct result of lower corporate profits, but another part relates to the fragility and availability of capital, for risk or debt or equity purposes, that is coming into our economy. I think if we could have more information, that would be very useful. That is, it seems to me, as much a systemic economic problem in Ontario as any other matter.

Ms Clark: Yes, it is true. We agree with that and we will look into that. I have here the capital spending by large companies. I am sure you have seen this in the Globe and Mail today and you were referencing those. Yes, it is a problem, and as corporate profits fall and we have high capacity utilization, that does feed through into expectations of lower business investment. As an economy in Ontario, we have all recognized that we do not have nearly the level of capital investment that we think we need for the future. That is a systemic problem that we have to address as a province and as a country.

Mr Sterling: We hear all these arguments about having a lower dollar and how attractive that would be for exports and for our manufacturing sector. What are the arguments for having a high dollar? If you are going to keep your inflation rate down, the higher dollar probably serves people on fixed incomes rather than those who have a great deal of income, so it would seem to me it would be a kinder policy to those who are less fortunate. I understand that Sweden went through a number of devaluations in the 1980s when it found its productivity was low, and that it has not really come out in a positive way for them. I understand, in attacking your debt -- government debt, public debt -- that if you keep your inflation rate down, you can service that debt or deal with that debt in a more reasonable way.

Ms Clark: Let's be clear. I think everybody would prefer to have lower inflation as compared to higher inflation. You have to sever the dollar from inflation in some instances, but the entire economy, particularly people on fixed incomes, is better, although there is an argument that creditors and debtors benefit differently from high and low inflation. But I think, based on expectations of what is going to happen with prices, business investment and consumer confidence, it is better to have low inflation.

Now you get into, what is the value of having a high dollar as compared to a lower dollar? In economic terms, again I think it is the stability that you want to have in some instances. If the dollar is stable, that does not feed any changes in price through to imports into the economy, which can create inflation, so I think what you are looking for is stability in some sense. There is the question of competitiveness abroad, and again, at a certain level of the dollar a company will or will not be competitive, but it is the difficulties of price changes that are difficult to cope with.

With progressive devaluations, at some point you run out of room as to how much you can devalue. You just cannot keep devaluing your currency to penetrate into a foreign market, I think what everybody would like to see, or what economists would say makes the economy function more smoothly, are stable prices and stable dollars. There are advantages to having a lower price for some exports, but it is clear that stability would be just as useful, I think, for most sectors.

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Mr Sterling: Is there any economic measure of what the real value of the dollar should be, other than demand and the credibility of the governor of the Bank of Canada?

Ms Clark: There is something called purchasing power parity, which compares the intrinsic value of goods produced in one economy compared to goods produced in another economy. Based on those kinds of measures, economists say the dollar or the currency should be worth X. However, that looks at just the real side of the value of the dollar. There is also the financial or capital side of the value of the dollar, so you have to consider what happens there in terms of capital inflows and outflows. Based on purchasing power parity, we think the dollar is overvalued and should be lower, probably in the 80-cent range.

The Vice-Chair: Okay, if we could just leave it there with questions, maybe we should continue with the second half of the presentation and then we will come back to those who still have more questions after we have heard the rest of the presentation.

Mr Davies: As I indicated, the second part is an overview of our fiscal circumstance as we are now sitting. It also provides the committee with a thumbnail sketch, as it were, of the major transfers. As I understood it, that is what the committee is going to be focusing on in its deliberations for the next while. I would ask Tony Salerno to take you through the document marked "Fiscal Environment," the part II package.

Mr Salerno: This section essentially divides into three small segments. One gives the picture of the general fiscal environment in which the 1991-92 budget was constructed. It provides a summary of the update of the fiscal picture as of the second-quarter Ontario Finances and concludes with a brief overview of the major transfer recipients.

In setting the 1991 budget, Ontario had to cope with one of the most severe recessions in the province's history. In fact, for the first time in memory, revenues this year were projected to decrease by roughly 1% from last year's actuals. Part of the reason for this decline in revenues was clearly the recession, but another major component was also what the federal government was doing with its transfers. It largely was offloading to the province. The actions of the 1990-91 budget alone cost the province $1.6 billion this year in reduced transfers from the federal government.

Mr Sterling: Can you tell us how you calculate that $1.6 billion? I read that the transfers actually increased last year; did they? Is this based on some 1988 formula or something like that, what you would have got if this had happened?

Mr Salerno: This is based on the transfers that would have come from the federal government based on our spending. A large component of that would have been social assistance. Under previous rules they would have picked up 50% of social assistance costs.

Mr Sterling: Okay. So you are basing it on their not having capped.

Mr Salerno: That is right. They capped their contribution at 5%.

Mr Sterling: Yes. Now, I asked for figures on total income taxes collected by the province and the federal government, and you people provided them to me. I looked at the total package, your percentage of what you got in 1988 and what you were projecting to get this year. They are your figures. Basically, if you had taken the same percentages as you received in 1988, you would have received in personal income taxes about $750 million to $850 million less than you received this year. That tells me that you picked up tax points within the shift of what has happened within the personal income tax area. Am I correct in that?

Mr Davies: Maybe I could take a quick run at it. I do not think it is fair to say we picked up tax points.

Total tax revenues on the personal tax side were up through the late 1980s because the Ontario economy was growing more rapidly than the rest of the country. The transfer payments relate to costs associated with delivery of social services, post-secondary education and health. It is those areas that are reflected in the $1.6 billion, because the federal government unilaterally changed the formulas that had been agreed upon as to its sharing of those elements. The $1.6 billion relates to that rather than to revenues collected on our behalf by the federal government.

Mr Sterling: Yes, but I guess in fairness, in terms of looking at the overall picture, if you complain about getting less money from the federal government, and the federal government and the provincial government change their income tax regimes -- I believe they knocked a few points off the federal tax level and we have increased it progressively over the last four or five years.

Mr Salerno: In terms of the sharing, the tax points the province receives in lieu of cash transfers from the federal government have not changed since --

Mr Sterling: I know, but we have changed them unilaterally here.

Mr Salerno: For the personal tax rates, the province can impose any rate it chooses. That has nothing to do with the federal government.

Mr Sterling: Well, sure it does.

Mr Salerno: We both occupy, for instance, the sales tax room; we both occupy the corporate tax; we both occupy tobacco and fuel taxes and so on.

Mr Sterling: You see, what I am saying is --

The Vice-Chair: Just trying to facilitate the process here a bit from a time standpoint, maybe we could have one more response from the Treasury people, and then I need to move on because we have a couple of other people who want to ask some questions around this, and we still have to get through the presentation.

Mr Davies: Mr Chairman, I will keep it very brief. We would be glad to come back and discuss this at greater length, but I think we should distinguish between the role of the federal government in being the province's agent in collecting certain taxes and its role in collecting taxes on behalf of the entire country and redistributing those funds according to previously agreed upon programs like the established programs funding program or the Canada assistance plan. There is a distinction there, because in one case the federal government is merely acting as the collection agent, and even that has complications, because it collects and pays us in instalments based on what it thinks it is going to collect.

Mr Sterling: I have to respond, and I will be as brief. I think the person on the street looks at his income taxes as income taxes, period, and if the province takes a bigger part of the total package that he pays -- if he pays $10,000 in income tax and the province in 1988 was taking 50% of that, but now takes 55% of it -- we will keep it constant dollars for the sake of clarity -- then I think the province has basically stolen -- not stolen but --

Interjection: Let me rephrase that.

Mr B. Ward: I do not think the average worker looks at --

Mr Sterling: If the federal government has taken less, then there basically is a transfer of resources from the federal government to the provincial government, which you are failing to acknowledge.

Mr Carr: I had a question on the revenues, the decline of one percentage point, which was the first year-over-year forecast revenue decline since 1945. How did we fare versus other provinces in that regard: better, worse, the same? Any idea, just overall?

Mr Salerno: Worse, for two reasons: first, the recession is much more severe in Ontario; second, the impact of the federal actions hit Ontario disproportionately.

Mr Carr: Why would that be?

Mr Salerno: Because CAP, for instance, the social assistance sharing, was targeted specifically at the richer provinces, Ontario being one of the three: Ontario, BC and --

Mr Carr: How did we fare compared to the other rich ones, the BCs and so on?

Mr Salerno: -- and also because social assistance spending has been growing faster, again because of the severity of the recession in Ontario, with Ontario picking up the whole cost now, beyond the 5% that the federal government will share. In other words, the federal government has capped its contribution, regardless of the cost, at 5%. As the next point illustrates, for social assistance increases you have 47%. Everything beyond the 5% is being picked up by Ontario fully.

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Mr Carr: How do we fare versus the other rich provinces though? I know there is a difference between the rich provinces and the poorer, but versus the other ones? We fared worse still?

Mr Salerno: Yes. The recession in Ontario has been much more --

Mr Carr: So revenue in Ontario declined more than in any other.

Mr Salerno: That is correct.

Mrs Sullivan: I just want to make a point that the decrease in the rate of increase and then ultimately the final bang from the feds have been things the province has really known about and has been able to build into budgets for a long time.

I recall that when Mr Nixon was Treasurer there were very clear signals. Indeed the rate of increase in the EPF transfers was well known at the time. It was very clear that the feds were going to become tougher and tougher on the provinces. So in terms of budget-making Mr Sterling's point is, "Yes, we should give the credit to the feds for transferring some money," but we have known for a long time that the decrease is one that has hit Ontario hard -- it has hit other provinces hard as well, but particularly Ontario, Alberta and British Columbia -- and that it is going to continue to hit us harder.

One of the things that Mr Sterling raised, which I hope when you get to the spending pressures for this year, related to the income tax collection agreement -- if our PIT is down, should you not also include that "last year there was a windfall because PIT was up"? Should you not also be projecting a decrease in the PIT transfers as an expenditure pressure or as a revenue pressure, in terms of your budgetary planning? Do not answer that now, but when you get on to that page.

The Vice-Chair: Maybe we can continue with the presentation.

Mr Salerno: Just to conclude on this page, despite these severe pressures that we talked about, the government is maintaining its deficit target of $9.7 billion for this year and the strategy to reduce the deficit over the medium term.

On the next page we highlight or summarize the projections for the year as updated in the second-quarter Ontario Finances. You will see that the deficit, the last line on the table, is essentially on target. There is a very marginal deterioration of $14 million.

Overall, the revenues are unchanged at $43,037,000,000 and the consolidated expenditure is up only marginally at $16 million. That is the impact or the effect of all the changes that have been made in-year. I will go to those in two pages from this.

On the next page we highlight the in-year changes to the revenues. We talked about the revenues being up $2 million, or essentially unchanged, but there have been some changes in the makeup of the revenues. In keeping with the news we have heard about what is happening to corporate profits, corporate taxes are projected to decrease an additional $70 million from the projection in the budget. This makes the year-over-year decline about 28% from last year.

The mining profit taxes as well -- they are income-sensitive -- show a $10-million decline. Tobacco tax is up, in fact, $30 million. This is up from our projection. We had anticipated a very significant drop because of both the federal tax increase that was announced in the budget and our own increases, but the decrease is not as severe as we had anticipated. The land transfer tax also is up, mainly because of the strong sales at the low end of the market in the early spring. All other taxation accounts for another $8-million increase, leaving a net decrease in the tax area of $17 million.

Other revenues are up $15 million. The key change there is a decrease of $10 million in the vehicle and driver registration fees. Interest on investment is up $25 million. That is because our liquid reserves this year are a little higher than earlier anticipated.

Federal payments are offsetting decreases. The federal government has removed the export tax on softwood lumber, which it used to transfer to the province. This will result in a reduction in those transfers of $9 million to the province.

Mr Davies: I do not know if it is appropriate to address Mrs Sullivan's observation on the vulnerabilities of tax elements at this page or later. As Tony has already pointed out, we have taken corporations tax down despite the fact that we started the year with a very low estimate of a very high year-over-year decline. We have made that decline even higher in our estimates at this stage.

With corporate income taxes, though, most companies operate on a December-to-December year, so you really do not know what their tax filing is going to be until they file, usually in March, which is very late in our year. So it is still our best estimate and it is not inconsistent with what is being reported in these profit declines, but it is very difficult to project whether or not we will have to adjust that one way or the other towards the end of the year.

Retail sales do not show up on this list of adjustments we made in the second quarter, because for the first number of months of the year that are being reported on here, retail sales were on target. The critical months for retail sales are the one that we are now in and December, in January we will have a much better fix as to whether or not we are on board and on target with retail sales.

I would point out that our year-over-year estimate right now shows a negative growth. What we are estimating is a negative growth in retail sales tax. That is despite the fact that inflation is going up. Remember, we pay our sales tax on the full cost of a product, not on its cost minus inflation. So that is a big year-over-year drop in retail sales that we have already brought on board.

The third one, and again it is not on the list, is the one Mrs Sullivan alluded to: personal income tax. As I was pointing out in one of the comments on Mr Sterling's question, the federal government acts, in effect, as the collection agent for the province on personal income tax, as it does for every other province except Quebec. It pays provinces on instalment, as it were.

It attempts and does its best job in attempting to guess how much personal income tax revenue is going to come in and starts paying on account in instalments to the provinces, effectively on a monthly basis. Then periodically, and it is usually once or twice a year, it comes in with a reconciliation as to what was paid on instalment and what was actually collected. Those adjustments come in November-December and again in February-March, somewhere thereabouts.

In some years those adjustments have been positive. In fact in the late 1980s this province found itself on the winning end of those adjustments quite significantly, because no one at the federal level or at our level had forecast how quickly the Ontario economy was really growing. There will be occasions and there have been occasions in the past when those adjustments will go the other way, and we are waiting with some anticipation to see how they will go this year.

Mrs Sullivan: My point was, this could be a year when indeed the windfall will be a negative one and some of the actions that were --

Interjections.

Mrs Sullivan: The fancy term, the opposition word is always, "It's a windfall."

Mr Davies: A windstorm in this case.

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Mrs Sullivan: A windstorm? It could be.

Last year, by example, because of an apparent windfall in transfers, the Treasurer was able to preflow some capital money, by example, to a hospital sector, I think it was. I think it was the health care sector anyhow; teachers' pensions was one area. This year there will not be that opportunity, and indeed you discover to your surprise that there is much less of a transfer than what had been anticipated because the feds report so late.

Mr Davies: That is absolutely right and there is no question that budget-making is going to be very difficult for the coming year, as it was this year. The impacts of the recession that we now hope we are coming out of still linger on when we have unemployment rates above 9%, hopefully below 10% now, and we have the pressures that are being faced and the structural changes in the economy. It is a very tough time to try to balance revenues and expenditures in any way, even to meet targets that many thought had unduly high deficit levels.

Mr Phillips: I am sorry for being late. I thought the meeting was cancelled. The thing I cannot figure out is that the economy is performing substantially better than Treasury thought it would in virtually every aspect. You project next year it will perform substantially better than you used to think. Why are the numbers not improving substantially? Why is the deficit not dropping as I would have thought? Why are our costs not dropping as I would have thought?

Mr Davies: I wonder if I could let Phyllis Clark answer. She did go through a presentation earlier on and highlighted those changes. I think that as economists we would probably not use the adverb "substantially" to comment on those changes, but I will let Phyllis elaborate.

Ms Clark: Sure. For 1991 what we expect is a decline of about 2% as compared to a decline of about 3% that was anticipated in the budget.

Mr Phillips: Yes, I know that.

Ms Clark: For 1992 we forecast 3.8% real growth as compared to 3.4% real growth. Our long-term growth has not changed from the moderate forecast that we had before.

Mr Phillips: I know all the figures, by the way. On the four key indicators you used, we are performing what I call substantially; you say marginally. Why are the numbers not calling it?

Ms Clark: One reason is that nominal growth in fact is down because we are doing better on CPI. Nominal growth is down and that does make a difference. If you look at the nominal growth on page 3 of the economic section, what you have is nominal growth at 6.8% for 1992 as compared to 7.3%.

Mr Phillips: Could you pick it up in the CPI?

Ms Clark: CPI is down.

Mr Phillips: On your four key indicators for this year, they are all substantially better. I would not think that this would be my expectation. The deficit should be dropping beyond what you think, and the cost should be.

Ms Clark: The unemployment rate, although better than anticipated, is still very high.

Mr Phillips: Yes, but we built a higher unemployment rate into the numbers and they are now better.

Ms Clark: But nevertheless high. What we are talking about are different degrees. We are still having very high unemployment, and the fallout that comes from high unemployment is --

Mr Phillips: I know that, but I just --

The Vice-Chair: Mr Phillips, I want to leave it there for the time being only so that we can continue on and finish the presentation.

Mr Phillips: I just need a complete answer to why the numbers are not better.

The Vice-Chair: Okay. We can come back to that. I would like to have them complete the presentation on the transfer recipients issue and then we can come back and continue questioning on other issues.

Mr Salerno: Before we move on to the transfer recipients, I would like to finish the fiscal update. The revenues, as I said, are essentially on target. Given that there have been significant in-year expenditure pressures to maintain the deficit target at $9.7 billion, those expenditure pressures have had to be dealt with internally through lower spending in other areas.

The next page demonstrates that and it gives you where the pressures have been. The key expenditure areas have been in the social assistance case load. We are now anticipating an additional $250 million to meet the needs there. Payments to the teachers' pension fund are also higher by another $215 million, and extra firefighting $53 million. These are the key changes, the key pressures that have had to be dealt with.

To manage these, the government has taken a number of actions. All direct operating expenditure of the ministry has been constrained by 5% to save $100 million this year. This will be carried on into next year and the full saving next year will be $200 million. The delay in the implementation of the wage protection fund --

Mr Sterling: Can I ask a question here? There is a pressure of $240 million on the increased social assistance case load. When I look at your figures for the Ontario short-term outlook, you show that job creation is better by 22,000 jobs and the unemployment rate is better by 0.4%. Why are you out by $240 million?

Mr Davies: I think this really comes back to a question Mr Phillips was asking: If the economy is improving, why are expenditure pressures not going down and revenues going up? The quick answer is, on the social assistance program in particular, these things lag. They lag because people are just getting into the programs. We might have an improvement in the pattern next year or later this year which, with the restructuring changes to the social assistance program in Ontario over the last several years and the impact of those structural changes, eligibility criteria and so on, could be changing the nature and the takeup of the program, which we were only estimating at the time. Because of the changes, we did not know exactly what would happen.

With respect to why revenues do not go up automatically with increases, I think Phyllis hit on the main point: We collect taxes on inflated dollars rather than on nominal dollars. If your nominal dollars are not going up because your inflation is coming down, your taxes do not respond as quickly as you would otherwise think they would.

Mr B. Ward: On social assistance, the federal government made some changes to the UI system, and it is my understanding those changes impacted in the sense that people were falling off the UI safety net quicker and on to social assistance. Is that part of the impact?

Mr Phillips: That would have been built in, though. That is a year old.

Ms Clark: But still there was a large fallout from that and it did have an impact on our social assistance case loads. The social assistance case loads have been bigger than we were forecasting.

Mr Sterling: My concern is, when we are going into the social assistance programs do we know what they are going to cost us? What $240 million tells me, in view of the other figures you present in your budget, is that we do not know what the heck we are doing in terms of these social assistance programs. We are creating programs without accurate cost estimates.

We knew what the Canada Employment and Immigration Commission cutbacks were going to do, or we should have known, and we knew what the improved social assistance programs were going to be, or we should have known, yet what we are seeing is sort of a reverse of where the figures should be. What should have happened is there should have been less spending on social assistance, according to the figures I have here, not more.

The Vice-Chair: We did say we would take about one hour and we are at about an hour and 15 minutes. I am trying to speed up the process here a bit, if you would like to continue, please.

Mr Salerno: I will give you a couple of indications of the fiscal environment as we see it now for 1992-1993. The situation is continuing to be weak. The recovery is not as strong as it was after the last recession in 1982-83. The recovery is weak and very vulnerable.

The key factors that move our revenues do not seem to be a source of major strength. Corporate profits are not projected to recover strongly and, furthermore, the losses that have been accumulated may be carried forward, which further reduces the growth in our corporate income tax; personal incomes again are expected to increase only moderately, which will auger badly for the growth in our personal income tax; retail sales tax will start increasing next year, but again, not at a very strong pace, and the unemployment level is expected to remain relatively high, which again will maintain the pressure on our social assistance programs.

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Mr Phillips: On the other side of it, every single economic indicator is better than you thought when you prepared the original plan. With the CPI down lower than you thought, salary settlements lower and costs lower, I would have thought the economic outlook would have improved our fiscal outlook.

Mr Salerno: I just reiterate what has been said before. One of the key indicators, the nominal growth, is in fact lower than anticipated earlier, and nominal growth does yield additional revenue. That is the one indicator that triggers all revenues. For instance, we apply the retail sales tax on the entire price, including inflation. If that is lower, the take there will be lower. Incomes will tend to be lower with lower inflation.

Mr Phillips: Salary settlements will be lower. I just cannot understand why, if our economic outlook is substantially better, our fiscal outlook is not substantially better. It just does not add up.

The Vice-Chair: We seem to be getting into a bit of a disagreement here, or we cannot get the question answered right now. If we continue, we will give you another opportunity to ask.

Mr Salerno: Turning very briefly to the major transfers, we have a few pages here that describe the essence of the major transfers, who they are, the amounts they receive from the provinces and the composition at least in terms of where the largest component of the transfer in fact is applied.

Major transfers represent approximately 32% of the provincial budget of $16.7 billion for this year. On this page we have summarized who they are -- hospitals, universities, colleges, school boards and municipalities -- and the amounts they receive from the province. We have indicated here that essentially wages and salaries are the largest component of their expenditure, ranging from about 50% for municipalities to 80% for universities and school boards.

Hospitals is the first one we highlight here. We have indicated grants are provided to 225 hospitals. I do not think there is much point in going through each individual one. If there are any specific questions you would like to ask, I will leave it there.

The Vice-Chair: Maybe we can go back and open it up for questions. I had Mr Poirier on the list. I may have to slip out because I am supposed to be speaking on this bill; if I do, I will ask Mr Wiseman to sit in the chair.

Mr Poirier: Looking at this picture globally, I appreciate that very much, but what I see, having played with statistics myself as a public servant and now as an MPP, is that you are giving us a bit of a traditional set of tools for a traditional situation in our socioeconomic conditions. After much reading and discussion here at Queen's Park, Toronto and in my riding, something tells me that we are about to enter, if we have not already and we are going to remain in, a socioeconomic situation that is not going to be traditional.

For example, talking to the bank in Hawkesbury in my riding, population 10,000, where there are a lot of manufacturing jobs but they are teetering on the edge of disappearing for good, people were rushing like hell to get loans. They had to hire more loan officers in the springtime. Talking to people who have had to cut back on jobs, young people making $30,000 this spring took mortgages for $180,000, $200,000 homes -- of course their wives work in grocery stores or whatever like that -- they were completely oblivious to what the situation was with manufacturing jobs. I am so surprised the banks would have given them those type of mortgages. Now they are losing their jobs, with only their wives working in convenience stores or something like that.

These jobs are probably not going to come back with what is happening with the possible bringing of Mexico into the free trade deal in the springtime by the feds and the lack of investor confidence that may be hit very hard with whatever happens to Canada, bloody heck, even though we seem to think we have discussed this so much in the past. We are fed up discussing it. The fact remains that no matter how you shake your head or take a shower about it, it is still there.

You talked about the cyclical nature, where people are sitting it out waiting for the economic situation to get better. It has always been cyclical. There is always a trough, but for each trough there is a crest. I am wondering what type of crest, if a crest and when a crest, if it lasts longer with the feds transferring even less down to us, and the worldwide confidence in investment in Canada when we do not even know what Canada we are going to get, not 10 years from now but in 1992, which is just around the corner.

When I look at the employment figures and when I read that unemployment is down, I am very leery because I do not believe the Statscan figures for unemployment for local situations or whatever, because in my riding a lot of the people have stopped bothering to look for a job. They have gone off unemployment, not because they found a job, but because they ran out and they are not even bothering to look any more.

That particular tough aspect is the figures are down. I look at the official figures for Prescott and Russell and I look at a place like Hawkesbury within Prescott and Russell that has over 20% unemployment and just about all the manufacturing jobs are disappearing -- two more closures in the last two weeks. I look at the productivity aspect. I was looking at some of the European magazines I read. Canada had the lowest productivity for all the G-7. It does not look good. If we are not going to be competitive, if we are not going to be productive or if we are going to be less than the other developed countries, what the heck does that mean for Ontario? What does it mean for Ontario manufacturing jobs?

Barbara mentioned the capital investment. The outlook is a heck of a lot worse than what I see here as a short-term, even mid-term, document for the the whole aspect of constitutional considerations, which are not here.

Relatively speaking, even though this is not necessarily an outlook about which to go on the front lawn and yell, "This is fantastic," I think it is going to be a hell of a lot worse than this when you have put it all together and when you have moved back far enough to get as objective a look as this. What is happening to our Ontario? What is going to happen to our Ontario when you have put all these things that are not in here together? We are not in the traditional mould here. Something is happening to Ontario that has not happened before and it is going to stay with us for a heck of a while longer.

Mrs Sullivan: Until the next election.

Mr Poirier: Yes, and even longer than till the next election. Whichever government is going to take over four years hence is still going to have to deal with this. I am saying this is in a non-partisan way. We are going to have to deal with this as Ontarians and as Canadians, with whatever is left of Canada, in a heck of a lot longer mode than is predicted right now, when I put this and the rest all together. How do you feel about that?

Mr Davies: Someone once called economics the dismal science. I think Mr Poirier is making it very dismal indeed. I am not saying he will not be proven to be correct.

Mr Poirier: I hope I am wrong, but I am afraid not.

Mr Davies: I am sure we all hope we are wrong.

I would make a couple of observations. Downside risks exist indeed. On the second point that you alluded to, the reliability of data, our forecasts are based on what is available to use to forecast. We are massaging the numbers the same way that people have done traditionally. I think you are very accurate when you question whether the historic data we have collected truly reflects what is really happening. That is something that is really, as I said earlier, a sea change. So there is the downside risk, the reliability of data. Our forecasts are as good as the data that are available on which to base them, as are all those other individuals' forecasts that we enumerated, and you see we are sort of in the pack. But the whole pack could be wrong. I would not dispute your observation at all.

The only positive light I can see is in the observations that foreign ambassadors have given me as recently as a meeting last evening with a group of Japanese investors, who really see Canada and Ontario as having great potential relative to their investment opportunities elsewhere in the world. Sometimes we are so close to our problems -- and we do have problems -- and we have become so absorbed in our problems that we forget that in relative terms we have a multitude of resources and benefits here in this province and in this country.

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Mr Poirier: I can understand the Japanese investors. If they are going to be willing -- and they are investing massively, or trying to invest massively in eastern Europe and what is left of the Soviet Union and whatever, obviously they have a long-term confidence wherever their investments are. I am sure they say the same thing about Canada, whether it is together or not together. Whatever the heck Canada looks like two years down the road, they will still invest. I agree with you. But the other investments that are not Japanese, that do not have this confidence the Japanese have with their massive banking system and availability of capital, that do not worry about the Constitution, the composition of countries and alliances and whatever worldwide -- not everybody is Japanese with a Japanese bank in his back pocket. That is what I am worried about.

Mr Davies: Perhaps it is more than just the Japanese bank. It is also that degree of confidence in the future. If you do not have confidence in the future, it becomes a self-fulfilling prophecy. Things do go wrong.

Mr Poirier: True.

Mrs Sullivan: I have a question that takes a very different tack. To a certain extent, this is the first pre-budget hearing for this committee. We have seen the Treasurer speculate that he wants to enter into a new approach to pre-budget hearings involving debates or dialogue around the table. When the MUSH sector or business or industry come to the table and are faced with a debate scenario in terms of pre-budget approach, it seems to me that they will react the way Bay Street is now reacting to the Treasurer's statement, and that is with laughter or with disdain.

I know I am putting you on the spot, but did the advice to the Treasurer come from Treasury, as to that being an appropriate way to conduct pre-budget hearings, or was it political advice?

Mr Christopherson: Wait a minute. Hang on.

Mr Davies: I am going to let the Treasurer speak for himself on what his plans are.

Mr Christopherson: Nice try.

Mr Davies: He has indicated in the House and elsewhere the approaches he would like to take. I will not answer your question because, as you know, it is privileged as to how ministers make up their minds. They make up their minds. I would only observe that it is in the general public interest that people have a full appreciation of different perspectives. When we are having to allocate scarce resources, it is very important that as many people appreciate the perspectives of others as possible.

Mr Phillips: I will go back to my question of before. I honestly cannot fathom how the economy can be performing better and the fiscal outlook is not better. If there is a lag, then this fiscal year is performing economically much better than you thought going in, so the lag should hit next year and the numbers should be better next year. CPI is way down and, yes, that may impact your retail sales income. But it must impact dramatically on the wage settlements that you had planned. The number of people in the workforce is substantially higher in both 1991 and 1992. Real growth is better in both years.

I have to believe that when the economic outlook is better the fiscal outlook has to improve. This is what I have been asking the Treasurer, as you know: "Why, with all the economic numbers better, don't you say, `Listen, the fiscal numbers are going to be better.'" That is what is holding the economy back. One of the things is this four-year deficit. Surely with the economy performing better you should now be able to say, "Listen, the deficits are going to be better than we thought." I cannot understand that.

You do not have to clarify today, but there is a little subissue I wanted to ask. You say the wage protection fund is $85 million less because of the delay in legislation. I am going to assume, therefore, that the number of applicants is the same; it is just that it will take you longer to process them. But I am more interested in the bigger issue, and you just confirmed that other one.

Mr Salerno: There are two things going on with the wage protection fund. Initially it was that the legislation was going to be delayed. Then the $85 million that was being saved this year would have been transferred into next year when the program was fully operational. It now appears from the early numbers we are getting that the cost might in fact be lower than earlier anticipated. Consequently, the $85 million may not be a full add-on to next year's plan. It may be lower.

Mr Phillips: The thought entered my mind, but it says here in this document that it is due to the postponement.

Mr Salerno: Right.

Mr Phillips: So that is not the case?

Mr Salerno: As I said, the initial savings that were projected were because the legislation was delayed. However, as I just said, the costs now appear to be lower based on the applications that are on hand.

Mr Phillips: I am sorry. This was not my major question. Maybe outside here someone could tell me how much lower it is going to be.

Mr Sterling: I want to ask another question, a major one, but on the wage protection, since Mr Phillips has raised it. Have you negotiated with the federal government regarding the UIC clawback problem? Are you out of that problem yet?

Mr Davies: We would have to defer to those who are administering that program in another department and maybe get them in touch with you.

Mr Sterling: Okay, that is fine.

Mr Phillips: Could I get my question in, my major one, on why the fiscal outlook is not better if the economic outlook is better?

Mr Davies: If I am addressing your question properly, you are saying, "Why have we not seen improvement in this year's numbers right away?" I will give you a simple example. Wage settlements are for a term of a contract. Inflation might have come down in the course of the year, but the contract that was negotiated last year and is running the entire course of this calendar year does not get interrupted and adjusted.

Mr Phillips: But we should see that saving in the future.

Mr Davies: But it will be obviously an element to be considered in negotiating future contracts, contracts yet to be negotiated in the public sector.

The second point we have already addressed on the revenue side. Revenues are driven by nominal growth, not by real growth. If you are asking me to forecast what the government's expenditure budget plans are going to be for the future and whether or not, with lower wage demands because of lower inflation, any saving can be translated into a lower deficit, you are really asking a question that is part of the budget-making process that I am not in the position to answer yet because the government has not addressed itself to its overall expenditure plan.

Mr Phillips: You laid out your four-year plan based on the economy as you thought it was. Is the logical conclusion --

Mr Davies: But if you take a look at our economic projections from last year, we were projecting a significant moderation of inflation.

Mr Phillips: I know all the numbers, but I am saying if the economy is performing better, would the numbers be better over a four-year period?

Mr Davies: Which numbers?

Mr Phillips: Your fiscal numbers.

Mr Davies: It all depends on expenditure and revenue decisions made by governments of the day.

Mr Phillips: But if you take the ones that you have built into your four-year plan, if the economy is performing better, would not the fiscal plan be better?

Mr Davies: I believe I am correct in saying that Mr Laughren, on all occasions, has said that his target is on the deficit line and he has not focused on the combination of revenues and expenditures to get there.

Mr Phillips: But is it fair to say that if the economy performed better, our fiscal plan should perform better?

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Mr Davies: That is a decision of the government. I am serious, Mr Phillips; that is what governments decide, what sort of mix of revenues and expenditures they want.

The Acting Chair (Mr Wiseman): That is his answer. Mr Sterling?

Mr Sterling: Following along the same line, my concern is over the long term more than what appears to be here. I think what both Mr Phillips and I smell perhaps out of all this is that, in spite of an economy which has not been good but perhaps is a little better than we thought it was, we see the government reeling in terms of its own predictions and, particularly on the expenditure side, not being able to control them.

Mr Jamison: In your opinion, right?

Mr Sterling: Of course it is. My concern over the long term is the ability of this government and the successive government, whatever that should be, when we have had some sustained growth for a while, to be able to deal with the problem then. I do not want to reproduce what the Conservatives had to do in 1984 when they faced $200 billion of total debt and had to face the people and say, "We are still facing a $5-billion deficit or a $6-billion deficit." Somebody has to turn that around somewhere along the line. You just cannot go on for ever, regardless of all the arguments of how much you can spend.

What is your long-term prediction? Taking these real growth figures of 3.7%, 3.5%, 3.4% in 1995, when can a government realistically look to having a chance at balancing the budget? I am much more optimistic about our outlook. We have a tremendous immigrant influx into our economy. They are really tremendous assets, if utilized properly. In spite of the government, I suggest that we are probably not going to do badly over the next four or five years. Given that, when can we see ourselves out of this mire?

Mr Davies: I really cannot answer that, because that is a decision the elected representatives have to take as to what their expenditure and revenue moves would be. If you were asking me, "When would it be if there was no change in any of the existing programs of government and no change in the existing tax base?" I think it would be quite a few years, quite frankly, because the cost drivers underlying many expenditure programs far outstrip the natural growth in the revenue base. Health care, social services, even education continue to grow at a natural rate far exceeding the natural rate in growth in revenues. So something has to change.

Mr Sterling: Let's say the programs just stayed the same. What kind of increase in taxation would be necessary on an annual basis -- 5%, 10%, 15%?

Mr Davies: To be honest, I have never done that sort of calculation, because that is normally not the option a government chooses to take, leaving one side of the equation unchanged and moving just on the other.

Mr Sterling: Would that not be a good one to have in terms of being able to say to this government and future governments, "Look, if you leave everything the way it is, then you have got to increase taxation by 8% overall, or 28% overall"? Otherwise we go on and on and we delude ourselves in terms of how far we can go on the expenditure side. Is it possible to calculate that kind of thing?

Mr Davies: One can make the assumptions and do the calculation, yes.

Mr Sterling: Is it a lot of work to do that calculation?

Mr Davies: The critical work is making the assumptions of what happens. Once you sign on to the assumptions, the exercise is mechanical. It is not hard. What is hard is figuring out the assumptions to use.

Mr Sterling: You mean in terms of growth?

Mr Davies: In terms of growth and reaction of the economy to that growth. Again, it comes back to the point that Mr Poirier is making. We can do it on the basis of traditional and historic patterns and relationships. Whether those will turn out to be true in the future, I do not know.

Mr Poirier: I have my doubts.

The Acting Chair: One quick question, Mr Phillips, and then we will have to close, because it is almost 12.

Mr Phillips: What is really frustrating me is that in your budget you outline the medium-term fiscal outlook, the four-year plan. Under it you say, "These fiscal projections are based on the medium-term economic outlook described in budget paper B." I am not trying to put words in anybody's mouth, it is just that I read the budget and then I say, "Okay, the economic outlook is now changed; therefore, presumably these fiscal projections change." I cannot understand why we cannot get an answer to that.

Mr Davies: I heard over here, and I think it is a good answer, that the government will be indicating its fiscal plan for the year 1992-93 when it presents a budget.

Mr Phillips: But if your economic outlook changes, the fiscal outlook presumably improves. If it was based on a worse economic outlook, presumably with your new economic outlook, the numbers should be better.

Mr Davies: Presuming every other estimate was dead on and totally without change in that intervening period.

Mr Jamison: The projections you have given us today indicate that the government is sticking fairly closely to the $9.7-billion figure for this fiscal year. It has come to my attention -- the preliminary word we are getting -- that probably both at the federal end and with other provinces, their deficit figures are in a number of cases going to be substantially higher than were projected. I find that particularly interesting, although some of the figures have not actually come in, but all the vibes that are coming in indicate that the change we are seeing is not exclusive to Ontario, and it is not exclusive in the fact that revenues are falling because of the restructuring. It is going on in the permanent restructuring, and the job losses, loss of income from manufacturing.

I just wanted to point that out, that it will be very interesting to really have a look at not only what is happening at the federal level but also what is happening in other provinces as far as their projections on deficits are concerned, and especially other jurisdictions such as Quebec, when those figures come in. My preliminary understanding is that those provinces' deficits are going to be higher than had been projected. I think possibly the work that has been done by the Treasurer in trying to maintain the $9.7-billion figure that was originally given should at least receive some credibility at this point, rather than having that rehashed and beat on again.

The Acting Chair: A quick last word, Mrs Sullivan.

Mrs Sullivan: I want to follow up on the point of Mr Phillips and Mr Sterling. There is a formula by which an increase in the GDP is factored to project revenues. I think the point that is being made is that with your projections of increases in GDP, slight or greater as they may be, with no other revenue moves, there is indeed a projection of revenue that, with no other expenditure moves, could lead to a Treasurer's decision to change deficit projections for next year or deficit decisions for next year. In fact formulas exist -- they are standard practice in Treasury -- and the Treasurer could, based on your projections, make decisions in the budget that would have an impact both on single-year deficits and ultimately on long-term debt. Do you concur with that?

Mr Davies: I certainly concur that treasurers and governments can make decisions on how they want the shape of the budget to be, yes.

Mrs Sullivan: But the formula is one that is standard practice in terms of predicting what your revenues are going to be. With projections already of a slight increase in economic performance, the final bottom line, it could be reasonably assumed, could be affected positively.

Mr Davies: I would have to look at the number again. I believe we are showing nominal growth next year lower than we showed in the budget, and normally you apply that rule of thumb multiplier to nominal growth. So, if anything, it would be the other way.

Mrs Sullivan: It is still better than this year.

Mr Davies: Yes, year over year, revenue is growing. I do not think we were forecasting ever that we were going to have yet another decline next year in year-over-year revenue growth. It is difficult enough to face that in one year.

The Acting Chair: It is 12 o'clock.

Mr Sterling: I think this is important. It is a process question. Since we have the Deputy Treasurer with us, where should we as a committee concentrate our efforts over the next three, four or five weeks before we break at Christmas? I would like to have some feeling perhaps from you as to when we should be giving the Treasurer advice on what parts of the decision-making process that goes on, if that is in fact our role or our desire as a committee. Can you give us any guidance as to what people we should be listening to at this stage of the game?

The Acting Chair: I think Mr Christopherson probably has a better answer to that question.

Mr Christopherson: I would just like to throw something out, and then if you still want to direct a question to Mr Davies, please do, but I think I can help a little.

At the last meeting we agreed that we were going to start the pre-budget consultation for the MUSH and that we would do that as quickly as possible. I made it very clear at that time that if indeed we wanted to have an impact on that, we ought to move as quickly as possible so that it can be in the hands of the Treasurer as quickly as possible.

In terms of the other pre-budget consultations we will do, I am hoping that the Treasurer, either himself or through me, will be able to provide some sense of a time frame for the new year so that it is timely and it is meaningful.

That is a political overview from the Treasurer's office on those two issues. If Mr Davies can add something to that, please, I encourage him to do so.

Mr Davies: That is my understanding of the circumstance now.

Mr Sterling: Okay, thanks.

The Acting Chair: I would like to thank you for coming this morning and giving your presentation. The clerk has just indicated that he has all the significant MUSH group scheduled for November 21 and that this committee will be adjourned until 10 am, November 21.

The committee adjourned at 1204.