STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
CONTENTS
Wednesday 19 January 1994
Pre-budget consultations
Ministry of Finance
Hon Floyd Laughren, minister
Jay Kaufman, deputy minister
Steve Dorey, acting assistant deputy minister, office of economic policy
Gregg Smyth, assistant controller, office of the controller
Dr Peter Warrian, commissioner, Public Sector Labour Market and Productivity Commission
Toronto-Dominion Bank
Peter Drake, vice-president, economic research
Mimi Curtis, economist, department of economic research
Conference Board of Canada
James Frank, vice-president and chief economist
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/
Prince Edward-Lennox-Hastings-Sud ND)
*Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)
*Caplan, Elinor (Oriole L)
*Carr, Gary (Oakville South/-Sud PC)
*Cousens, W. Donald (Markham PC)
Haslam, Karen (Perth ND)
*Jamison, Norm (Norfolk ND)
*Kwinter, Monte (Wilson Heights L)
*Lessard, Wayne (Windsor-Walkerville ND)
*Mathyssen, Irene (Middlesex ND)
*Phillips, Gerry (Scarborough-Agincourt L)
*Sutherland, Kimble (Oxford ND)
*In attendance / présents
Substitutions present/ Membres remplaçants présents:
Fletcher, Derek (Guelph ND) for Mrs Haslam
Harris, Michael D. (Nipissing PC) for Mr Carr
Morrow, Mark (Wentworth East/-Est ND) for Mr Wiseman
Owens, Stephen (Scarborough Centre ND) for Mr Wiseman
Turnbull, David (York Mills PC) for Mr Cousens
Wood, Len (Cochrane North/-Nord ND) for Mrs Mathyssen
Clerk pro tem / Greffière par intérim: Bryce, Donna
Staff / Personnel:
Campbell, Elaine, research officer, Legislative Research Service
Israel, Edward, research officer, Legislative Research Service
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
WEDNESDAY 19 JANUARY 1994
The committee met at 1007 in the St Clair/Thames/Erie Rooms, Macdonald Block.
PRE-BUDGET CONSULTATIONS
The Chair (Mr Paul R. Johnson): The standing committee on finance and economic affairs will come to order. This is the first day in a series of pre-budget consultations.
MINISTRY OF FINANCE
The Chair: I would like to welcome everyone here, in particular the Honourable Floyd Laughren, Minister of Finance. Today we have a presentation by the minister and ministry representatives. I'm in the hands of the committee as to how we shall proceed. I understand the minister is available until noon. Is that correct?
Hon Floyd Laughren (Minister of Finance): No. I thought the deal was I was here till 11. The cabinet meeting is going on and I'm supposed to be there.
The Chair: So the Finance minister is here until 11 and his assistants will remain to continue.
Mr Michael D. Harris (Nipissing): Mr Chair, before we begin, I have a motion that I would like to put before the committee. I recognize time constraints and I will try to be brief and direct.
I think members of the committee will recall, following the very first NDP budget, that we delayed proceedings in the Legislature because we felt Ontario taxpayers had been left out of the budget process. As you'll recall, we eventually held our own hearings on that budget around the process. We then called for a major reform of the budget process in some detail in New Directions, Volume One, which was released later that year.
Last year, on the very first day of pre-budget consultations similar to this, we called on the Minister of Finance to reform the budget process once again. He chose to go the old route and the end result last year was a budget that completely ignored virtually every presentation that was made, even from those who were here looking at spending priorities as opposed to tax and did not call for tax increases.
What the consultation process brought us last year was a budget that contained the largest tax grab in Ontario history: 10 tax increases generating some $2 billion in new revenue.
It was a budget that produced higher taxes for the vast majority of Ontario families, including those with annual incomes as low as $20,000, family income;
Another multibillion-dollar deficit projected at $9.4 billion, rising to $11 billion or $12 billion or who knows, was the result of the process last year;
Another credit rating cut, the third in three years, as we followed the same process last year;
A set of books so fudged the Provincial Auditor refused to endorse them was the result of last year's process;
Employment policies so ineffective that at the end of the three years there were still 553,000 Ontarians out of work;
A continuation of disastrously high levels of dependence on social assistance; and I could go on and on.
As they say, if you keep doing things the same way, the predictability is you're going to get the same results. With results like those described above, we simply can't afford to do the same thing.
I say it's not too late to reform the process, and therefore I move that in order to restore effectiveness and integrity in the pre-budget consultation process, in order to provide the best possible framework and guidance for the Minister of Finance to develop the 1994 budget, the committee postpone the pre-budget consultations pending the following:
(1) The Minister of Finance provides the committee with revenue, spending and deficit projections for the 1994-95 fiscal year;
(2) GVA, government value assessments, are established to review priorities to provide a value-for-money analysis of all new and existing spending and avoiding duplication;
(3) The Ministry of Finance provides a status report on its efforts to address the concerns of the Provincial Auditor regarding the government's auditing practices;
(4) The Minister of Finance reports on the effects of the social contract to date and on the expenditure control plan, which was integral in the last budget;
For meaningful input to be given to the Treasurer by us and by groups, surely we're entitled to have that information today.
(5) Advance written briefs are obtained from all currently scheduled consultation groups in lieu of the oral presentations in order to use their appearance time for a truly consultative working session with committee members and relevant ministry staff;
(6) Additional time is requested from the House leaders in order to consult with taxpayers from all parts of Ontario and from all socioeconomic backgrounds.
I move this motion. I believe that it would lead to a far better process, far more meaningful input from interest groups and ordinary Ontarians, and put us as a committee in a far better position to actually give meaningful advice to the Treasurer.
Mr Gerry Phillips (Scarborough-Agincourt): I kind of question why this is before us. The fact is that we all agreed to the process, that the Minister of Finance is here now for 50 minutes to talk about at least three of these questions. For our part, we sent the Minister of Finance and copied to the committee virtually all of these questions two weeks ago, and I think the minister is here prepared to talk about answers to them or, if not today, to give the committee written responses on them. On two of these proposals, if it had been the intention of the Conservative Party to want to proceed this way, all it could have done is said, "We'd like the written briefs."
My own view is that much of this is already being done and will be provided today; that is why we're here today, and the motion is in many respects redundant. We're already doing this. I kind of resent it being put on the table when we have the minister only for an hour and the staff only for three hours. I kind of hoped we'd get on discussing the answers to the questions in this brief.
I think the committee can order its own business. We order our business, we are doing much of this and I would prefer to get on with it.
Mr Kimble Sutherland (Oxford): I would just want to echo some of Mr Phillips's comments and add a few more. I'm glad to see that the Conservative Party is finally interested in full pre-budget consultations, knowing for many years when it was in government that extensive, wide-open consultation may not have occurred, to allow the public and many groups to participate.
I also want to say that there is a process for planning committee business. It's a subcommittee process. All three parties are represented. The third party had a representative there. If there were specific issues they wanted the committee to deal with in pre-budget consultation, they could have done that. I don't know why those issues weren't brought up at the subcommittee. Maybe the third party wasn't organized at that time to figure out exactly what it wanted to hear from the public and have discussed at the hearings. I understand from just briefly looking through the presentation here that some of these issues that have been put forward will be discussed and presented today.
If the third party has respect for the committee process, it would use the appropriate process, which is the subcommittee where the agendas are discussed and agreed upon by all three parties as to how pre-budget hearings would proceed. The Tories were represented at those subcommittee meetings, agreed to the process that was put forward. We have the Minister of Finance here and Ministry of Finance staff and we have many different groups coming forward. I agree with Mr Phillips. This motion really is redundant and is not appropriate.
Mr Harris: I don't know why this is a surprise. In 1991 in New Directions we detailed very specifically the budgetary reforms for the budgetary process and how we thought, if you wanted to make it meaningful, it should be followed. That was ignored then, it was ignored the next year, it was ignored the next year. Last year we made the same recommendations.
Clearly we are outvoted in the steering committee, we are outvoted here and we understand that, but we think it's important to point out the results of starting out and carrying on this year the same as we did last year. It was a sham. The taxpayers, those who made presentations, saw nothing in the budget of the types of recommendations and consultations they made.
So we want to go firmly on the record, saying that if you're going to start down the same path, you may just end up, based upon the last three budgets this Treasurer has presented, with predictably the same results. We find that unacceptable to the taxpayers and the people of Ontario, and if the committee once again this year wishes to proceed this way, we understand. We will participate but with reluctance in a process that we think could be so much better, so much more open, so much more meaningful in truly providing advice to the Treasurer. So we think it's important that we restate again, for the third year in a row, our concerns and the fact that you've consistently ignored our advice.
Mr Sutherland: I want to repeat that the process for dealing with how pre-budget hearings should occur is the subcommittee process. These concerns that are being expressed today by the third party were never brought up at the subcommittee where they could have been dealt with. So it is very clear that either this was just a last-minute thought or the third party isn't exactly sure all the time how it wants to proceed, but they were never brought up as concerns at the subcommittee meetings.
Mr Phillips: I'm not sure Mr Harris is familiar with everything that's gone on here, but for our party, we sent the Minister of Finance a detailed, three-page letter saying, "Here are the things that we as a party want to discuss." The minister's staff have been working on that. We will get answers to that today or over the next few weeks. So that gives, I think, answers to three of the issues that the leader of the third party has raised.
On the written briefs, it is actually practice that we get written briefs from people who present. So number 5 will be done. I think we all debated how much time we wanted to devote to this exercise and all three parties agreed on number 6 on the timing. In terms of the government value assessments, that's why we're here, to understand what the government's plans are, and historically they've given us the plans for spending.
I'm keen to have a meaningful debate on the budget and the Minister of Finance appreciates that we will have that. I'm keen that we provide whatever advice we can. But to suggest that the motion that's before us is anything basically different than we already plan to do -- except in a couple of details, and neither of those was raised at the subcommittee, as I recall it. So I think we should get on with it.
Mr Norm Jamison (Norfolk): I have to agree with Mr Phillips and my colleague to my left. It's interesting to see Mr Harris here for the first time in three years. The subcommittee that really steered this committee through developed a consensus to carry on in a certain direction. I find it passing strange to find the leader of the third party here today at the 11th hour to put forward these concerns. If I was to really call it the way that I perceive it this morning, I would consider it to be an opportunistic approach to this process that really is standing somewhat in the way of the Treasurer and his valuable time that has been allotted now being lessened by some 20-odd minutes. Again, the steering committee developed a very clear consensus on how this committee would proceed, and I find it rather strange that this type of happening would take place at the 11th hour.
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The Chair: At this point in time it would appear that committee members would like to move forward and I will therefore put the question.
All those in favour of Mr Harris's motion? All those opposed? The motion is defeated.
Welcome to the committee, Mr Laughren. If you and your staff would like to proceed.
Hon Mr Laughren: Thank you very much, Mr Chairman. I knew that something was missing from my life in the last month and I didn't know what it was until I got here today and got back into the fray. I enjoy that.
I thought I should first introduce the people who are with me today. To my far right is David Trick, the assistant deputy minister; beside me is Simon Rosenblum, who is my chief of staff in the Ministry of Finance; Jay Kaufman, who is the Deputy Minister and Secretary of the Treasury Board; next Dr Peter Warrian, who is the chair of the Public Sector Labour Market and Productivity Commission, and to his left is Steve Dorey, acting deputy minister.
I will try to resolve or answer some of the questions that are raised in Mr Harris's motion during the presentation. I will go through the slide presentation, which I hope will be useful for members of the committee, and I'd like to keep it to about 30 minutes and then still allow 30 minutes for an exchange with members of the committee. If I take more than 30 in the presentation, we'll add that on to the time for exchanges with members, because I find that valuable and interesting and I hope that members will as well. If we could go ahead with the first of the slides, and perhaps if the lights were dimmed at the front, in particular, it would be helpful.
Just a reminder to members of the committee that we set out this year, as in the previous year, to have three priorities. One was to create jobs, two was to maintain the essential services of the province and third was to control the deficit. We have worked extremely hard at all three of those. I know that some members will have differing views on how well we've achieved any one of them, but we have worked hard at them.
On controlling the deficit, for example, we tackled committed expenditures this year and reduced them by $4 billion. We increased government revenues by about $2.8 billion in the budget, some consisting of tax increases and some consisting of non-tax revenues, and we implemented the social contract, which will effect savings of about $2 billion. We are determined that as we go through that process we do what we can to maintain the essential services of the province. That is what people are telling us they want.
During the pre-budget consultations last year, that's what people told us they wanted. I don't expect Mr Harris to agree with me, but we did listen to the people during those pre-budget consultations and we did do what we could in very difficult times to create jobs, to maintain the essential services and to get the deficit under control. That $4-billion expenditure control plan and the social contract were not painless exercises for the government or for the people of the province, but we felt that we had to do that.
On the jobs side, there were about 79,000 new jobs created in 1993 and we worked with the private sector to make that happen by investing in infrastructure, by some economic development actions and through training and education initiatives: the base capital expenditures of about $3 billion, which creates and sustains about 52,000 jobs; the Jobs Ontario Capital of over $600 million, about 10,000 jobs, and we put in place our capital corporations that are up and running. That will help us implement some of our more strategic capital initiatives.
We have now the federal-provincial infrastructure program that was introduced by the new federal government and we are working very actively with them and with the municipalities and school boards to actually deliver that and make it happen. We expect that agreement to be signed next week, between us and Ottawa, and we expect that our investment in social housing will generate over 20,000 person-years of employment in 1993.
I will move fairly quickly through these so that we can get through the whole presentation. In the private sector, we've initiated through the Ontario Transportation Capital Corp some initiatives such as Highway 407, and consortia now are going to be coming forward with their presentations to the government. That's a huge project of about $1.2 billion. That is a massive project that will create up to 26,000 person-years of employment. It is a huge construction project and it will serve a very useful purpose in the Metro area.
The convention centre will create about 2,700 person-years of employment. We know that in fairly recent times there's been almost $4 billion in investments by the auto manufacturers. That's a terribly important part of the province's economy. Real business spending on equipment is up by about 10%; that's another important signal in the province.
Then there's the Windsor casino, which is controversial in some people's minds, but I can tell you, it's a $375-million construction project, over 7,000 person-years of employment and over 15,000 ongoing jobs in the province of Ontario. That is real economic development.
On the economic development side, we do have in place the sector partnership fund which is a $150-million fund for working with the private sector. We have the Jobs Ontario Community Action program announced by the minister earlier. That's $100 million a year. We have the Ontario lead investment fund, which you may recall started out being called the Ontario investment fund. It now has become the lead investment fund, and that's in place now with private sector and public sector funding.
We have Technology Ontario, which funds the centres of excellence at the universities. There's been direct assistance in training and infrastructure for Ford and Chrysler that helped secure major investments in jobs. There was the assistance to Mitel, Inglis and DuPont that secured over $250 million in investment and over 400,000 jobs. We have, as well, the manufacturing recovery program of over $100 million. In the last two years we've assisted over 200 firms that have supported 14,000 jobs.
There are other success stories. We worked with Chrysler to secure a $600-million investment for the new mini-van in the Windsor plant. With Ford, we supported them in a $1.1-billion investment for an engine plant, an aluminum-casting plant in the Windsor area, and with Mitel, we worked with them in Kanata near Ottawa as well. So jobs are being created.
We're also working very hard on education and training. You will know of the Jobs Ontario Training program, which is a three-year, $1.1-billion program. You'll know that we have a lot of placements there and there are more being created all the time.
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I'll move fairly quickly through this. We do know that Ontario's competitive position is improving, that unit labour costs have actually fallen in comparison with major competitors. We have had a stronger rise in exports. Quite frankly, our productivity growth in impressive. Our inflation rate is low and the exchange rate now is considerably lower than it was a couple of years ago, so we are well placed for sustained growth in the next number of years, and I'll have some more numbers on that in a few moments. We do have a good infrastructure in the province. Business investment is robust, investment intentions are good and we have an extremely highly skilled workforce. So that gives a background of where the province has been and what we're doing to support economic growth and development.
If we could turn now to some of the specific numbers dealing with the economy and the way in which we see it turning around, the first slide shows on the left the real gross domestic product per cent growth and on the right employment per cent growth. You can see that real GDP in 1989 was up 2.2% and then how it plummeted in 1990 and 1991; it came up a bit in 1992, and in 1993 the recovery continues. Employment: You can see how employment dropped by 3.4% in 1991, even in 1992 down 1.2%, but in 1993 it has come up again at 1.7%. So the economic turnaround is happening. There are numbers to substantiate it. That does not mean that there are not continuing problems, of course.
If you look at the next slide, which shows some of the numbers between 1993 and the 1994 forecast, we are predicting that about 88,000 jobs will be created, that the recovery will be led by exports and business equipment investment, and that other economies are strengthening as well, which of course helps our export markets. There will be modest employment and income gains, and if you look at the unemployment rate you can see -- and I noticed that Mr Martin just the other day was commenting on this as well -- that the unemployment rate still is going to be higher than anybody wants it to be. There are more people coming back into the labour force even when new jobs are being created. It keeps the unemployment rate up there. No one that I know is happy about that and we'll all work as hard as we can to do what we can about that, but no question that the unemployment rate is going to decline slowly.
The next slide looks at the medium-term outlook between 1995 and 1997. Obviously, this is looking down the road, but we've put on the slide what we think the outlook is and the consensus average, which is the private sector forecasters and banks and investment companies, as to what they think. It's a consensus of their views.
On real GDP, we are saying 4.3% during that 1995 to 1997 period. The consensus average is a little more than that; normal GDP almost the same; employment, they think it'll be a little higher than we do; unemployment rate, pretty close to being the same as the consensus average; and CPI inflation being the same as well. There will be average of about 124,000 jobs created each year. That's a considerable improvement. The last year that I was looking at was 1988, when there were 173,000 jobs created. So we're not up to that level of job creation, but still, 124,000 certainly indicates an improvement.
The next slide looks at private forecasts and what they think Ontario's going to do, and you'll see that our forecast for Ontario -- this is actually 1994 to 1997 -- is 4.1% growth per year and the consensus forecast is for a little more than that, 4.2%. But the one reason for putting this slide up is to show that Ontario is well placed in comparison with other leading countries, all of which are our competitors. So we are well placed and we should take some encouragement in that.
The next slide -- sometimes I get asked about particular sectors and I don't think you want to spend a lot of time on this -- you can see that on the left-hand side it shows in the clear bar real output and on the black bar employment. You can see how output is growing in every case faster than employment. That's partly because of productivity improvements and so forth, but in a sense that's a competitive advantage even though one doesn't like the fact that employment isn't growing as fast. You can see that the export-intensive sectors are leading the way to the consumer-related sectors and very, very slow growth in the public sector, but I think that reflects our efforts to keep our costs down and to reduce deficits and at the same time to deliver our services more efficiently.
If we could look now at the fiscal picture, which is gradually improving, the number you see there is what we presented last spring. That's where we were headed. We were headed for a $16.7-billion deficit. That was not an exaggerated number, that's where we were headed, and the actions we took on the expenditure control plan, the social contract and the tax increases, get us down. We started out saying it was $9.2 billion. It now looks to be about $9.5 billion and we think that we'll come in right about $9.5 billion at the end of this fiscal year, at the end of March. We are committed to keeping that deficit going down.
The next slide gets more specific, into the revenues and expenditures, and you can see that in the budget plan for this year we plan for $43.9 billion in revenues and there's been an in-year change of about $830 million. There are details on that in a slide that's yet to come.
On the operating expenditures you can see on program spending our current outlook is to come in about $200 million under what was in the budget. Public debt interest stays the same. That would give you the operating deficit when you subtract the revenues and expenditures. We'd planned for $6 billion. It looks like it's going to be about $6.745 billion. Then on to that must be added the capital expenditure. Also not included there, before you ask, is what we call alternative financing or off-budget financing of about $800 million which isn't on there but would be part of our borrowing requirements.
Our deficit at year-end we predict will be around $9.5 billion. We don't have the final Christmas retail sales tax numbers in yet. That'll be in the next little while.
The next slide shows a breakdown of where the major changes on the revenue side are, and you can see that personal income tax is a big chunk and reflected federal government overpayments for 1992 rather than this year. Then you have retail sales tax off about $40 million -- that's on a base of $8 billion; corporations tax down $220 million; employer health tax minus $30 million; tobacco tax minus $70 million from our budget plan, and land transfer tax down $90 million etc. That's where the revenue hits come from and we continue to track those, of course, but we think that's pretty close to what we'll end up with. As I say, we don't have the final RST numbers. As a matter of fact, we don't have the corporate income tax numbers. They're not in yet either. I think they come in in February or March.
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The next slide: There have been some questions on our expenditure control plan. This is the plan that I mentioned earlier in which we had set out to save $4 billion from committed spending this year. Out of that, the biggest chunk was our own operations, $720 million in government. Third Quarter Finances that will be out will show some slippage in that, but basically we're doing all right on it. It's been tough, but the pie there shows where we intend to get the savings of $4 billion.
The next slide deals with the social contract. I was surprised to read in the paper last week that we were not going to achieve savings in our social contract. I look forward to the exchange with the third party, because they must have had some reason for saying that and they must have had some evidence that we weren't going to achieve our $2 billion in savings. So I'll be very interested and look forward to hearing where that came from. We do think that we're going to achieve the $2 billion, almost, and the following chart will show exactly how much we were intending to save.
There have been very few layoffs associated with it. The job security fund is operating with interim guidelines for employers and employees. The public sector commission, the labour productivity commission headed by Dr Warrian, is up and will be fully operational by the end of this month, but they're already doing lots of things. The sector training and adjustment committees are working. Keep in mind that this is a three-year process. It's not a six-month process or a one-year process; it's a three-year process, and we intend to achieve the savings that we set out.
If you go ahead to the next slide, you'll see the social contract savings by sector and how it totals almost $2.1 billion, actually. We've always talked about the $2 billion in savings, but about $2 billion each year for each of the next three years. This year I think we'll probably miss the $2.1 billion by about $100 million, so we'll still be at about the $2-billion level of savings.
The next slide shows where we'll miss, why it won't be the full $2.1 billion. You may recall that there was $100 million retained by Ontario Hydro because of their unique problems. There was $10 million retained by the WCB and their related agencies, and $2 million by the Ontario Housing Corp, which had more to do with the federal-provincial cost-sharing arrangements than anything else.
On the municipal side, we deferred $55 million, because they're on a calendar year versus us on a fiscal year, but we'll pick that up at the end of the three-year period, into the fourth year. Then also, we allowed the municipal electric utilities to retain the $14 million so that they could pass those savings on to their ratepayers.
So if you add all of those up, if you started with $2.1 billion in savings and you end up with almost $200 million off that, you end up with about $1.9 billion. So we'll probably be about $100 million short on the $2 billion in targeted savings, but it will be very, very close to the $2 billion and we see no reason why we will not achieve that this year.
You may want to talk to Dr Warrian later about some of the ways in which we're working on the efficiencies and with the job security fund and so forth, which I think is an important component of the social contract. I know there's been a lot of talk about simply the savings and it being a fiscal initiative, but it's more than that. It has a lot to do with restructuring the public sector, and we are determined to make that happen. We've got three years under the social contract to effect that, and we're working very hard on that now.
If you look at the list that's on the slide, all of the agreements by sectors provide for training and adjustment committees. They will operate sector redeployment registries, so there will be a registry across sectors of people available as restructuring goes on in the public sector. The administration of the job security fund applications will eventually be decentralized to those sector committees. Unions and employers will approve training plans for the employees. Sector committees have been established for all sectors where any layoffs have occurred, which are not very many. The requirements for payouts for UIC top-up from the job security fund include laid-off or on-notice people due to the social contract. There are currently, I understand, and if it's different Dr Warrian will bring you up to speed on it, about 83 job security fund applications, of which 70 have been approved and 13 are awaiting training plans to be eligible for the job security fund.
The next slide shows our commitment to making our government services more efficient and more affordable. The slide shows the spending and operating programs from 1984 right through to 1993-94. You can see the drop to an actual minus number for operating programs. Of course, these are operating programs and do not include interest on the public debt, for example. I know we've worked very hard on it and it is showing results.
As a matter of fact, the next slide isolates two major areas of expenditure growth. One is social assistance, the top chart. Going back from 1981-82, you can see how rapidly social assistance expenditures were growing and how now, despite the recession, still being in it, we're bringing those costs down. On the Ministry of Health operating expenditures, they averaged about 11% all during the 1980s, and we've brought that down to less than 1% last year and almost to zero this year. I can tell you that if you were to isolate the drug benefit plan in here, it would show 18% or 19% growth all through the 1980s. So we've simply had to curtail that kind of growth in those sectors because we couldn't afford it.
If we can move to the 1994-95 fiscal outlook, this year's deficit, as I said earlier, is tracking at $9.5 billion. We remain committed to a steady deficit reduction as the economy recovers. That's harder than it sounds, because revenues are not going up very much even as the economy recovers. So that's been tough. For 1994-95, for example, we anticipate revenue shortfalls of about $1.6 billion for next year over what we had thought they would be. Also, there are going to be some expenditure pressures, and we'll detail those for you too. In the next month, treasury board will be looking at ministry expenditure plans ministry by ministry for the 1994-95 year. We'll try to strike that balance between keeping those expenditures down and at the same time thinking about their impact on jobs and on essential services as well.
The next slide shows the 1994-95 revenue outlook. We had predicted $44 billion and now it'll be $46.5 billion. Currently it's $43.1 billion for 1993-94, so we're off $900 million for 1993-94, and for 1994-95 we're off by that $1.6 billion I mentioned which we originally thought would be our revenues that year. It's largely due to a number of shortfalls. That $1.6 billion, and this isn't on the slide, consists of lower PIT revenues that have already been reflected in overpayments for the 1992 year, and then that gives a lower base for subsequent years. There is $300 million from the lower corporation tax. It'll be operating from a lower base because of the decrease this year. There's $100 million in retail sales tax revenue because of the lower economic outlook numbers. There's $100 million because of lower EPF revisions, not because of an arbitrary reduction but simply because of the lower population numbers for Ontario. There's a $100-million shortfall from what we call our non-tax revenues. We think they'll be $100 million lower, and $200 million from other tax and non-tax revenues, largely because of the slower economic recovery. So that's where next year the numbers are still going to be very difficult. That's the revenue pressures next year.
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The next slide shows the expenditure pressures next year. Under our expenditure control plan, we put in place some labour adjustment policies and a redeployment fund. There's going to be a pressure of about $95 million there. We had originally put in our plan some cost-sharing for the Ontario drug benefit. We changed our minds on that and decided not to do it, but that cost us $100 million from what we had built into our revenues for 1994-95. Social assistance costs we think will be $100 million higher than we'd anticipated and the same with the student assistance program and legal aid, just from a higher client base there. So those are the pressures on the expenditure side.
Turning to some of the problems with the federal government and its transfers, this you will know has been a continuing source of considerable aggravation and fiscal pain for the province. We will lose this year about $4.4 billion as a result of the arbitrary restrictions that the federal government imposed on us. That's from the EPF and from what we call the cap on CAP. Right now Ontario receives about 29% of the cost of social assistance because of the cap on CAP. Other provinces receive 50%. That alone will cost us about $1.7 billion this year. The limits to EPF growth will cost us about $2.8 billion this year alone. Those transfers now cover about 31% of our spending as compared to 52% in 1979-80.
I would remind members that when many of these programs were put in place, they were put in place with the understanding and the assumption that there was a partnership with the federal government in the cost of them. That has been changed. I often wonder to what extent many of those programs would even have been initiated if it hadn't been on that assumption that the federal government was going to pay 50%. It is no longer doing so and we end up carrying the difference.
The next slide shows the limits on the transfers to the province that I referred to. If they were not in place, our deficit this year would be not much more than half of what it is now. It would be less the $4.4 billion. It would be $5.1 billion instead of $9.5 billion. That's the kind of problem that we're facing.
We have a federal-provincial finance meeting starting tomorrow night and running through on Friday, and that's obviously one of the things that we'll be talking about. I'll get to that.
There are some slides on the underground economy. In the interests of time, unless members really want to see them now, I was going to skip those. They're in your package, so we're not trying to keep them from you, but if you've no objections, we'll go ahead to the tax fairness section. Is that all right? Okay.
Improving tax fairness: Members will know that the Fair Tax Commission has reported. We are looking at that report and I'm sure many of you are as well. We have indicated already that we have no plans for any significant net new taxes in 1994-95, but that doesn't mean there won't be some rejigging. We haven't made decisions for 1994-95 yet, even on rejigging of existing taxes. I'd appreciate your advice in that regard.
We have worked hard on the tax system to make it fairer. There have been substantial tax increases, of course there have, but we've really tried to make them progressive in nature. That's why we've relied a lot on the income tax system and enriching the Ontario tax reduction program for low-income taxpayers. The seniors' tax grants were replaced with refundable credits; the employer health tax was extended to self-employed; we've introduced a corporate minimum tax; we've reduced some corporate tax expenditures and closed some loopholes; and of course our very first bill that we introduced was to stop the retail sales tax from being applied on the GST as well. That saved the taxpayers of this province about $500 million.
The Fair Tax Commission recommendations: I don't think we need to go through them all, but I'm very proud of that report. It's the first really comprehensive look at Ontario's tax regime in 25 years, since the Smith report 25 years ago. It brought together an enormous number of people who had expertise but also ordinary folk out there who had a say in the tax commission's deliberations. They held hearings all across the province. They have brought forward 135 recommendations that cover a very broad array of tax mixes.
Some of the things they've recommended are of particular interest to us. One of the centrepieces was the property tax, changing that to a different mix, such as the income tax system, and we're looking at that. You will set your own agenda, I appreciate, but any work you do at looking at the Fair Tax Commission and reporting on it would be very, very much appreciated. We'd be very interested in any work you do if you do decide to look at the Fair Tax Commission.
They do talk about that, of course. They recommend harmonization with the RST and the GST in the interest of efficiency. They recommend more emphasis on environmental taxes. They want a fairer, more open tax policy process -- I'll address the process at the end of the slides -- and also to abolish the $100,000 general lifetime exemption for capital gains.
I feel very strongly about that. I know we have our own work to do on the tax system, so I'm not suggesting that only the federal government has to respond to the Fair Tax Commission, but certainly one of the things that I will be suggesting and encouraging the federal Minister of Finance to do is to abolish that in the interest of fairness, and quite frankly revenue, to abolish the $100,000 exemption on capital gains and to look seriously at a national wealth tax as well.
Anyway, we are looking at the Fair Tax Commission. I think everyone understands the system couldn't digest all the recommendations in that report in one budget, and I don't think you would either expect or want us to, but we are looking at it.
The last part of the presentation deals with the prebudget consultation. We do want a more inclusive and more open consultation process. Each year we've changed it a bit, and this year we'll be changing it again. We're going to have eight Toronto-based forums prebudget, plus the session with the Premier's councils and the Ontario business advisory councils, and we're going to travel to four regional centres -- Kingston, Windsor, Hamilton and Sudbury -- to have consultations there to get a perspective that gets outside southern Ontario. All of the forums this year will be open to the media to make them more open. That has not been the case in the past. It's all going to start on February 8 and will end in mid-March. So we are trying to make it a more open process.
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We're going to concentrate in the consultations on job creation and the economy, on the Fair Tax Commission report itself and on preserving social services, and, as I said, we're going to make it more open. The Fair Tax Commission had a lot to say about making the budget process more open, and we plan to do that in as open a way as possible.
To do that involves a couple of things. One, budget secrecy will now be more like the normal cabinet confidentiality process, where you do have to have some confidentiality in the system, and I think members appreciate that, but we believe leaks of interim material or draft material should not be considered budget secrecy. If we're going to make it more open, well, we can't have it both ways. We're going to make it more open, and I know that, if that's the case, you would not demand my resignation if there's a leak of an interim document, that you would understand that that's part of the price you pay for making the process more open.
Mr W. Donald Cousens (Markham): Let the whole government quit.
Hon Mr Laughren: The member for Markham is off and running.
We are quite serious about making it more open. We're not going to have the Ontario Provincial Police at the Frost complex, the Finance complex, where they've been for ever. Every budget I can ever remember has had the OPP there, since before we formed the government, but we're going to only have them there at the very final stages when we've got a final document and leakage of that could potentially allow someone to have a financial gain. I don't think any of us want that. We are trying to get it to a point where there's really tight security at the very end when we're dealing with the final document. We think that will save about $200,000 a year on security. I think that's an important signal to send as well. We are determined to make that happen. I suspect there will be some vibes around it, but that's okay. I think we're better off doing it, that everybody will be better off for it.
In conclusion, we do want to indicate to members that the economy is continuing to strengthen and that jobs are being created and that the province is well positioned. The deficit is under control. It's still a tough, tough problem to keep that deficit going down while maintaining essential services. That's not easy. It would be easy if you weren't so concerned about the essential services, but I think most of us are.
There is an opportunity now for a new partnership with the federal government. We want to make it work. We sent signals as early as possible that there are some irritants that must be removed but that we want to work with the federal government.
Finally, we're heading into a time when we want to have a more open pre-budget process so that we talk with people about some of our potential decisions and people can respond to them.
I didn't time it when I started. I think we should certainly go to 11:30, so I'm in your hands, Mr Chair.
The Chair: Thank you very much for allowing yourself to remain for another 25 minutes. We'll divide the time evenly and start with the Liberal caucus.
Mr Phillips: I appreciate the chance to get at the budget process. I'll start by saying I hope we'll have a chance to discuss our detailed questions. I found the report didn't touch on a lot of the questions we had, and I hope we get into it with the officials and get written responses.
My own overview comment on your report is that it's a little bit different from your summary comment. I regard the presentation, what we've seen to date, to be somewhat bleak and somewhat discouraging as opposed to the optimism you have. I'll give you the two things that bother me the most in the presentation.
One is that this budget will bring you into the fifth year of the Rae government. As I look at the job numbers in the province, after all your job programs and all the activity, the number of people out of work in the province will still be virtually unchanged and at essentially record levels in 1994. As I see the numbers, there will be at least 560,000 people out of work. As you pointed out last year, there's another 150,000 or more discouraged workers who aren't even in those numbers. As I say, after all this activity and all the economic "growth" and taking into account all your programs for 1994, as I understand your numbers, we will still see essentially a record number of people out of work, with the reported unemployment rate running above 10% and the real unemployment rate running above 13%.
Have I interpreted your numbers properly, that we are looking at roughly 560,000 people still being out of work and another perhaps 150,000 people who aren't even in those numbers being out of work? Is that all there is in 1994 for the unemployed?
Hon Mr Laughren: I noticed, when I was going over the numbers, that it does give one pause for thought when you see those numbers. I was looking at the federal numbers as well. I don't mean this as a partisan shot, certainly not at you, but when the federal election was going on, the Tory leader, Ms Campbell, said, "This is what the unemployment rate's going to be," and she was really clobbered by the present government in Ottawa for being so pessimistic. Now I notice this week that Mr Martin is confirming those numbers, so I'm not sure that saying the numbers are not accurate is a very honest response on my part. The private sector forecasters are saying that those are the unemployment numbers, the best we can come up with, the most accurate. It's always easy, I suppose, to fudge numbers, but that's not our intention. Those numbers are as straight as we can give you.
There is only so much a provincial government can do; I'm sure you can appreciate that. But it's one reason we've kept our capital spending up to the levels we've kept it. It would have been very easy to reduce capital expenditures during these tough times, but one of the main reasons we've kept the capital spending up is because of the unemployment rate and also because it keeps the infrastructure tuned up as best we can for when the recovery occurs, as it's starting to do now.
We're doing a lot, we're doing what we can, but I'm not going to pretend to you that a province like Ontario can turn this around.
Mr Phillips: I understand that.
Hon Mr Laughren: Okay. Finally, we have -- and I can give you the precise numbers -- created about 300,000 jobs in the last three years. That's a lot for a province in the middle of a recession.
Mr Phillips: I just looked at those numbers yesterday, and I would say to you that capital expenditure this year is $300 million lower than it was two years ago. I'm just saying I don't think we should play politics with people.
Hon Mr Laughren: That's right.
Mr Phillips: The second thing of big concern to me is the very disturbing news on the revenue side we got today. To me, looking now at a revenue shortfall of $1.6 billion, it throws off a huge signal. Many people, myself included, have been looking at the medium-term fiscal outlook, and if 1994-95 is slipping by $1.6 billion, that puts into question your whole medium-term fiscal outlook. That's the second most disturbing thing I've heard here today, that the revenue is in serious jeopardy for 1994-95. We're talking major dollars here. My own cursory interpretation of it is that there's a distinct possibility we're heading for our fourth straight year of a roughly $10-billion deficit if those are the revenue numbers you're predicting now.
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My question is one I have asked before in a different forum: What is causing this revenue shortfall? You've taken taxes up. That's not a partisan statement, to use your language; that's just a statement of fact. You've taken taxes up by, I think, roughly $3 billion over the last three years. But as I try to interpret these numbers, rather than tax revenue going up over those three years, tax revenues actually dropped. I hope you can give us an explanation or that we'll have a chance to discuss what has caused that. That's not a new question for me, but that's the second most disturbing thing.
The most disturbing thing for me is the employment situation, which I don't take any comfort in. The second is that I think we have a major long-term revenue problem here that we need an explanation for.
Hon Mr Laughren: The $1.6 billion is the number to which I think you're specifically addressing your comments. Half of that is on the PIT side. That's $800 million. That $800 million is split between repayments for the 1992 year. Now, it doesn't give me much comfort in terms of 1994-95, but to explain where it's coming from, it's not coming from 1994-95; it's because of overpayments for 1992. The other half is from a lower base from which we then function on income tax for subsequent years. So half of that $1.6 billion is on the PIT side, going back to 1992, and then subsequent years with that new base.
Mr Phillips: But is it fair to say, Minister, that tax revenue in 1994-95 will actually be lower than tax revenue was in 1990-91, that after all of this activity with increased taxes, we're actually generating less revenue with taxes than we did in 1990-91?
Hon Mr Laughren: If you're off, it's not by much; I think that's probably pretty accurate. Another way of looking at it, Mr Phillips, is that if we had not done those tax increases -- I might get some quarrel from some of you about this -- it would truly be fanciful to say that revenues would have gone up or would have stayed the same if we hadn't implemented any of those tax increases. I don't think objective-minded people would make that case. There's no question that the revenues would be lower than they are now if we hadn't brought in those tax increases. I'm sure you understand that.
The depth of this recession has been truly profound. I'm not sure it's sunk in on everybody how profound it's been. I can tell you that the main reason for it is the economic recession. That's what's hammered us on our revenues. Look at the unemployment numbers to which you refer. Those are people who in many cases were making substantial contributions to the tax system, not just on the income side but on the retail sales tax side and so forth. There's no question that revenues have been the number one problem, along with unemployment and so forth; there are other problems, but on the fiscal side.
While you may not approve of all our efforts on the expenditure side, you can see by the charts that we have worked extremely hard and had some accomplishments on the expenditure control side. It's much harder to crank up revenues than it is to control them, in-year particularly. When your revenues drop, your revenues drop.
Mr Monte Kwinter (Wilson Heights): Mr Minister, I find it difficult to accept your final summary on page 4, your last slide where you say the deficit is under control and on a gradual downward track. In your first budget of 1990, where you showed a five-year projection of where the deficit would be, you went from a high-water mark of $9.6 billion, I think it was, which you didn't achieve, and it was supposed to keep reducing quite dramatically until 1995. In fact, what has happened is that it's gone the opposite way. Every year the deficit has increased over the previous year, and you've taken the debt of this province, right now in the current term, and doubled it in that time. Your projection, particularly with your off-book projections, is that it's going to be over $10 billion. How can you say it's under control and is gradually reducing when the facts are that it's just the opposite?
Hon Mr Laughren: That's not quite fair. This year our deficit will be lower than it was last year, next year it will be lower than this year, and the year after that it will be lower again. There's nothing magical about it.
I shudder to think of what would have been the case if we hadn't engaged in the expenditure control plan and the social contract and the tax increases. It really would have been -- and it's not a puffed-up number -- $16 billion, $17 billion. That's what I mean when I say we've got that kind of growth under control on the deficit and have started it now on a downward slope and we're going to keep on that downward slope. We simply can't allow it to do otherwise.
It's one thing to have increasing deficits as you slip into and experience a recession. It's another thing to have increasing deficits as you come out of the recession through a recovery. Even though it's going to be a slow recovery with high unemployment, you still have to get those deficits on a downward slope. I have no quarrel with you on that.
I look at what happened at the federal level with the deficit as an example of how tough it is. Once again, not as a political comment, but look what happened to the deficit at the federal level: It went through the roof. We at least have got it more under control. We're still continuing to work at it, but it's been tough.
Mr Harris: Thank you very much, Mr Minister. I appreciate the fact that you're here a little longer than you'd originally planned.
Let me also comment on the regional forums and increasing the openness. A surprise perhaps, coming from the opposition politicians: I agree with you. I think the budget secrecy is a sham and that it far outweighs any sense of trying to trick somebody into having to resign because of this, this or that. The openness and demystifying the process is something I've pushed for and promoted since New Directions in 1991. We are very supportive of it. We may call for your resignation for other reasons --
Hon Mr Laughren: You already have.
Mr Harris: We already have, which you appreciate and understand.
Hon Mr Laughren: I understand it. I don't appreciate it.
Mr Harris: That's right. I would hope some of this $200,000 in savings isn't used to hire the OPP to investigate who came out with the leaks. Anyway, that will be another matter for another day.
Hon Mr Laughren: That's Gerry Phillips's question.
Mr Harris: We're delighted that the forums this year will be open to the media; in fact, I hope they'll be open to the committee members. I recall last year. Not only should the committee members have been having the forums, but they were told they weren't able to go to them. They were disinvited, as were the media. I think this is a significant change. It doesn't go as far as I think it should. I don't know what the purpose of the committee is, quite frankly. I think the committee should be hosting these forums and I think even more information should be shared with those who are coming to the forums. Perhaps we're all making progress here, that even the committee members, I assume, will be able to go to these forums and that they'll be around the province now that the media can go as well. I just wanted to congratulate you on those two moves. I think they're good moves.
Hon Mr Laughren: But now?
Mr Harris: Yes, now I have a few specific questions. Your revenue projection for 1994-95 is $46.5 billion. You then go on to talk about the transfers from the feds that you're concerned about. Nowhere do you give us the figures that they transferred and the increases year over year. My understanding is that in 1991-92 the feds transferred you substantially more money than they did the year before, also in 1992-93.
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I understand your concerns about the 50% funding. You feel they unilaterally didn't live up to that commitment, and they feel you unilaterally changed the program spending without consulting them, and we pointed the fingers back and forth. You talk about this new sense of cooperation, though, and we all hope this is going to come about. We wish Mr Martin and the federal government well over the next period of time.
In your $46.5 billion of revenue, how much of an increase do you expect from Paul Martin this year?
Hon Mr Laughren: Just as a minor correction, you're right that we budgeted revenues at $46.5 billion. Now we're saying that our revenues are going to be off by $1.6 billion, which takes us down to $44.9 billion.
Mr Harris: I'm sorry, $44.9 billion is the new figure.
Hon Mr Laughren: Yes. Your question still remains, though. As a matter of fact, that's a question I wish I could answer.
Mr Harris: How much is in there now? You've obviously estimated a figure. Do you project that the feds will give you the same money, less money or more money than last year in all the transfers?
Mr Jay Kaufman: We're expecting, obviously, under CAP, an increase. The current cap is a 5% growth on this year's base. Under the EPF, it's frozen on a per capita basis, so if we see some increase in the population we would expect to get from that some increase.
Mr Harris: We're obviously going to find out more. I think Mr Martin has said, "Don't expect any increase."
Mr Kaufman: We'll get you the specific numbers; that's not a problem.
Mr Harris: I think that will be significant, and that will unfold over the next period of time.
Second, I want to get into the social contract part, but let me talk about jobs. I too consider these figures very bleak: the job projections, the deficit projections, the revenue projections; all indicators of economic activity.
You repeated something today that I found strange: that you've created 300,000 jobs with your interventions. The Premier said that yesterday and the media said: "We think you're fudging those numbers, pulling them out of the air. Where do you get those from, Premier?"
Your Finance officials finally released something to the media that shows the number of jobs being created, this sheet that talks about anti-recession, base capital, jobs capital, 1991-92, 1992-93, 1993-94. Cumulatively, it shows 300,000 jobs having been created as a result of your expenditures. It doesn't take into account all the jobs that were lost, that net, over many of those years, we lost jobs, but it says there were 300,000 created. To get those 300,000, your figures show that you only spent $12 billion, or $40,000 a job.
Finance officials also admitted to the media yesterday that these were basically one-year jobs and that at the end of the year they disappeared. Do you think spending $40,000 per job is a good government expenditure to create part-time jobs that disappear at the end of that year? That's what your Finance officials have told us, the information the media got yesterday, to somehow justify this wild claim by the Premier that "We created 300,000 jobs," and you've repeated it today.
Hon Mr Laughren: Yes, and I'll re-repeat it.
Mr Harris: So the $12 billion was well spent for these one-term jobs?
Hon Mr Laughren: Wait a minute now. You're making an assumption about them being all one-year jobs, which is not the case.
Mr Harris: That's what your officials told the media yesterday, that most of them were one-year jobs.
Hon Mr Laughren: I suppose you could make the argument that building a house creates a certain number of jobs for one year, to build a house or whatever.
Mr Harris: Exactly.
Hon Mr Laughren: But if you keep on building houses, those jobs don't all end in one year either.
Mr Harris: So you're going to keep spending the $12 billion year after year to create these jobs and keep them going? Your figures show these jobs, at $12 billion to support them, are $40,000 a job. Do you plan to keep spending $40,000 every year to keep these jobs going and roll them over year after year?
Hon Mr Laughren: We're going to keep our capital expenditures up at a level that supports jobs and creates jobs. I think you'd be the very first one to be critical if we weren't doing it. You may quarrel with some of these programs and say we should be doing something else, but I haven't heard anybody say that we shouldn't be spending the amount we're spending on capital. If you've got some suggestions that would create different kinds of jobs or that would build different kinds of homes, I'd be interested in hearing them, but I can tell you that without this kind of expenditure the unemployment rate would be higher, social assistance rates would be higher and revenues would be lower. You can't have it both ways.
Mr Harris: I guess it's the numbers. I clearly believe that if you hadn't taxed the $12 billion and had resigned, hundreds of thousands more jobs would have been created by the private sector in this province, but we will have a disagreement on that. I don't think it was an efficient use of taxpayers' dollars, that the taxes required destroyed far more investment in jobs than these temporary ones you got.
Let me go to the numbers on the social contract. You project there's going to be $2 billion in saving, yet you don't give us any numbers. We have no indication of what was spent last year, how much was spent this year, and the saving. What we think you're going to do, Treasurer, is that after the money has all been spent you'll say: "Well, we would have spent $2 billion more and we didn't, so there you are. Look at the saving." This is what the auditor fears. This is what accountants fear.
I have a letter from an accountant who was very concerned about accounting and what it meant for accountants who had contracts with public agencies. He says he contacted the Institute of Chartered Accountants of Ontario, concerned over the possible latent audit responsibilities arising from the social contract. The institute has looked into this, contacted the Ministry of Municipal Affairs, the Ministry of Health, the social contract secretariat. All these bodies have advised the institute that there'll be no follow-up on compliance with plans submitted by the municipalities or other government-related agencies. Clearly, you don't have to worry out there, all you auditors who are going to be auditing the books --
The Chair: Mr Harris, I have to interrupt you to tell you your time's expired, but if Mr Laughren would like to respond to what you've said so far --
Mr Harris: Can you give us some assurance that there will be any kind of audit that you actually saved anything or that in fact there was no saving? We have no way of knowing.
Hon Mr Laughren: You divided your question into two sections, one dealing with our direct employees, the Ontario public service, the roughly 90,000 people who work for the Ontario government. I think you would appreciate where the saving is achieved there, through unpaid days off.
Mr Harris: When the Provincial Auditor verifies it, I'll agree.
Hon Mr Laughren: Fine. He doesn't wait for us to tell him what to do -- maybe you've noticed -- so he will do that.
Mr Harris: The bulk of the $2 billion is outside of that.
Hon Mr Laughren: That's right. That's why I said I'll divide it into two sections. One is our own employees, for whom unpaid leave and other savings are being received; that comes to over $200 million in each of the next three years.
In the broader public sector, as we call it, transfers are reduced to them. When we reduce their transfers, that's a saving, and they effect those savings through compensation reduction. Quite frankly, once we've reduced their transfer, and there are certain rules under the Social Contract Act, then the saving is already achieved. Once the transfers are reduced, the saving is realized. It's done. It's a done deal then.
With our own employees it's an ongoing process of trying to work out the combination of days off and other savings as indicated in the Social Contract Act. I don't think it's a problem, but we invite anybody who wants to audit it. The Provincial Auditor will do it if he wants; we don't tell him what to do.
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Mr Jamison: Just a comment and then a question. Both Mr Phillips and Mr Harris have indicated that they're not pleased with the projections from here, but on page 13 of the report you've given, it certainly shows Ontario well ahead of most industrialized countries in our projections on GDP. If they consider that to be bleak, I wonder what they would consider those other countries to be, given the same time period.
The question I have really deals with the transfer payment issue. We've heard a lot about this issue, and I find it interesting that $4.4 billion is the figure this year in the continuing reductions since 1982. It would be rather handy at this point in time.
The concern I have is that we stand at 29%. I believe there are three provinces affected with the cap on CAP and so forth. But as an example, the province next door to us, Quebec, with a similar economy, is still receiving 50-cent dollars. They're experiencing deficit problems, as most provinces are. The impact of that continual reduction in percentage is significant to this province, because this province has been hardest hit through this recession because of our industrial base, as reorganization in manufacturing has taken place and subsidiary plants have been taken away as much as possible through the climate; free trade, whatever. My understanding is that you said it's one half of the deficit figure. That's very significant.
I understand that you're going to be meeting in the next day or so with your counterparts federally and provincially. The concern is that the federal government has indicated somewhat that it's looking at keeping the transfer payment the same. In my understanding, that would again reduce the percentage we'd receive, ultimately, and continue that problem. I'd like you to make a comment on what impact that has on those shared program costs in social services, health and education, which I think you mentioned, and I agree, should be a real cost-share situation.
Hon Mr Laughren: If you look at the provinces that share our problem, Alberta and British Columbia, on the cap on CAP, Ontario is in a league of its own in terms of the impact on us of that action by the federal government. I indicate on a slide that that's costing us about $1.7 billion this year.
I stand to be corrected on this by officials who know more than I on these specifics, but I think both BC and Alberta are close to receiving 50-cent dollars on those programs, the cap on CAP. It hasn't had the impact on them that it's had on us because of our very dramatic increase in social assistance spending.
I remember thinking about what would happen in Quebec if the same thing happened. If it dropped to 29% of social assistance, a little over $1 billion -- and once again I stand to be corrected -- would be the impact on Quebec if the same thing applied to it. I'm not wishing this on Quebec, by any stretch of the imagination, but I just put it in context that that's the kind of dollars we're talking about.
The federal government knows that's a major irritant with us. I think it's also a matter of principle as well as a matter of dollars.
Mr Wayne Lessard (Windsor-Walkerville): Thank you very much for your presentation and thank you as well for putting Windsor on your schedule of pre-budget forums. It's going to give an opportunity to my constituents to play a role in the budget-making process.
In your presentation, you referred to the work of the Fair Tax Commission. One of the recommendations they had was to place greater reliance on the use of environmental taxation policy in the protection of Ontario's lakes and rivers from toxic pollution and also to improve air quality and reduce waste. You didn't refer to that in your presentation. I wondered what your feelings were with respect to the use of taxation policy playing a greater role in environmental protection and sustainability.
Hon Mr Laughren: That's an interesting question. The Fair Tax Commission does put a fair amount of emphasis on that. I met yesterday afternoon with the Ontario Round Table on the Environment and Economy, and it is looking at the Fair Tax Commission's recommendations. They haven't just automatically endorsed them; they're looking at them with quite a critical eye and are now working on preparing a report, which they're going to send to me as well, on what they think should be done on environmental taxes, because there are some concerns about environmental taxes. One which I share is on jobs. I've never felt that action on the environment costs jobs in the macro sense, but it can in the micro sense, and sometimes quite dramatically. That's one consideration to think about when we take action on environmental taxes.
Second is the whole principle of neutrality in environmental taxes. The environmental movement feels very strongly that it doesn't want to be seen as a cash cow for the treasury. They say, "You should be imposing environmental taxes in order to modify or change behaviour for the environmental good," so they're very anxious that we not simply increase it under the guise of an environmental tax when really it's just to get revenue. They're worried about that.
Third, they were concerned about earmarking, which surprised me. They said to be careful on earmarking, because it can start out being the right thing, but down the road, when it has modified behaviour, what do you then do with it? Do you just keep the money coming in, or do you move on to something else? I think they're approaching it in a very thoughtful way and are going to be coming back with some comments.
I'm quite open and favourable to the idea of using the tax system for environmental purposes, given all of those cautions, because I've seen examples when it doesn't have legitimacy. Quite frankly, that was part of the problem with the tire tax. In the minds of the public, it didn't have legitimacy; it was simply used to increase revenues. That's why we cancelled it. That was an example of why when we do environmental taxes, we have to keep all those things in mind and try -- and I emphasize the word "try" -- to build a consensus among the stakeholders, if that's the right term: environmentalists and the people who have jobs who are going to be affected and us keeping an eye on the revenues.
Those are the things that I think about when I sit down and talk and think about environmental taxes.
The Chair: Mr Laughren, on behalf of the committee, I'd like to thank you for making your presentation this morning and being so generous as to allow each caucus a couple of extra minutes.
Hon Mr Laughren: Thank you very much. I do look forward to the deliberations of the committee. I followed your work on the underground economy. You haven't completed your final report yet, I understand, but I do look forward to that, because that's something that's troubling to all of us. We didn't get into it today; there wasn't time. But we are concerned about that and are working with the federal government and Quebec as well. I really do want to see what you produce. Finally, if you decide to do something on the Fair Tax Commission, I'd be very anxious in seeing what you do.
The Chair: The committee is not adjourned yet. Staff will remain to answer questions of committee members, and I know there are two committee members who wanted to ask questions. Unfortunately, while the Finance minister was here, he did not have time.
Mrs Elinor Caplan (Oriole): Actually, I too wanted to follow along on the line of job creation. I understand what the Treasurer is saying, and I look at his projections. Every day I meet people in my constituency office and I don't know what to tell them. There are 560,000 people in the province who are looking for work and another 150,000 who have stopped looking and are in despair. Your projections don't offer them any hope over the next little while. I'd point out to the Treasurer that the level of capital expenditure in the province has remained constant at around a $3-billion base since the mid-1980s, so the pride you take in the number of jobs your government has created really is a historical pattern that has been established over numbers of years and doesn't offer much hope to those people who are looking to re-enter the workforce.
I simply ask, what do you say to the 560,000 people who want to work and don't find any hope offered to them by what you've had to say to the committee today?
Hon Mr Laughren: Keep in mind that we are predicting 124,000 jobs per year in the next number of years -- not for 1994; 88,000 in 1994, but then increasing in subsequent years. While it would be nice to do a lot more, I think you'd be the first one to admit that the province can only do so much. We can't employ 500,000 more people in the province. I think you understand that.
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Mrs Caplan: There's also only one taxpayer.
Hon Mr Laughren: Exactly.
Mrs Caplan: I understand that you're looking to the federal government for more money, but it's going to the pocket of the same taxpayer also. Realistically, what do you say to those people who want to work, who are looking for work, and you're not creating the kind of climate where the private sector is coming to Ontario to invest? Nobody expects the government to do it all itself.
Hon Mr Laughren: A lot of the things we've done have been working with the private sector, encouraging the private sector, working in partnership with it. There's lots of evidence of this, lots of it, and I can put it up on the screen. That's delivered: A lot of the things we've done have leveraged a lot of private sector jobs.
The other thing, which I didn't spend a lot of time on today, is the importance of training and retraining and education, that puts people who are able to take advantage of that in a position that as the recovery occurs, they'll be better placed than they would otherwise be.
So I don't despair. I don't like those levels of unemployment. Nobody does. But for us to think that we can give you numbers that are wildly different from what everybody else is predicting -- the federal government, private forecasters, our own folks -- wouldn't be realistic. And as you say, simply taking tax dollars and pouring --
Mrs Caplan: Not the answer.
Hon Mr Laughren: That's not the answer either. There's a balance there. All I can indicate is that I think we're striking the best balance we can. Heaven knows, our deficit is high enough; it's higher than I'd like it to be. But to be even more draconian by slashing more jobs and more expenditures, particularly on the capital side, I don't think is the answer.
Mrs Caplan: I'd just point out to the Treasurer as he leaves that your operating deficit is double what you said was acceptable in your deficit reduction plan in 1991. Couple that with the number of people who want to work and are looking for jobs, and perhaps it was the mistakes made in that first budget of 1991 that have contributed to the aggravated situation today.
Hon Mr Laughren: Well --
Mrs Caplan: I understand, but there is an opportunity for you to say, "You know, we made some mistakes."
Hon Mr Laughren: Your leader was the one who was out there saying we should have slashed expenditures this year by $4 billion more than we did: $4 billion. Do you know how many jobs that would be? That would be between 40,000 and 50,000 jobs at least, in our estimation. So when you talk to me about us offering hope and not creating enough jobs, I would go back and talk to your caucus, Mrs Caplan, about what it is they would have done if they'd had their way, or at least if your leader had had her way, and cut spending by $4 billion more. There would have been at least 40,000 or 50,000 more people unemployed out there than there are today.
Mrs Caplan: In fact, with respect, Treasurer, your tax increases, which didn't result in any increased revenue, took 40,000 to 50,000 jobs out of the economy.
Hon Mr Laughren: That's simply not the case.
Mrs Caplan: We can debate it.
The Chair: Thank you again, Mr Laughren.
Hon Mr Laughren: Thank you very much.
Mr Cousens: You should come back for some more fun.
Mr David Turnbull (York Mills): I was hoping that maybe I could get the minister to answer this, but I will ask the officials. Being mindful of the fact that the federal government ran on a platform of getting rid of GST, its suggestion was that one of the possibilities would be a national sales tax. They have indicated that there will be no reduction in the amount of revenue they would gather, that they couldn't afford a reduction in revenue.
If you go to a national sales tax, if you were to take the money which has been distributed across the goods and services areas and move that into a sales tax, it would infer an increase in the tax which would be paid in retail premises. I am concerned that the implication of that might be to further stimulate the move for people to cross-border shop. I wonder if you could comment on that. I realize that these are ongoing negotiations with the federal government.
Mr Kaufman: Just on the last point, there are no negotiations at this juncture with the federal government on the GST. They've indicated in the throne speech, as you know, a desire to change the tax. We're really waiting on them to give us some indication of where they want to go. Perhaps at our finance ministers' meeting this week we'll get a better indication.
What they've said to date is that they plan to move fairly quickly on this issue, hold parliamentary hearings over a four- to five-month period and then come up with some specific recommendations which we'll all have to look at at that point in time. It's not at all clear what the federal plan is with respect to a national sales tax.
Mr Turnbull: If it were moved to a national sales tax, do you agree that would potentially have some dangerous side-effects for our retail sector?
Mr Kaufman: Our officials have certainly recognized, as we've looked at the growth of the underground economy, that the introduction of the GST seems to have had an impact on the growth of the underground economy. Obviously, if that's true, then one has to be quite cautious about what one does in terms of the introduction of a national sales tax. As I said before, we'll have to see what the federal government is proposing and the merits of that, and look at it at that point in time.
Mr Sutherland: I just wanted to come back to some of the issues Mr Harris raised, that we're spending $40,000 a job in terms of job creation. When I look at the examples in your presentation, the amount spent at Ford and Chrysler, and work that out and work out the amounts for Mitel, Inglis and Dupont, both average around $11,000.
The other factor is, when you're presenting these two examples, for example, the first one at Ford and Chrysler, that's only the direct jobs at the Ford and Chrysler assembly plants. That doesn't take into account any spinoff jobs created by auto parts suppliers.
Mr Kaufman: I'll ask Steve to answer the last part of your question, but on the first part, my understanding about the $40,000 per job related directly to construction jobs and not to --
Mr Sutherland: But you can't just take the number of jobs, the amount spent, and do a simple division and say that's how much you're spending per job, without taking into account any of the suppliers, the other jobs created by the suppliers of the products for those homes etc.
Mrs Caplan: That's doesn't lower the cost of creating that job.
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Mr Steve Dorey: I'm Steve Dorey, the acting assistant deputy minister of the office of economic policy. I think what was done here was simply, what is the economic impact of the programs that government has in place primarily designed to create jobs? Obviously, if you're looking at capital construction you're creating more than jobs. You're creating schools and hospitals and roads and so on. The impact calculates out at about $40,000 a job, but obviously you get much more out of that than simply the jobs. You get the goods and services and capital goods that are produced in the process. These calculations do take account of the second-round effects.
Mrs Caplan: Say that again? They do take account of the what?
Mr Dorey: They do take account of the secondary effects, the indirect effects, of the moneys.
The Chair: Surely committee members have many questions they'd like to ask the officials of the Finance ministry, and we have 10 minutes left this morning. We will of course be meeting this afternoon for an extended period. Mr Kwinter?
Mr Kwinter: Take a look at page 11 of the presentation I have; I don't know what slide number it was. One of my concerns is that every year at this time we have the treasury officials appear before this committee and we have officials from the private sector -- the banks, the various financial institutions -- to give us their projections of what the real gross domestic product is going to be and the nominal gross domestic product, and the government invariably is at the high side of the numbers. Of course, that is reflected in their budget, because if they expect certain amounts of money it makes their deficits less, but invariably, every year, they're off. Certainly in the last four years, every year, and even at this time, when you're about 12 weeks away from a budget, they're off. The Treasurer will come in and say the deficit is going to be $9.5 billion as of now, but when the budget comes in it'll be $10.6 billion or something, and all that happens in this 12-week period.
My question is, if you're going to be making projections that affect the way your budget looks, because your revenues are going to determine what your expenditure differential is going to be and all of these things, why would you not, if anything, be on the small-c conservative side and come up with numbers to say, "This is the worst-case scenario," and let us budget to that number so that in the best-case scenario you get a chance to reduce the debt and also the deficit, as opposed to the other way around?
Take a look at the projections. I referred this to the Treasurer. Every year, the projection was that the deficit is going to come down but every year the deficit has been going up. To give you an example, in 1991-92 the consolidated deficit was projected at $9.7 billion, which was understated. In 1992-93 it was supposed to be $8.9 billion, which was understated. In 1993-94 it was supposed to be $8.4 billion, which was understated. In 1994-95, $7.8 billion. In effect, every year it showed it coming down. The reality is that every year it goes up.
The thing that disturbs me the most is that in 1991 we had demonstrations outside this building because people were concerned about the projected $9.6-billion or $9.7-billion deficit, and now it's accepted as that norm: "Hey, we're doing great; we've kept our deficit at $10 billion. I mean, what do you want? That's pretty good."
Surely, if that is going to be built into the system, that for the foreseeable future the normal deficit is going to be $10 billion and that is the target, "Let's make sure we keep it under that number because then it's acceptable," then I think we have a problem.
Mr Kaufman: I have a number of comments on that. First of all, in defence of forecasters, and our forecasters in particular, everybody in the world has been wrong about the way this global economy would perform over the last period of time. When you go back to 1990-91 and look at the way the economic situation in the country was being talked about at that point in time, everyone expected a relatively mild recession and a relatively short recession. That has not occurred that way. We've had a profound change in the economy, particularly a profound change in Ontario. The combination of high interest, the high dollar and the rest of the story, which you know about, has created a very unique situation in this province, and it has made forecasting in general much more difficult.
I would also add that, from Ontario's position, we're highly dependent for a large part of our revenue forecast, with respect to the personal income tax, on the federal government. We have consistently and dramatically been surprised by the numbers we receive from the federal government. This began in 1991. I remember the first occasion when my head of fiscal planning walked in and told me of the first billion-dollar loss on PIT. I couldn't imagine a billion-dollar loss. Within three weeks, it was $2 billion. We've had a great deal of difficulty and the federal government has had a great deal of difficulty in trying to estimate that.
The fact is that the budget is on a downward trajectory. I remind you that the budget this year is forecasting a deficit of about $9.5 billion. That is substantially down from last year. I think the Treasurer has indicated that no one is happy about a deficit that sits at $10 billion. The commitment of the government is in fact to carry out measures that will reduce the trajectory of that deficit downward as quickly as is reasonably possible. That's the policy direction, I think this year in particular as things have stabilized, except for the PIT side. I think everyone again has misjudged the recovery a bit this year: It's been lower this year than everyone has expected. Most of the impact, again, has been on the personal income tax in terms of our problem.
I would say in relation to next year, and we've tried to be cautious, if you look on page 11, we quite consistently across the entire piece are below private sector forecasts at this point in time. We have tried to be very cautious and not overestimate what we think we're going to get by way of economic recovery and revenues. But I want to emphasize that it's very, very tough. I think we're into a more stable period now, and we should expect better forecasts.
Mrs Caplan: Supplementary to that --
The Chair: I'd just say that we have a couple minutes. I'm going to give you your supplementary.
Mrs Caplan: We can do it this afternoon if you'd like. We'll have time this afternoon.
The Chair: We have a couple of minutes left, and Mr Cousens has a question too. I want to remind people that the ministry official will be here at 2 pm for one hour if there are any further questions.
Mrs Caplan: The only thing -- this is really supplementary -- is to verify a number. You keep saying $9.5 billion, as on page 17. I'm adding it up, and I think it's fair to include the $800 million that's off-book. What you're really reporting, as of today, is $10.4 billion as a deficit number for this year if you add in all those things that have traditionally been included in the budget. Is that not correct?
Mr Kaufman: I don't think we've characterized it that way, but if you add the two numbers together, that's the math.
Mrs Caplan: The math is that $10.4 billion is the number for the reported deficit if you include all the things which have traditionally been included in deficit requirements of the province over the last few years.
Mr Kaufman: If you treat the accounting the traditional way it's been done, on a consolidated basis -- as you know, our view is that we've restructured a part of the capital debt; it shows up as debt -- we certainly take the view that it is not part of the current account deficit, and that's the reason for the distinction between a budgetary structure and a non-budgetary structure. It's like your house. As you all know, you make mortgage payments on your house for a period of time. Those costs are calculated on a current account basis. We've calculated the cost of that borrowing on a current account basis, and we're paying off the debt over time. It does end up on the total debt of the province, however.
Mrs Caplan: We'll pursue it this afternoon.
The Chair: Mr Sutherland has a procedural question.
Mr Sutherland: In my view, we were a little remiss in one group we didn't invite for our pre-budget hearings. We asked some others to comment on the Fair Tax Commission, but we didn't ask anybody from the Fair Tax Commission to come and make a presentation or respond to questions about some of its recommendations. I'm just asking whether there would be a willingness to have a representative from the Fair Tax Commission come. I know our schedule is very tight. Looking at what we have before us, it would probably have to be later in the day, but I'm willing to sit one day to 6 o'clock to accommodate, if the other parties were willing to do so.
Mr Cousens: We're in agreement. Good suggestion.
Mrs Caplan: No problem.
The Chair: We'll ask the clerk to see what can be done about that.
I thank the ministry officials for appearing here this morning, and look forward to seeing you this afternoon.
The committee recessed from 1201 to 1407.
The Chair: We will continue with opportunities for members to question officials of the Ministry of Finance.
Before you is information on two items: one is the definition of "enterprise crime," something that was requested by Mr Kwinter; and, second, some questions that were forwarded to the Finance minister from Mr Phillips. There is a package there of questions and responses from the Finance minister to Mr Phillips. We all have copies of those now.
Because we have a presentation at 3 o'clock, we have approximately 53 minutes. I guess it would be fair to divide the time evenly.
Mr Phillips: The current fiscal outlook: I realize that you can't, I gather, give us the level of detail we had last year around April, but it makes our work more difficult. Maybe I can just start by trying to get some explanation of the revenue thing. We talked a little bit this morning about it.
As I look at the numbers we had in the budget last year, you were expecting revenues this fiscal year, 1994-95, of $46.5 billion. I gather that's now down to $44.9 billion. The next year you're expecting revenues of $49.4 billion. The reason I raise these is because I think for the committee's use we have to have some idea of where we're going over the next three years or so. I don't think we can deal with just one year. Are we likely facing similar revenue challenges in 1995-96 and 1996-97?
Mr Dorey: The $1.6-billion shortfall for 1994-95 includes some quite substantial onetime repayments. It's repayment with respect to the 1992 tax year to the federal government of something in the order of $400 million, which we hadn't expected at the time of last year's budget. There's also a $100 million or so repayment of EPF population adjustment that we hadn't anticipated. Our expectation is that for 1995-96 the shortfall relative to our budget forecast will be substantially smaller than the $1.6 billion for 1994-95. So it's not on an upward trend.
Mr Phillips: When do you think we can get the level of detail that we had last year? Is it before our committee's work is done?
Mr Kaufman: On the revenue side?
Mr Phillips: Yes.
Mr Kaufman: There are a couple of factors on the revenue side that we need to wait for until we can give you a fairly complete picture. One, obviously, is the federal budget. If some of the signals coming out of Ottawa are any indication, it could have a fairly dramatic impact on our budget. I think we can probably give you a fairly good revenue analysis now. I think the numbers we've given here and any further detail you want in support of those numbers we could certainly give you.
Mr Phillips: Good. If I go back to the April 5 document of last year, I would find it very useful to get the revenue projections by tax source and it would be useful for me to get it for 1994-95, 1995-96 and 1996-97, which is what we were provided last year. Sale of assets would be helpful.
I haven't had a chance to go over all your responses to my questions, but breaking the tax revenue down, as you did, breaking the other sources of revenue and then, as you say, you'll know presumably in the next couple of weeks the federal numbers. For me, it would be very helpful on a three-year basis. It would be important, before the committee concludes its work, to get that as well.
Presenting the budget in the way the Provincial Auditor has recommended, I have a note from the ministry indicating it is the intention to report both this year's numbers, 1993-94, and 1994-95 on the basis that the Provincial Auditor has recommended. Can we have assurances that is the intent?
Mr Kaufman: I think you'll appreciate that in meeting the objectives of a new system the amount of work involved is enormous, quite frankly, and quite costly. Our critical path is to be able to meet that target of next September, and I think we're on target for meeting that objective. There's a lot of work involved in this change from the current cash accounting system to an accrual system. We're optimistic we can meet that target.
Mr Phillips: Did I mishear the target? The letter I have says, "As you know, the ministry has indicated the Ministry of Finance will work towards implementing the public sector accounting auditing board recommendations in the public accounts for the year ended March 31, 1994." You will do that in the year ending March 31, 1994?
Mr Kaufman: Yes, and the target date is September for having that work done and completed and reported -- September 1994.
Mr Phillips: Am I missing something?
Mr Kaufman: I don't think so.
Mr Phillips: I had assumed what this meant was that the budget would be presented in accordance with the public sector accounting and auditing board recommendations. Am I hearing something different?
Mr Kaufman: I think the Treasurer has already indicated we're not planning for this forthcoming budget, if that's your question, to present the budget along the new accounting principles. We're not going to be in a position by that point in time to have had the work done, number one, and, number two, the plan at this juncture, in order to ensure consistency with last year's budget, is to present it in a similar way. I think in terms of the kinds of issues you've been raising, most of the questions that you've been flagging, information has been contained in the budgets.
Mr Phillips: I just serve notice that I am not going to find that acceptable. Maybe you have to read these letters very, very carefully, but I had assumed the letter meant that you were planning to accommodate the auditor's recommendations. I never for a moment thought it would be September before we saw that. I think the auditor has signalled that the books do not represent to the public the state of the finances of the province, and if you prepare a budget on the basis of going against those recommendations, I think we have a problem.
Mr Kaufman: I think to be fair, Mr Phillips, we had a previous Provincial Auditor who was absolutely insistent that the accounts of the province be maintained on a modified cash basis. The new Provincial Auditor has indicated he would like the books of the province presented on a different basis. We're accommodating that request. It is an enormous job to transform the books of the province to that new system. I'm not aware that the Provincial Auditor has any other expectations than the plan we're on now, which is to present the next public accounts in the form that he would like them to be presented in. That's where I think we are on this issue.
Mr Phillips: I don't want to be overly contentious -- I'm serious -- but I just think the books of the province are getting so out of whack with reality. I'm sorry to be as blunt as that. I had accepted the letter I got back as saying: "They're moving to it. We will have the books this year and next year on the basis that he's recommended."
As far as I'm concerned, it sounds to me like the budget will be presented on a basis the auditor said in his annual report he does not find acceptable, and he doesn't feel that represents the finances of the province to the people of the province. I think we have really a fundamental problem.
I'm sorry to go on about this, but we're talking about billions of dollars of expenditures that aren't going to be reported the way the Provincial Auditor has recommended. I serve notice that this is going to be a problem for us. The auditor could not have been more clear on it.
I have concerns as well around some of the sales of assets. I gather, if I read your letter correctly here, that you are planning to continue with $600 million or $700 million a year of sale leasebacks. You're going to sell existing GO trains, then lease them back. I gather we're going to be selling buildings like this and leasing them back. I gather we're going to be selling up to $500 million worth of jails and courthouses and then leasing them back.
Mr Kaufman: I don't want to speak specifically on jails and courthouses, but certainly the plan is to transfer realty assets to the new realty corporation. We've been moving to transfer land assets and this year building assets, and that process is to continue. I don't have the details specifically of what's being transferred, so I can't answer the question of whether over the next couple of years it involves courthouses or not, but yes, that's the plan we have in place.
Mr Phillips: I just go by the letters I get from you people which say you are planning to sell $500 million worth of jails and courthouses to this Ontario Realty Corp and then lease them back.
Mr Kaufman: I'll confirm for you the types of assets that are being sold to the corporation over the next couple of years, but I can't give you an answer today whether it's $500 million worth of courts. It doesn't ring right to me that it's $500 million.
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Mr Phillips: I'll find the letter here fairly quickly, I think, because it's from the Ministry of Finance. I have so many letters, but I'm sure your own staff remember sending it to us. It indicated that over the next two years you plan to sell $500 million worth of jails, courthouses and correction centres to the realty corporation and then lease them back.
Mr Phillips: This letter is August 16: "Over the next two fiscal years, about another $500 million of Management Board Secretariat accommodations are intended to be acquired" by the realty corporation and then leased back. These are "correctional facilities, courthouses and detention centres." Is that still the intent?
Mr Kaufman: The number of $500 million over the next couple of years is correct. The actual detail of that is being reviewed and I'll undertake to get back to you with more detail. Certainly it's my sense and understanding that it's not simply jails and courthouses, but I do want to get back to you on it. But the number of $500 million is roughly correct over two years.
Mr Phillips: I just go by what you tell me. Again, the reason I raise this is, to me that kind of thing is like, "We've got a problem with paying for the groceries so let's go and get somebody to lend us some money against our furniture and then we'll lease it back." We are taking in revenue that in my opinion is not real revenue, and the auditor said the same thing. The auditor said that's not real revenue.
Then we're taking on a brand-new annual cost of leasing them back again. In my opinion, we run the risk of distorting our books, and again, that's what the auditor says. So I think I'll have some real questions around is that a legitimate transaction to sell our jails and then lease them back. How do you respond to the auditor's comments that this is not a legitimate way of keeping the books?
Mr Kaufman: I think you'll appreciate that currently our assets have been valued at zero. One of the major purposes of establishing the realty corporation is in fact to put some value on assets which clearly have value, to put in place a better management of our realty assets and to introduce some effective pricing within the Ontario public service so that we're in fact getting more efficient use of our assets.
Our expectations are that by virtue of introducing a user price within our operations, we will save significant moneys and achieve greater efficiencies in the use of our assets. They'll be better managed. So there are a number of purposes that we're trying to achieve through the construction of the realty corporation. Our view generally is that when we're refinancing assets like GO Transit, it's a refinancing of existing assets. It's no different than taking equity out of your house, in some sense. Clearly, you add to the debt. No one's arguing about adding to the debt, but on a current account basis, you've got some carrying charges.
Mr Phillips: Will you show that as debt then?
Mr Kaufman: Certainly. Overall, if we're borrowing additionally, then clearly we'll have additional provincial debt, but on a current account basis, the point we've been trying to make in terms of capital assets is that they ought to be accounted for in a different way so that the costs of those assets are more effectively aligned to the stream of benefits that arises from them. That's basically why we're in the process of restructuring the way in which we do capital.
I think in public finance circles, you are probably well aware that this has been a long-standing issue about how we deal with capital. Most public finance experts have argued quite strongly that historically the result of treating capital on a current account basis is that we've underspent in public sector capital and we keep on trading off capital spending against operating spending. So part of the policy shift here is in fact to meet some of those public policy objectives.
Mr Phillips: I don't want to dominate if my colleagues have some questions.
The Chair: There's about two minutes left.
Mr Phillips: I've got lots of questions.
Mr Kaufman: We're quite prepared to sit down with you and go over all the questions and provide you with answers. From our point of view, we don't have to do all that today.
Mr Phillips: Good. Just working my way down here, some of these revenue numbers were on the five-year licences. I gather from your response today that you do not plan to take into revenue the five-year licence revenue; you'll only take into revenue the one year. The purpose of this question just is that we've moved to five-year licences, and opposition, who has a cynical view, says it's designed to take five years' revenue in the first three years. You will not show that as revenue, though.
Mr Kaufman: On our current cash accounting it would show as revenue. On an accrual basis, I'm told it would show on a three-year basis. So in our current system it would be treated as revenue, yes.
Mr Phillips: Boy, you've got to really understand this jargon. I thought that you said the revenues will be shown the year earned, ie, on an accrual basis.
Mr Kaufman: Sorry. My point was that under our current accounting system, yes, it does show up as revenue in the year we get it. Under an accrual system, I'm told by staff that it would show up in each of the years for which the period is covered. So if it's a three-year licence, part of it would show up in year 1, year 2, year 3. It depends, Mr Phillips, on at what point we are on which accounting system.
Mr Phillips: I just want to be clear. On any of these things where we move to three-year licence or a five-year licence, you will only show in revenue the revenue for the year that it was earned. In other words, if I buy a licence for five years, you'll only show in 1994-95 one year of that five-year revenue.
Mr Gregg Smyth: I'm the assistant controller in the office of the controller, Ministry of Finance. As Jay has said, when we prepare the public accounts on an accrual basis, just as we look at accounts payable etc, we look at the revenues and see which revenues pertain to the particular period --
Mr Phillips: Let me be very specific. This year's budget, when the budget comes out, will you show the revenue for the licences for the one year they're earned or will you show all revenue for licences that were sold?
Mr Kaufman: This year's budget will be based on a cash accounting -- that was my point earlier.
Mr Phillips: I understand that, but the answer you gave me here is that the revenues will be shown in the year earned in the public accounts. I assume from the answer you gave me that you were, in this year's budget, going to show only the revenue for the year it was earned. But I gather the answer is you're going to show the full revenue in this year's budget.
Mr Kaufman: In this year's budget, because we've used a cash accounting for purposes of presenting this year's budget, we'll show the revenues in on a current basis, yes.
Mr Phillips: Let me just say that on the basis of this, I'm going to get my microscope out, because I think that the written answers I have here, you've got to really understand the language you use to understand what you're saying. I completely interpreted it differently. I thought you were doing what I thought you should do.
Mr Kaufman: Let me try and be very clear. What I said at the outset was that we are moving, in terms of the public accounts for the forthcoming year, to report those on an accrual basis and bring them in line with what the Provincial Auditor has asked. We're targeted to complete that exercise by September so we can produce the public accounts on that basis.
For the budget this year, we intend to present it on the current accounting basis, which is a modified cash basis of accounting. In terms of the kinds of information that we've provided in the past, we will be very forthcoming in presenting what we're doing through our capital corporations. The off-budget capital financing will be all very clear in the budget. There won't be any mystery about it. But that's the plan at this juncture.
The Chair: Thank you. We're going to move on now.
Mr Cousens: I'm concerned with and my questions will centre mainly on the social contract. On page 20 you indicate that the social contract is working and you point to $2 billion in savings achieved. Do you have any costs, how much it has cost the government to implement the social contract? I guess there are hard costs and soft costs. I think the loss of morale and other things that have gone on are hard to quantify and impossible to quantify, but how much has it cost? Has there been any real accounting of that?
Mr Kaufman: Peter Warrian can answer you. I think the only accounting we've done that we've reported publicly is the direct negotiating costs that were accrued during the period of negotiations. We haven't done any additional accounting of the costs of the social contract. It's a normal part of the business of government's activities.
Mr Cousens: You say a normal part of business activities. Then there's the other whole factor of how much time people have been spending on it. Has there been any kind of adding-up of that?
Dr Peter Warrian: The direct costs of the negotiations were about $900,000. That information was previously --
Mr Cousens: That's the only dollar that you have on the cost of the social contract? There's no other costs associated? Certainly I think there are many other aspects too, what the social contract has done and is doing to the province.
Dr Warrian: You're correct in the sense that there would be implementation costs that the government as an employer or other employers or union groups might bear. I'm not speaking to that. I understand that those costs are there. We don't have any figures on that. Those are with the respective employers or unions. But our direct cost in the social contract was approximately $900,000.
Mr Cousens: When you say there are very few layoffs, could you give us a sense of what the layoffs are in each of the sectors, how many people in each sector were laid off?
Dr Warrian: Yes. We have a figure that we've indicated, which is 82. Of those 82 -- I'm trying to find the rest of them -- some 38 are with GO Transit.
Mr Cousens: This is across the province?
Dr Warrian: Yes, across the province, and this is against a base of about 900,000 people.
Mr Cousens: So 82 people laid off?
Dr Warrian: Out of 900,000. I have a sector breakdown I'm trying to find. As I said, of the 82, approximately half, that is, 38 of them, were from GO Transit. My recollection is that there are 16 in the hospitals. Sorry; I can't find it in my notes for the moment.
Mr Cousens: If 82 is the number that you're delivering, I have to tell you that I'm going to invite all the sectors to share with us the number of people who have been laid off, let go, since the social contract was brought in. Municipalities across the province in many, many cases -- 82 doesn't begin to touch on the number of people affected because of the social contract.
Dr Warrian: Mr Cousens, let me be precise. When I give you the figures, we have widely circulated the entitlements and the interim guidelines for the job security fund. We are dependent on employers or unions coming forward to us to identify the people. Now, there frankly has been a temptation to blame everything on the social contract or mix the social contract and the ECP. But for those who have been directly identified under the social contract, the figures are as follows. There are 41 in the ABCs -- that's basically 38 in GO Transit plus three others -- 16 in health; six in social services; two in the school boards; and people in the municipalities. That is the information we had as of last week.
Mr Cousens: I suppose, in your own mind, if through the expenditure control plan which also parallels activity of the social contract, someone were to have been let go because of the expenditure control plan, are you saying then, legalistically, that is not included in the people who are affected by the social contract?
Dr Warrian: Yes, that is not included.
Mr Cousens: Therefore, municipalities have had to cut back. They would say, "Well, this is the expenditure control plan," and therefore they have let certain people go. Therefore, those numbers would not appear in your numbers for the social contract.
Dr Warrian: Yes, it is a little more precise than that. If somebody has gotten -- well, the language people use, they've gotten a certain social contract hit, they've had a certain target and say that's $25,000 in some agency, they may have had another hit or another fiscal target driven by ECP impact them as well. I'm not saying there aren't other people who have been impacted in other ways, but when the question is put, "How many social contract layoffs are there?" those are the numbers.
Mr Cousens: How many would have been affected through loss of jobs through the expenditure control plan? Is there any sense of what those numbers would be?
Mr Kaufman: When we developed the expenditure control plan and we had analysed its impact on the broader public sector, our estimate was that the potential jobs impact could be handled by attrition. If I look at the latest numbers -- you mentioned the municipalities -- in fact in 1993 the latest information we have is that employment in the municipal sector has grown 10,000 in Ontario over 1992. There appear to be no overall net reductions in jobs as a result of the expenditure control plan in the province, or at least in respect to the municipalities. If I look at health and welfare services, they've gone up about 21,000 in overall jobs in 1993 over 1992.
I think our basic assessment was that there would not be a major impact on the jobs side from expenditure control. In fact, our assessment was that the significant jobs impact would be on the Ontario public service directly. I think the jobs impact that we expected overall was about 3,000 to 4,000 and our hope was that we would be able to deal with that pretty much through redeployment, retraining. I don't have the exact numbers, we can get these for you, but I don't believe in terms of layoffs of full-time staff that we have more than a handful of layoffs of full-time staff in the OPS, and that was the area where we felt the most significant impact was going to occur.
Interjection.
Mr Kaufman: I've just been told that there's been one full-time person who's ended up laid off in the OPS. Is that right, Phyllis, as a result of the ECP? And nobody laid off as a result of the social contract in the OPS. Phyllis Clark is from the Management Board Secretariat.
Mr Cousens: I'm surprised and, trusting as we are as we share these bits of information, I find it incredible because the sense I have is that through hospitals, through other agencies within the government, within the sectors, there are far more people impacted. Maybe another question is: How many people through these sectors have been given early retirement? That might be a different way of your assessing the number of people who have attrited.
Mr Kaufman: We don't have that number. We would certainly be able to get that number for you for the OPS, but I couldn't give you that number for the broader public sector. There will be a substantial number of people in the OPS who've opted for early retirement, but we should be clear about that; part of the plan was in fact to encourage early retirement.
Mr Cousens: I accept that, but part of my problem is that the government has refused to allow myself or others to see the agreements and the contracts. It's been a closed book, as far as I'm concerned. I have questions on the order paper in which I have asked to gain access to see the agreements so that I can begin to understand that and I've been refused access to the social contract agreements. It's in the order paper. You can talk to the minister. I have not been able to get in and see it.
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Mr Kaufman: These are documents in the public domain, as far as I'm aware.
Mr Cousens: You look at the order papers; there are questions that I have asked. I've asked the minister to gain access and I have not been able to do so.
Mr Kaufman: We'll follow up and look at the request and see if we can respond positively to it.
Mr Cousens: When you say there are very few layoffs, I challenge that. I don't have numbers either, but your numbers to me are surprisingly low. I don't want to give artificial numbers; I hope I'm not getting them here.
Mr Kaufman: All I'm quoting from here is the Statscan report which provides details on employment. The one area where we've had a dramatic decrease in the number of jobs has been in provincial administration, which means the OPS, and we know we've had a dramatic decrease there. But as I say, there have been virtually no layoffs.
In the area of municipal administration, it's grown by 10,000 jobs. In the area of health and welfare, it's grown by 21,000 jobs. As I recall the numbers, when we looked at the impact of the ECP, I believe we estimated about 11,000 jobs could be impacted. The attrition rate in the broader public sector, we estimated, was in the order of 17,000.
What may occur -- obviously, these are macro numbers -- is an individual situation. There may in fact be a place where there are individual layoffs in one local area but, overall, our feeling was that the system could manage this degree of expenditure reduction.
The reason we went to the social contract at the end of the day, of course, was to protect jobs and it was our judgement that ECP going much beyond that would have a major impact on jobs.
Mr Cousens: I just have a great concern that the morale within the public service in Ontario has been negatively impacted, because so many people now have a sense of insecurity about their being able to keep their job because of what they've seen happening. When you give these numbers, the sense I have is different. My colleague has some other questions.
Mr Gary Carr (Oakville South): My question would be for somebody on the policy taxation issue. As you know, last year in the finance committee we spent a great deal of time hearing from economists who said the worse thing we could do last year was increase taxes. We had the biggest tax increase in the history of the province last year. Our minority report called for no new taxes at that point last year. We weren't listened to. The economists weren't listened to.
As you know, the $2 billion killed consumer confidence. Consumer confidence is very fragile now. The $2 billion, economists have projected, could lose as many as 50,000 jobs as a result of it and it was probably the worst possible thing that could be done. We now have heard the prime minister, Mr Chrétien, saying they will not be increasing taxes.
I would like to ask the question to the senior tax person who has Floyd's ear. The question I would like to ask him or her is, what does that person recommend the Treasurer do regarding taxation? Should he increase any taxes, and what will the recommendation be? I know the person who made the recommendation last year may have said not to increase at the end of the day and I recognize the Premier and the Minister of Finance are responsible, but I want to hear from the top person, the taxation person whom Floyd listens to, what is their recommendation with regard to taxation?
Mr Kaufman: I don't think that's -- if I understand what you're asking -- a reasonable question to ask. I think the government was facing a major problem in its deficit. As the minister has indicated, it felt it had to tackle that problem --
Mr Carr: I'm talking about this year. What is their recommendation for this year? Forget the past; the $2 billion, that's done. What does he or she recommend this year? We are the finance committee that has to write a report that supposedly you look at. What is your recommendation to us on taxation?
Mr Kaufman: I think the Treasurer has said to you -- this is a matter of government policy, not a matter of what officials say -- he doesn't expect to see major new net tax increases in this forthcoming budget. That's what is on the public record. I don't think we're in a position to say anything more than that.
Mr Carr: Okay, so it's net, but we could see some shifting.
With regard to job creation, as you know, the Jobs Ontario Training program, you throw out numbers of jobs that have been created. The controls in place on that are probably the worst controls. If you were in the private sector you'd be laughed at. The figures that we get, brokers -- we've got three brokers charged, Mr Wiseman, with regard to this. If it was you who laughed -- sorry, Kimble. We've got a situation right now where you're throwing out numbers that are coming from the brokers. There are absolutely no controls in place for you to check that.
My question to you is this: With the job numbers that are being thrown out, whatever they are, can you tell me that you believe they are accurate, and let's be specific with the Jobs Ontario Training? Can you sit here and tell us the job numbers that your government is giving out are true and accurate?
The Chair: Can I just say something? First of all, I just want to let Mr Carr know he's only got a couple of minutes. The other thing I'd like Mr Carr to remember is these people are here to help answer questions you might have. Although you weren't exactly badgering, you were getting close, I must say.
Mr Carr: I don't mean to be. I guess my problem is the frustration. I'd like to get clear answers from you, and if my tone appears sometimes, it isn't, because those who work on the committee realize that, but I do want to get some definite answers and so I'll go with that answer. Can you sit here and tell us today that those job numbers are accurate with regard to the Jobs Ontario Training program?
Mr Kaufman: With Jobs Ontario Training, we've got these numbers from the program, and as far as I'm aware, they're fully accurate.
Mr Carr: But there are no controls. You have no way of checking them.
Mr Sutherland: Oh come on.
Mr Carr: What's this?
Mr Kaufman: The numbers that we've got are numbers which are number of training placements, and I think the number is 23,000, and there are 10,000 further training spots which are being filled. That's the information we have, and I can't speak more than that. We count on line ministries to have accurate information.
Mr Carr: Okay, fine. I'll accept that. Very quickly, one last question. In the expenditure control plan, you had in the Ministry of Education and Training, ministry integration, reorganization, streamlining and cash constraint management, a $47-million change. You know the program. Are those figures accurate in each of the ministries? When you talk about integration, reorganization, streamlining, cash constraint, what did that mean? How did you get the savings that you say you got in those programs?
Mr Kaufman: As I recall, and I'll ask staff to help me here if I'm off base, the way in which we calculated those numbers had to do with the reduction in the salary and wages envelope associated with central administrative functions and non-salary dollars. It looked at the total saving that was got through the basic downsizing and integration of central administrative organizations. It didn't include any saving associated with any program rationalization that's occurred since the integration. It's pretty much exclusively dealing with central administrative operations.
Mr Sutherland: I want one more question on the social contract. The numbers you were presenting don't take into account the fact that some people may receive a layoff notice but because of collective agreement responsibilities they may receive that notice, say, six to nine months in advance, and in the meantime they may get redeployed in that six- to nine-month period. Those people wouldn't be included in these numbers then.
Dr Warrian: To speak bluntly, the figures I gave are the ones who actually hit the street. There is all kinds of churning in the system. If I may, I'll try and elaborate a little bit more for Mr Cousens, that those are the actual layoffs. Those layoff notices may be received by a number of people, but the question is how many go out the door at the other end. The answer to that is our best information and the applications that we've received are with respect to 82 employees who have actually gone out the door and hit the street related to social contract targets.
There's an awful lot of churning in the system. Somebody may get a notice but there's a bumping procedure or halfway through that somebody else retired and they go over to that job, all sorts of churning. So the aspect Mr Cousens refers to, that anxiety about potential job loss, is real and it is widespread. The actual numbers are well short of that, but I'm not denying there could be layoffs for other reasons.
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The final comment I would make is this is a huge system. Even in the midst of the depths of the recession, the turnover rate has been 1.5%. That means -- family situations change, people die, whatever, they move to other parts of the country -- around 12,000 to 14,000 people in the broader public sector change their jobs each year. So there's lots of churning going on in the system.
We are doing a survey of employers to try and get the actual data. My best insight into this is simply as follows: Number one, the actual direct layoffs, ie, people out the door, is very small, related to the social contract at least. That doesn't mean nothing is going on. There's lots of churning through notice of layoff but then there's bumping around. They don't actually go out the door. There have been, particularly with respect to part-time employees, significant reductions in hours and some of them are on irregular shifts, they're casuals. There's lots of that going on.
Finally, there is a significant amount of attrition where people retire. You know, Joe retired and they decided not to replace Joe or they don't replace Joe for eight months and therefore they make up their social contract target. Somebody else may go into that job later or something; lots of churning around, so lots of non-replacement of retirees, lots of reduction in hours, particularly with respect to part-time or casual employees.
However, in terms of people going out the door, ie, terminations, there is a relatively small amount of that. We are surveying to get the actual data. That's the most accurate picture I can give you.
Mr Sutherland: I had one other question related to the forecasts that were put forward here for some of the G-7 nations on page 13 of the presentation, private forecasts. For the United States, just yesterday I thought I heard about a 4% growth and some reports indicating higher. The numbers here are for a three-year average --
Mr Dorey: Yes. Actually, it's a four-year average. It's the calendar years 1994 through 1997 and it's the outlook over those four years. Certainly the kinds of numbers people are talking about for the final quarter of 1993 range up to 5% and above. It was a very strong quarter. But that's probably what you saw. For the year as a whole it'll be around 2.8% for 1993 and the current forecast for 1994, the consensus view is 3% for the US.
Mr Wiseman: I don't know if you have this at your fingertips, but a good indicator of what the economy is doing is the number of new orders for machine-making tools. Do you have any idea of what is happening in that area, whether companies are buying machinery to make tools? In other words, we're looking at the tool and die sector and the import sector in terms of orders.
Mr Dorey: It's a good question. Those numbers are published regularly in the US. We don't publish them, break that particular aggregate out as cleanly, but certainly imports of machinery and equipment have been very strong and investment in machinery and equipment have been very strong this year. Certainly that's been, along with exports, the leading sector of the economy. But in terms of what's happening to orders for machine equipment, I don't have that at hand.
Mr Jim Wiseman (Durham West): Do we know what's happening with the housing starts? I didn't see that in the bundle.
Mr Dorey: Housing was the sector that probably most underperformed our expectations this year. We had expected in the budget 57,000 housing starts; it looks like we will have 42,000 at the end of the year. That's a huge shortfall. Housing starts have picked up somewhat towards the end of the year and resale activity picked up a bit towards the end of the year. But certainly 1993 was well below our expectations and we've also lowered our forecast for 1994 for the housing sector.
Mr Wiseman: One of the figures that I like to see, and I don't see it very often because everybody likes to use statistics, is the total employment, the number of people who are working in full- and part-time jobs. I didn't see that in the bundle. I have to confess I couldn't make it this morning, I was on another committee, but what's happening with the total employment in the province of Ontario?
Mr Dorey: Employment this year was up 79,000 to a total employment for the year of -- or at least the last month, December, was 4,810,000.
Mr Wiseman: Is that surpassing or matching or below what you anticipated for the growth?
Mr Dorey: Employment growth this year was substantially below what we had expected. We had expected growth of 2.2% and in fact got 1.7%. So we're about a half per cent under, which would translate to about 25,000 jobs below what we had expected.
Mr Wiseman: What does that do to your revenue projections and what does that cause you to think about doing in terms of projecting for the coming year?
Mr Dorey: There are two effects of the employment numbers for 1993. Employment was, as I said, about 0.5% below what we expected. There was also substantially more part-time employment than we had expected. The mix between part-time and full-time tends to improve; you get more full-time as you move into a recovery. That didn't happen to the degree it normally does this year, although, again, in the latter part of the year, the final quarter, full-time employment was substantially higher.
Mr Wiseman: In terms of the Ontario public sector, what was the total number of jobs in the Ontario public sector last year and what are the totals this year?
Mr Dorey: For the broader public sector, we don't have those precise figures, do we?
Mr Kaufman: Roughly 900,000 in the broader public sector.
Mr Wiseman: Well, here's where we get into the problem, if we don't know how many.
Mr Dorey: Is it up or down?
Mr Wiseman: I know we haven't had to lay off the number of people, but I know the positions have been eliminated?
Mr Dorey: What we know is that provincial administration was down 10,000 on average between 1992 and 1993, down from 88,000 to 78,000. On the other hand, health and welfare was up 21,000, education was up 4,000 and the municipalities were up 10,000. The provincial administration sector is shrinking, but other parts of the public sector in the province are at least stable.
Mr Wiseman: Or growing.
Mr Dorey: Or growing.
Mr Wiseman: That's an interesting point.
Dr Warrian: There's a regular survey, but we wouldn't know till the end of the year.
Mr Wiseman: Could we have those numbers?
Mr Dorey: Sure.
Mr Wiseman: This is an important number to know in terms of what's happening in growth and where the employment is.
Just one last question and that is on manufacturing, because manufacturing is an important sector. Do we know what's happening in the manufacturing sector from the point of view of total number of people employed on a year-over-year basis? Can we see what's happening there from last year to this year?
Mr Dorey: Yes. Total employment this year, 1993, was actually down 3,000 from 1992 overall on about 900,000 employees. It's a very small decline, but it was a decline. The pattern was a reasonably strong performance in the early part of the year. It dipped quite sharply in the summer and came back reasonably strong later in the year. So for an annual average, employment is down 3,000.
Mr Wiseman: Is this slippage that's taking place happening in one sector? Is it happening across? Can we pinpoint any area?
Mr Dorey: It's pretty widespread across the manufacturing sector. There's not one of the detailed sectors that has a decline of more than 10,000 jobs. Electrical products were down 8,000, which is the biggest, but I don't know that you can read a whole lot into that.
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Mrs Irene Mathyssen (Middlesex): Yet productivity is up, isn't it?
Mr Dorey: Productivity is up dramatically, yes.
Mrs Mathyssen: So this is the jobless recovery that we hear about that isn't particularly positive in terms of human beings.
Mr Dorey: Certainly, output has expanded quite sharply and employment hasn't risen. If output continues to rise substantially, then presumably employment will follow it, but there are big productivity gains, a lot fewer workers producing more output, yes.
Mr Wiseman: Could you supply us with those kinds of numbers in terms of the Ontario domestic product and how much it's grown and the sectors where it's growing? I think we need to know these kinds of indicators in order to make a reasonable assessment of what we should put in the recommendations. I don't think broad generalizations are going to be really helpful to you at this point.
The Chair: I'd like to thank the Ministry of Finance officials and staff for presenting before the committee this afternoon and answering what were some interesting questions.
Mr Kaufman: As I said, the offer stands if members would like additional information. Certainly, we're available to provide that.
The Chair: Anything they would like to send you in writing would be responded to, of course.
Mr Phillips: In terms of that, I have the responses. I need a lot more clarification on it. Can I just go to them individually?
The Chair: Mr Kaufman has indicated he'd be glad to help you with that.
Mr Phillips: Great. Thank you.
The Chair: Now everybody's going to leave. We'll just allow about a minute for all the Ministry of Finance staff to clear the room and then we will ask representatives from the Toronto-Dominion Bank to come forward.
TORONTO-DOMINION BANK
The Chair: Next are representatives from the Toronto-Dominion Bank, Peter Drake, vice-president, economic research, and Mimi Curtis, economist, department of economic research.
Mr Peter Drake: Thank you very much for inviting us. Our intent is to speak for no more than about 15 minutes. I'm going to speak briefly on the Canadian economic outlook, my colleague Mimi Curtis will make some comments on the Ontario economic outlook, and then I'll come back and finish off with one or two comments on deficits and taxes and so on. Then perhaps the committee would like to ask us some questions.
Dealing then first with the Canadian economic outlook, we are forecasting an improvement in Canada's economic performance in 1994. I'm not going to spew out a lot of numbers to the committee, and in fact we've given out handouts that have a lot of this detail, but I think a couple of numbers are relevant.
We're expecting improved real economic growth in Canada this year. Specifically, we're expecting an increase of about 3.4% in real gross domestic product, and that's up from the estimated 2.5% in 1993.
Spending a moment on where that growth might be coming from, I think the first thing to note is that external economic conditions will continue to be quite favourable to Canadian economic growth, and that's especially important in this recovery. We're expecting slightly stronger economic growth in the United States. We're expecting some very modest economic recovery in Europe and Japan in 1994, but I stress that it will be modest and I think it will occur largely in the second half of the year. I think that to the extent it affects us, we will also see a better economic performance in Mexico.
The other external factor which is extremely important is the Canadian dollar, and I think we may see a little bit of weakening during 1994. It's even possible that we'll see a small amount of strengthening in the dollar in the latter part of the year. There is potential for volatility in the dollar from political events in Canada, and I suppose the Quebec election is the primary issue there.
If there is any kind of widespread failure by governments to meet their deficit projections or if they are not perceived by capital markets as dealing with deficits in the upcoming budgets, there is potential for volatility in the dollar, and if there is any kind of sharp volatility, we would expect the same sort of spikes in short-term interest rates that we've seen in periods of past volatility.
As for the possibility of the dollar strengthening, if we continue in Canada to have noticeably or markedly lower inflation than in the United States, we would expect to see some gradual strengthening of the currency, though I would stress that we don't expect a lot of strengthening.
Exports will continue to be the engine of growth in the economy. Clearly, that forecast depends on some reasonable United States economic growth, the United States being of course our main partner, but I think, more important, such a forecast assumes at least the retention of Canada's gains in international competitiveness, especially the gains in productivity and the gains in the control of costs. Those are important and they will become even more important if, as we suspect, we begin to see some appreciation in the Canadian dollar, however modest that may be.
Another bright spot will be business spending. We've already seen some considerable growth in business spending on machinery and equipment. The demand for that is driven by the need for any and all businesses to continue to be competitive in what has become a very competitive and very international marketplace. It's being helped by a very substantial recovery in pre-tax profits. We're expecting an increase in pre-tax profits of about 30% this year, and that is a very substantial recovery.
I would point out, however, that even with that, and with a still substantial though smaller increase next year, it'll still be 1996 before pre-tax profits are back to where they were prior to the recession.
We may see the beginnings of an increase in non-residential construction this year. That has been a very weak spot in the Canadian economy, and I stress that what we see this year is likely only to be the beginnings. It's going to be 1995 before anything substantial happens.
We may see some increase in business inventories; they're very low. Businesses have been very cautious. As businesses become more convinced of the legitimacy of the recovery, we could see some improvement there.
We're expecting some improvement in housing, with housing starts to go up nationally to about 170,000 units from the estimated 155,000 last year, and that increase should be reflected in housing expenditure as well. Certainly, part of that increase is the expectation of a rebound in housing in Ontario.
Personal consumption expenditures I think will grow a little more rapidly in 1994 than they did last year, but they will continue to grow more slowly than the economy as a whole. There will be some increase in employment. Nationally, we're expecting an increase of about 200,000 jobs, and that will help, but there will continue to be economic factors restraining personal consumption expenditures. The unemployment rate will remain quite high. Nationally, I think it will average close to 11%. There will still be concern about job security and about low wage increases, so personal consumption is not ready to lead this recovery. It hasn't been ready to lead this recovery, and that I guess is one of the main differences between this recovery and past recoveries.
We don't expect governments to make a contribution to economic growth in 1994, simply because we presume the restraint all governments are under will prevent that.
We expect continued low inflation, a little higher than last year, a little bit above 2%. It was a little bit below 2% last year. That will reflect the lower Canadian dollar and a little less slack in the economy, but is certainly nothing to be concerned about.
We don't expect very much in the way of changes in interest rates. We could see slightly higher short-term interest rates, something in the order of 50 basis points or half a percentage point. That may well occur in response to some increases in short-term rates in the United States, but not a big change. We may see some small declines in long-term interest rates. Real long-term interest rates are still very high and there certainly is some room for them to move down. That will depend partly I think on how governments deal with things.
I'm going to ask my colleague Mimi Curtis to make a few comments on the outlook for Ontario.
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Ms Mimi Curtis: Before we turn to Ontario's economic performance and outlook, I would first like to highlight some changes to our forecast from last year. We estimate moderate growth of 2.5% in Ontario for 1993, with growth accelerating to 3.8% this year. These growth rates are somewhat weaker than our forecast a year ago.
Over the course of 1993 we have seen weaker activity on the part of consumers. Consumers remain cautious. Domestic spending in Canada rose in 1993, but growth was slower than that for the economy as a whole.
If we look at retail trade, retail sales grew at below-average rates last year. New housing activity picked up towards the end of 1993, but housing starts for the year as a whole fell. In terms of how Ontario's economy has ranked relative to other provincial economies, Ontario's economy continues to outperform Quebec's. Among the provinces, economic growth has been the fastest in BC and Alberta in 1993, but this year growth in Ontario's economy will lead all other provinces.
Turning to economic performance within Ontario's economy, the benefits of improved competitiveness have certainly been felt in the province's manufacturing sector. During the first 10 months of 1993, shipments rose by almost 9% in nominal terms to about $135 billion. Growth in manufacturing shipments was fairly widespread. Strong performances were recorded by the transportation equipment industries, as well as by the non-electrical machinery and primary metals industries.
If we look at Canada's manufacturing sector as a whole, we see that over the past two years there have been sharp increases in productivity. In 1993, manufacturing productivity, measured by real output per worker, rose by 3.9% in Canada, following growth of 4.5% in 1992. During the past year, the Canadian dollar fell sharply vis-à-vis the US dollar, which has also helped Canada's manufacturing sector become more competitive.
Turning to Ontario's export market, the value of exports grew by about 16% during the first three quarters of 1993, compared to year-earlier levels. The increases have been widespread among industries, with double-digit growth rates recorded in the exports of autos, plastics and rubber products, non-electrical machinery and electrical machinery, just to name a few. Over the course of the past year, the falling Canadian dollar and the continuing recovery in the US economy have helped stimulate demand for Ontario's exports.
Turning to Ontario's housing market, the recovery of new housing starts has been delayed until this year. The decline in 1993 resulted mainly from fewer starts in socially assisted units. There was also a slight decline in starts of private housing units. Total housing starts are expected to rise from an estimated 43,000 units in 1993 to 55,000 units this year. Generally speaking, the recovery in Ontario's housing market will likely stem from the private housing segment as we don't foresee a sharp increase in socially assisted units. By next year, total starts are expected to climb to 61,000 units.
We expect a pickup in new housing activity over the forecast period, but new housing starts won't be near the levels reached during the housing boom of the late 1980s when starts averaged almost 100,000 units per year. During the late 1980s, the first-time home buyer group, generally individuals aged 25 to 44, grew. We expect that over the course of the 1990-95 period, the size of this age group will shrink. This demographic trend points to a housing demand which will be much lower than the levels recorded during the late 1980s.
We have seen interest rates decline in 1993. This has helped improve housing affordability. In Toronto, the improvement has been quite significant. For example, the household income required to purchase a resale home in December 1993 was about $52,000, compared with $60,000 in December 1992. However, the comparison is more dramatic if we look at April 1990, when interest rates and Toronto resale house prices were near their peaks. During that period, the income required was $101,000, about twice the level required in December 1993. Interest rates have pretty much bottomed out and housing affordability in Toronto, as well as other major cities in Ontario, is not likely to improve much further.
Turning to Ontario's employment picture: Between December 1992 and last December, 64,000 net new jobs were created, most of them in the community business and personal services industries and the wholesale and retail trade sector. Why doesn't it feel like a full recovery? It's partly because the level of employment is still below the average level for 1989 as a whole before the economy went into recession. There has also been a structural change in employment. Between 1989 and 1993, the number and the proportion of self-employed workers in Canada grew.
Ontario's economic outlook is quite bright. Over the next two years, Ontario's economy is expected to grow the fastest in the country. We see continued strength in exports, a pickup in the province's housing market and improvement in employment, which should help brighten the consumer outlook. Employment will grow by just under 2% per year in 1994 and 1995.
However, Ontario's unemployment rate will remain at more than 10% over the forecast period. This is the result of faster growth in the province's labour force. The pace of economic growth in Ontario will accelerate from 2.5% in 1993 to 3.8% this year and to 3.9% in 1995.
Mr Drake will discuss Ontario's fiscal position.
Mr Drake: Just a few comments on debt and deficits. We have provided a useful perspective in one of the tables in the report on Ontario that was presented to you. If you look at the forecasts provided by the provincial governments in Canada and the federal government, we're looking at a total deficit this year of just over $65 billion. If these projections are achieved, it will be a very tiny improvement from last year.
I mention the combined federal and provincial deficits not because any one government's deficit or fiscal position is unimportant, but I think it's very important that we begin to look at the overall picture. I think that if these things are ever going to be solved, there's going to have to be much more in the way of cooperation among governments and much less in the way of one government trying to push the problem off to another.
Clearly the rating agencies are keeping a close eye on governments this year, and to the extent governments are not able to meet their deficit predictions, certainly there is the risk of further downgrades, and that of course can be translated into higher financing costs.
From a government's point of view, it's not just the concern about financial markets and the rating agencies, important as that may be. It's a serious problem and a difficult problem to solve. The harder governments work at solving the problem and the sooner they work hard at it, the better able they'll be to get on with the things that governments should legitimately do. It must be frustrating for governments: there are some things they feel they should legitimately be doing which they're constrained from doing simply because of their financial positions.
Just a couple of comments on what are some of the difficulties in dealing with government deficits. If one relied on past economic recoveries as a guide, one could be considerably more optimistic about economic expansion and economic recovery boosting government revenues. That clearly is a problem in this recovery. Low inflation restrains government revenues. Small wage increases and continued consumer caution, which is being reflected in lower than expected levels of consumer expenditures, are all having an adverse effect on revenue. So I think governments have to be pretty conservative in the kind of revenue projections they make.
It's not a time when governments can rely on additional taxes or tax increases; we're at the point where they're simply counterproductive in terms of the revenue produced. They are probably an issue in the increase of the so-called underground economy. When a population gets to the point where it thinks it's overtaxed, it tends to look for ways to avoid it.
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The solution to the problem is going to require a good deal more than cutting a little here and a little there. We seem to have a pretty fundamental problem. In effect, Canadians have been living beyond their means in terms of the government services they've been getting. It's very popular to say, "Cut here and cut there." I wish governments could perhaps take a slightly different approach and focus on the legitimate roles of government, and there are legitimate roles of government. Everybody talks about cutting, but there are legitimate roles of government, and perhaps if those could be redefined, it might be then easier to get the deficit thing under control.
I think governments should expect more help from the voters than they get. It's very difficult. There is a very widespread not-in-my-backyard syndrome. When I speak to audiences, and I do quite a bit of public speaking, I suggest to them that everybody's going to have to take some responsibility and I express some sympathy for governments. I think one of the reasons we have deficits is that governments listen to people who ask them to spend money. I think now what governments need are people to ask them to spend less or to spend differently.
We have given you information on Ontario's deficit situation in the report on Ontario in terms of deficit as a percentage of GDP -- it's falling; it is still above the all-province average -- and some information on Ontario's debt and per capita debt and debt in relation to GDP.
Finally, just one sentence on the Fair Tax Commission report: I am not in a position to make any kind of detailed comments, but a couple of things struck me when I looked at the summary. Clearly, the ways governments raise revenue are terribly important. I would hope that in this particular economic and fiscal situation, governments would not concentrate on the way in which they raise money to the exclusion of the way in which they spend it. Perhaps it's a time to try and figure out a viable level of government services and then put more energy into how that money may be raised.
I think what the report tells us, and the very fact that there were so many recommendations from a group that obviously worked very hard, is that a number of the recommendations depend both on the actions and the cooperation of other provinces and on the cooperation of the federal government, which suggests that this is a question that needs to be studied, not just by the province of Ontario but by all the Canadian provinces and by the federal government. In that sense, it could be a very useful stimulant to some very important work.
Those are our prepared remarks. We'd be happy to try and answer questions.
Mr Cousens: I have two questions. One is, what are the ingredients that affect consumer confidence? It's one of those very loose, psychological things, but when we are thinking about consumers and their confidence and their ability to spend money, to what extent does the government play a role? The taxation level and the way it reduces the amount they have: Is that part of the process of their thinking?
Mr Drake: Good question. You're absolutely right. It's terribly important, but it is a loose concept. I think one of the things that really has been affecting consumer confidence in the last several years has been concern about job security. Consumers, I think, have been saying to themselves, "Look, If I'm concerned that I won't have any cash coming in, I'm going to be very careful about what I spend." I think that has been a major issue.
Governments are having an effect right now and I think it's in two areas. Many consumers are very much aware that deficits are a problem and I think that to some extent, until they can see a really good medium-term plan as to how these things are going to get dealt with, some consumers are holding off simply because they're saying, "Maybe various levels of government are going to have to raise taxes, and if they are, I'm going to be in a different economic position."
Another area where we're seeing the effects at the bank is in terms of people beginning to take more action on their own in planning for their retirement. I think they're showing us that they are concerned -- this, I realize, is more a federal than a provincial issue -- about or the extent to which various federal financial support will be there in their old age. We're seeing this with our asset management group. It's not just that. I've got to be fair. It's also low interest rates. But I think this is part of it. People are aware that there is a problem, and so they're acting accordingly.
Mr Cousens: Ms Curtis, you were talking about housing prices and how they have become more affordable by virtue of interest rates coming down and the price of houses coming down and the combination of factors that go into it. When you say that during the mid-1980s we've been over $101,000 or $102,000 for a house which would be affordable -- you'd have to be making $102,000 -- and now today you could buy a house at $52,000, what percentage of the money are you talking about that a person would be investing in their house or what is the range that is going through?
Mr Drake: I think the way that gets calculated is you take, first of all, the average-priced house in the particular region you're talking about and then you assume a 25% down payment. You then say that the rest of it, presumably, has to be mortgaged. You take the standard debt service ratio and you include, and you're going to have to help me out here, mortgage --
Ms Curtis: Taxes and heating.
Mr Drake: -- taxes and heating, which are sort of the basic costs of the house. The mortgage payment plus those other payments add up to so-and-so and then you take the debt service ratio, which I think is roughly a third which is allowed. Then you say that in order to service the debt and to pay the payments, you need an income of such-and-such. That's how it gets calculated.
Mr Carr: I'd like to ask a question that would probably help the government in terms of what you think, but this is my third year on this committee and the government never listens anyway. So what I'm going to do is put you on the spot. I don't know if you can answer.
Looking at the last budget, the tax increases and the social contract -- I'll ask both of you and you can give a one-word answer -- how would you grade the government performance and that of the Treasurer? Let's make it A, B, C, D, E, F. Could you do that? How would you rate the government's performance on the budget last year and the economy? Would you like to give a shot at that?
Mr Drake: I'm going to give it a C+.
Ms Curtis: I'd have to go along with that.
Mr Cousens: Smart lady.
Mr Drake: I can explain if you want, but if you don't want, I won't.
Mr Carr: If we've got time, you can explain.
Mr Drake: There clearly were efforts at expenditure containment. I said to this committee last year that I didn't think it was the time to take money out of people's pockets in terms of tax increases. That was my view and it is my view. As far as the social contract is concerned, I understand where the government is coming from and given the rough ride they got into, I have considerable sympathy for a government that thought they were being humanitarian but didn't get that reaction. There are limits to how far you can take that in terms of the size of the problem.
Mrs Mathyssen: Just a couple of questions: You referred early in your presentation to Mexico, to its economy improving. I just wondered, very quickly, if the current instability, the problems they've experienced since New Year's Day, will impact that performance and what effect that might have on Ontario.
My second question has to do with the housing market. You noted that the number of housing starts was down and that was because of socially assisted units, the numbers there being down. I know that the federal program ended, so I know why the numbers of social units is down. I wonder, in terms of the health of an economy being measured by the number of housing starts, if those federal units had not been eliminated, would we be in a slightly better position here in Ontario?
I will confess to reading the newsletter of a competitor of yours. That competitor said that Ontarians have more after-tax disposable income than any other group in Canada. I wonder if that reflects your experience, and if that is indeed the reality, why people aren't spending. Is it an emotional reaction to all the bad news they keep hearing or is it really because we do have a serious economic problem that precludes that kind of spending?
Mr Drake: Let me try and start with the first one. The instability in Mexico certainly is a concern. Mexico is a country in a state of great economic change and clearly that's indicated in the problems that have been there. We don't pretend to be political analysts, but I think our view of it is that that serious problem will get settled and that the prospects for the Mexican economy are good.
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As far as the impact on Ontario is concerned, certainly there will be additional imports from Mexico and I think there will certainly be additional exports to Mexico. It's in Ontario's interest that Mexico grow quickly because I think that will certainly increase demand for exports from Ontario, just as it will for exports from the United States.
But it is a concern, and one of the things we would all be advised to do, perhaps, is to study Mexico a little more closely. There are differences in Mexico, and I don't pretend that I've done that. I do often have people come to me and ask me very blunt questions such as, "Why would anyone stay in Ontario given the wage levels in Mexico?" but it's not that simple. Mexico is not the same as Canada and it's not the same as the United States. I think it's wise for all of us, now that we are trading partners, to spend some time thinking about that.
I'm going to start on the housing question and Mimi will tell me when it's time for her to cut in.
Housing is an important part of the economy, but I think its importance at a time of economic recovery is less the absolute -- or rather, the proportional size of the housing construction industry in the economy -- than the fact that it tends to be a very stimulative activity. When one builds a house, one generates a lot of economic activity. It's not just that one is employing people to do the building, but one is purchasing building materials of many kinds and types.
Housing has traditionally been viewed as, economists use the term, as having a good multiplier. In the sense that housing activity was down, yes, I think that did have an adverse effect on economic activity. Mimi, do you want to add anything to that?
Ms Curtis: I'll just mention the point that I have data in front of me that look at 1992 to 1994; it's from CMHC. They look at a breakdown of provincial housing starts by type. They have the assisted component and it was substantially larger in 1992 than 1993.
I don't have the historical numbers, but in terms of what we can support, in terms of demand, if you look at housing starts, the late l980s was sort of interesting because it was when the baby-boomers were coming on to the market. It was when the typical first-time home buyer was apt to get into the market and purchase a home.
When we look at the next two years, we see demand being a little bit lower; actually, substantially lower than it has been during the late 1980s, so we do see a dropoff in terms of total housing starts because of demand.
Mr Drake: Again, I will start on the next one and Mimi may have some data which can help us out here.
Generally speaking, Ontario incomes have been quite high in relation to the other provinces. I don't think they've been the highest; I suspect the western provinces have been. I don't know whether Mimi has any data; if she has, she can be more specific.
I think the issue with Ontarians has been the depth and the nature of the recession. In terms of simple measurements, for example, decline in provincial gross domestic product, we already knew that Ontario took the biggest hit of any of the provinces. But I think it was more than that. It was the incredibly widespread and deep restructuring -- the polite term that people use -- in a number of industries, and of course especially in manufacturing industries. This was clearly much different than the kind of cyclical layoffs one has seen in past recessions.
I happen to live close to a Ford Motor Co production plant in Oakville. In past recessions, you knew that plant would probably have some downtime because the demand for durable goods would go down. But this time it was a much different thing. The restructuring, the layoffs, were not confined to what were the traditionally cyclical industries. They went through virtually every industry. It was a whole new ball game and a much bigger change, I think, than any of us understood as we went into the last few years.
There's one other fact I'd like to point out that I think illustrates consumers' behaviour. If you were to look at the Canadian national accounts for -- I think it was the second quarter of 1993 -- you would actually see an increase in personal disposable income. That was a one-time increase and it was a reflection of the federal tax refunds that got sent out. I think they were pushed into the second quarter. If I recall correctly, that really wasn't reflected in terms of consumer spending; it was reflected in higher savings. Normally, if that happened, you'd say, "Aha, yes, interest rates must have gone up." They didn't go up. It was just that people got some extra money, were particularly cautious and said, "No, we're not going to spend it, because we are concerned about the future."
I think this widespread concern about the future is a major issue and really is having a major impact, regardless of actual income levels.
Mrs Mathyssen: What grade did you give the Wilson-Crow team?
Mr Drake: I haven't given them a grade. I will tell you, though, the comments that I have made. My concern is to the future. I'm going to make two comments. I've occasionally gone back and looked at a number of things that have happened during the past five years. You can look at the individual things: the free trade agreement, the GST, the high interest rates, the rising dollar -- these are all past history -- and any one of those had a pretty severe effect, but their effect together was especially severe.
If we had it to do over again, if someone said to me, "What might we have done differently?" I think it was the enormous number of things that were done.
If someone had said to me a month before the FTA went into effect, "What sort of foreign exchange policy might you expect from the Bank of Canada?" I would have said, "I'm sure they'd try and prevent the dollar from rising during this period of adjustment," and I would have been dead wrong, absolutely wrong. I think the answer there is that there were so many things that happened at once and they exacerbated each other.
Just to illustrate the point, in the FTA there was nothing that I'm aware of that said there would be an enormous increase in cross-border shopping. You still had so much that you could bring back before you had to pay duty. But that put the notion in the heads of consumers. Then we had the rise in the dollar, which made the prices much more attractive. Then we had the GST, which confused consumers in the first instance, because there was such diverse discussion about what that would do to prices, and in the second instance it simply made them mad. That in turn sent consumers across the border and one of the results of that was a virtual revolution in the Canadian retailing industry. Now, we missed all of that. As forecasters, we simply didn't pick it up. I understand now why we didn't, but that is illustrative of the point.
I guess the key thing for the future is that we have gained some very important things in terms of international competitiveness. We've paid the price. There's no question we've paid the price for the gains we've made, and my concern for the future is that, having paid that price, I don't want to see us lose it. I don't want to see the economy pay that price and not get something in terms of benefit for it.
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Mr Phillips: In terms of your economic forecast, my conclusion on it is that you're very close to what the government estimates for 1994. We're talking kind of at the edges of the envelope here in terms of differences. That's not surprising, because that tends to happen each year, that somehow or other the numbers have a similarity. The government, I suspect, goes to people like yourselves and says, "What are you predicting?" and takes that into account. that's my take-away on the numbers from the Toronto-Dominion Bank, that in terms of an economic outlook for 1994, you're very close to the government numbers.
The one comment I would make is this: You indicate here that the number of jobs in Ontario in 1994 will be higher than in 1989, and I don't think that's factually correct. I think that even in 1994, according to your numbers and the government numbers, there still will be fewer people working than there was in 1989 or 1990. But that's a detail.
Where I would appreciate your advice is, I guess, in two areas. One is that the most troubling thing we heard this morning, apart from the job situation, which continues to be tragic, was that the revenue engine in the province is kind of in the ditch and spinning its wheels. We heard this morning that revenue will be down about $1.6 billion lower than the government had thought for 1994-95. Tax revenues, in spite of tax increases, actually will be less in 1994-95 than they were four years ago. Something very fundamental is happening with revenue that is not explained by the normal formulas that are used.
Can you give us any insight into what may be happening with the normal revenue-generating sources that would see our revenues in such difficult shape? It can't be explained just by the weak economy.
Mr Drake: There are perhaps a couple of areas we can at least point to. One of them is inflation, or the lack of inflation. This has been a topic that's been discussed by both economists and indeed finance ministers for some time. I think it was John Turner who, as Finance minister, introduced the indexation of federal income tax brackets, and that would be back some time in the 1970s. He did that in recognition of the fact that in an inflationary environment you tend to get what was then called "bracket creep" -- of course, it was at a time when there were more federal tax brackets than there are now -- and that tended to raise government revenue quite substantially, without any changes actually having been made in tax rates.
A low-inflation environment -- and I might say it's not just governments that have to learn to live with a low-inflation environment; it's quite a substantial change -- tends to restrain the growth in government revenue. Associated with this environment, of course, is the fact that wages and incomes are not rising very quickly.
I just got the November collective bargaining statistics across my desk this morning. For the first 11 months of this year, the average annual increase in wages in collective bargaining contracts across the country was 0.7%. I suspect that's the lowest since they've been keeping numbers. So your incomes are not growing terribly quickly and that affects personal income tax. Prices are not growing and that affects excise-type taxes where the amount of tax is a function of the price of a good or service that is purchased.
I think inflation is certainly one fundamental issue and it's something that we haven't had to deal with for a long time. We've had periods of the postwar period when inflation's been quite low, but not long periods. I think that's something that is going to have to be dealt with.
The other thing in terms of the economy recovery is consumption. Consumption is not leading this recovery, and that clearly has an impact on excise-type sales taxes and so on. So I think that's another issue.
The third one, and I can only make the most general comments, is the issue of the extent to which people are actively going out of their way to avoid paying tax, the so-called underground economy. It's very difficult to measure that. At the same time, I think most of us have a sense that it is becoming an increasing problem.
I guess my own view on that is that ultimately any government can only tax at a level that most of the population is prepared to accept. Obviously, no matter what level of taxes there will always be some people who will try to avoid them, and that's why you have systems in place to try and stop that. But ultimately you can tax at a level that the population will accept. I don't think there are any precise measures of that. It's something that is very much a matter of judgement. If in fact revenue is being severely affected by the so-called underground economy, the non-taxed economy, then I think it's something that governments at any level have to look at.
Those are the things that I can think of. Mimi, do you want to add anything?
Ms Curtis: I want to add something to your first comment about employment. I hope I can clarify something here. We were saying the level of employment by 1995 should surpass the average level for 1989. We don't foresee it surpassing the employment level this year.
Mr Phillips: Okay. I'm sorry, I misread that "by next year" to mean 1994. You're right. My apologies.
The Chair: That concludes our time, Mr Phillips. I'm sorry. Mr Drake and Ms Curtis, thank you very much for making your presentation before the committee today.
Mr Sutherland: Is this a new comment that's been put on your forecast at the bottom, "The information is drawn from other sources but we don't take responsibility or liability for the information on that"?
Mr Drake: We add that now because we are in the securities business and that's a requirement if you're in that business. It's not that we work any less hard or that we are consciously less responsible for what we do.
Mr Wiseman: I thought it might be a reflection of how badly you blew it in 1990.
Mr Sutherland: Or everyone else.
CONFERENCE BOARD OF CANADA
The Chair: The next presenter is the Conference Board of Canada, James Frank, vice-president.
Mr James Frank: I brought with me copies of two items for you. One is the executive summary of the Canadian forecast that we do at the conference board and the other is a copy of the notes that I'd like to speak to. If it's appropriate, I could proceed at this point.
The Chair: If you would just hold on for just a minute till we get these circulated and then we can proceed.
I think everyone has a copy of your reports now and you may proceed.
Mr Frank: Okay. Thank you. I have spoken before this committee in past years, and as an employee of the Conference Board of Canada I'm always pleased to do this. We are a major forecaster in Canada. We've been doing forecasts for Canada and the provinces for almost 20 years now. In all of the work that the conference board does, we take a position that is non-prescriptive. We don't advise governments on what to do or, for that matter, businesses that are members of the conference board. We're a not-for-profit organization and we are located in Ottawa.
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What I'd like to do this afternoon here is give you a bit of an understanding of the outlook that we have for Canada, and I'll comment a bit about Ontario as we go through this. We're just in the process of updating our Ontario forecast, and I've given you some numbers that we will comment on as we go through this. I hope the material I present to you will be useful as you go ahead in your deliberations. I'm not here today to lobby on behalf of my organization for anything in particular, so the tone of what I'm going to say is going to follow along in that light.
When we look at 1994, we're seeing an economy that is improving. I don't think there's much chance that we're going to have much of a setback, although we are on the low end of forecasters in terms of the outlook. I'm going to try to explain why that's the case.
We're looking for growth of about 3% this year. Inflation is just under 2%; the unemployment rate just under 11%. The performance of Ontario is now converging to the national average, and this is much better performance than we've had in the province for the past couple of years.
The overall economy continues to have a dual personality: The domestic scene continues to struggle while trade is leading the way.
Government spending on goods and services is going to drop by about 2% this year, we think. The same thing will happen in Ontario. This will be the first time that we will see real goods and services spending by governments decline since 1959 in Canada, so the restraint is in place and it is major.
Now, 1994, though, is going to see a broadening in the strength on to business investment, although we still believe the consumer is going to remain cautious and income constrained. I'll explain why that's the case. Interest rates are clearly not enough to alter the picture on consumer spending. What you really have to have, to go to one of the questions earlier, is sustained gains in employment and take-home pay, and that just has not been happening.
Despite the overall improvement, we say that the year is going to leave Canadians feeling much the same as they were in 1993. They face rising taxes and spending cutbacks as all governments deal with deficits, and there's going to be modest improvement in employment.
On the currency, we think it's worth about 83 cents. This usually gets gales of laughter from business audiences. They say, "How can that possibly be?" Analytically, on a purchasing power parity basis, that's the number that we tend to work with as we forecast in the medium term. We tell all our members to try to plan their business affairs with that in mind and not to count on a 76- or 77-cent dollar to pull the fat out of the fire year after year. So in our forecast we bring the currency back up towards 77 cents by next year at this time.
In light of this outlook on the exchange rate, a major factor behind the improvement in the economy last year was the performance of net exports. It's an old story, but I think the same thing's going to be true this year. Trade is going to be a major support for us, so we expect growth of about 6%, following 9% in exports last year.
The US housing industry and the US purchase of autos and parts are particularly strong areas for us, and they are areas of major exports for Canada. It's particularly true, of course, in Ontario with the auto sector.
When we think about trade, it's important for a committee like this to realize that there's a lot of intrafirm and interfirm trade going on. It's more so the case now than ever in the past and I think it's one of the hard things that we've had to try to come to grips with in a forecasting sense. The integration of the North American economy is going to make that even more so.
Tracking exports requires us also to track imports, and we'll see strong import growth over the coming year, as we have in the past couple of years, especially in the area of machinery and equipment spending.
All of this said, though, the trade sector's not going to give us the same kick or the same boost that we've had for the last couple of years and that's an important thing to keep in mind, because you can't have the same kind of growth year after year that's been so strong. The main reason behind it is that the US economy is not performing particularly well and the Clinton package is going to depress that economy over the next few years. The Canadian dollar's decline is not going to help us again. In other words, it's a one-time adjustment that's already taken place. We'll get benefit from it as the year unfolds, of course, but the stimulus to growth is not going to come from that sector.
Japan is something that typically in Ontario we don't spend much time talking about, but it is our secondlargest trader. We export about 5% of our exports to Japan and Japan is in the tank. Europe is not producing or growing very well either and when you couple that with the US, you can see why we're not looking for another boost, if you like, of the same magnitude from trade.
In spite of the decent outlook that we have -- I call it decent because it's relative to what we've been through for the past few years -- there remains the key problem of high unemployment and it improves only gradually. Our forecast is for 10.7%, under 11% this year. Ontario we expect to be just under 10.5%. I think the number's 10.3%.
The issue of employment growth is proving very difficult for us to handle in our forecasting because we're increasingly of the view that productivity gains are potentially so large that output can be boosted without the normal increases in employment that we have been accustomed to in the past. This is a structural change; it's something that's very hard to get your hands on.
We've had very large increases in machinery and equipment investment in the past 10 years. In 1993 we had a growth of 9%. We're forecasting 6% this year and also next year. A lot of this is labour-saving technology, of course, and it's a key reason why we expect employment growth of only about 2% this coming year in Canada and slightly weaker, also, in Ontario.
Firms remain reluctant to rehire. There still are lots of companies that are talking about major layoffs, now moving into the commercial services sector. We're seeing that still as a concern as the year unfolds.
It is important to understand this productivity connection because we may not get the employment gains that we would like because of this. We are forecasting only a small increase in non-farm productivity, at about 1% this year and next year. If productivity growth is stronger than that -- let's say it were 2% or higher -- then you would have a smaller increase in employment than we're expecting. I think that relationship is important to keep in mind, particularly noting that our machinery and equipment investment is now over 9% of GDP. So we're really pouring it on in that regard and I don't think it's going to change very much in the next year.
The extremely serious nature of the employment problem is showing up in manufacturing. You've been talking about this here at this committee for a long time. We had declines three years in a row and then we only got 0.8% growth last year. That's pretty modest.
The good news, we think, is that the worst is behind us. We wrote an article in the Canadian Business Review last summer on this topic and we think manufacturing will continue to prosper and recover but it's going to be a long time before it gets back to where we were prior to this recession.
Turning to the consumer situation, we don't see how you can have an economy performing very strongly until the consumer is willing to borrow again and this means they have to get their debt under control. This is happening. Interest costs, as a share of disposable income, are finally getting down towards around 8% from highs of over 10%, and things are improving on that front. The ongoing low interest rates and gradually improving employment should give us stronger household spending as we get through the second quarter of this year.
Consumer spending is going to generate average annual growth of only about 2% compared to only one sixth last year. In Ontario we expect it to be weaker and we should maybe talk a little bit about why we see that.
Why do we forecast such weak consumer spending and why are consumers concerned about borrowing, even with low interest rates? I talked about this at the Finance ministers' meeting in December in Ottawa. Part of the answer lies in the income prospects that we see and the other part is in the effects of low employment growth and the problems everyone has in finding a job. I think just about everybody knows someone who's lost their job and who's been unemployed for a long period of time, and that affects people.
Within the unionized workforce we know that two thirds of the employees covered by collective agreements in the first nine months of last year had freezes or rollbacks -- two thirds of them. So, ladies and gentlemen, those folks aren't going to have any increase in purchasing power in the coming year. This pattern is going to be pretty much followed through as we get more restraint. I see in Alberta they're expecting to cut public servants' salaries again. You're going to see restraint on that side.
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At the conference board we do a lot of surveying in the non-union sector in the fall each year of people's pay plans and we find that most companies are expecting something, on average, of around 2%. In our judgement, that's going to get downsized before the dust settles and we're saying here in this piece at about 1.75%. So for wage and salary earners there's very little in the way of personal disposable income gains for 1994, assuming no further tax increases. That's an assumption I think that will fail. There's no gain in real disposable income when you look at inflation of 1.6%. That's one of the main reasons then that we have consumer spending still struggling not only in Ontario but also in Canada.
Now, on the consumer confidence area I can bring you a little bit of good news here today because I just have the results for our survey which we do every quarter. It hasn't been released yet to the media. In the third quarter, you may recall, we had quite a drop in confidence and we were a little worried about whether that would rebound. I think part of it had to do with what happened in the summertime and so on, but in the fourth quarter confidence, as you can see in the text, jumped from 93 to 105 in Canada as a whole. This is really quite a nice result. More importantly, though, in Ontario there was a jump, from 81 to 112, in the fourth quarter.
What I would have to say to you, though, is that consumers are very nervous and they're very twitchy and so don't assume that this is on the way up for the duration, because I rather doubt that's the case.
When you look at business confidence, I also have the fourth-quarter number here for you. We had a nice rebound in the fourth quarter, up to 151, rose 14 points. Business people are more confident, quite a lot more confident in 1993 than they were in 1992. As we interpret those results and look ahead throughout this year, things in the business community from business people's perspectives are fairly positive, and I think that's encouraging. We're also, by the way, not seeing the volatility in the business sector with confidence that we find among consumers.
Turning to housing, you were discussing earlier the issue of affordability and that's been the case. Regrettably, though, we have missed on our forecast of housing starts quite badly in the last couple of years. We have been working on an analytical base that suggested to us that we should expect around 200,000 starts in Canada and last year we got 156,000. It's been very volatile, up and down each month and with a downward trend.
I think we're going to have to temper our view a lot because it seems that people's willingness to go and borrow, to take on a mortgage, to take additional debt, is just not there. There may be other things happening on the demographic front. You think about the boomerang generation, kids leaving home, coming home to live with their folks and this type of thing as maybe being a factor in here. We've no way of knowing that.
We're forecasting 180,000 starts this year. Sure, it's a strengthening area of the economy, but it's nothing to write home about. In Ontario, you can see you had 46,000 starts last year. We're expecting about 60,000 this year. That could be affected depending on how much social starts come though that we don't expect now.
Overall business investment in the construction sector is the area that is really weak. I think if you look around Toronto here, you'll be hard pressed to count many cranes. In Ottawa we had one and it was at Canada Post. It's now down and the building is finished. There's just not much going on in non-residential construction.
The major factor there, when you look at the 11% decline in 1992 and another 9% in 1993, is that we think the bottom has been hit. If you think of that as good news, well then celebrate. We'll have a little bit of growth this year; 1% is nothing. But I don't think you can look ahead at any major change there for the foreseeable future. The vacancy rate is just simply too high.
Machinery and equipment is a different story. It's quite well known and it's a very positive story and it is one of the things that is leading to good pickup and investment in the coming year. You can see the numbers that we're forecasting for this year.
I have to say a few words about governments, I guess, because it's more than anything else expected. When you look at the revenue prospects for governments, they're better this year than they've been for several years. We expect personal income growth of about 4% this year. That'll be twice what it was last year. The tax base is growing, and that means even if you didn't do anything, you should be pulling in more revenue than you have in the previous year.
Total direct tax collections by provincial governments from personal income taxes we're forecasting to rise by 12%. That's not just for Ontario; that's all provinces. I can't give you a number just for Ontario. That compares to only 1% last year. It's quite a different world we're talking about here. Also, we expect a 5% provincial retail sales tax revenue gain in 1994 compared to 1.6% last year. The bottom line is that the fiscal position of all governments is going to improve in 1994-95. Lord help me if I have to come back here next year with another round of deficits moving up by something like $65 billion in total, compared to projections of something in the low $50 billions.
Corporate profits I think are going to turn in some tax revenue for governments this year. We're forecasting about 7% growth, after a 9% increase last year. The fiscal situation of governments should improve from that source as well.
Now, on the infrastructure and spending side, this is government investment, it's going to be a source of strength, as you can see in that table I presented to you. It's like the impact on housing starts from the social side; these are initiatives that have some discretion around them and that can make a difference. We're looking at 7% growth there in both federal and provincial investment spending.
The recent announcement of increased deficits by the feds and of course by most of the provinces underlines the difficulty that they've all had in deficit control during this recession. Despite the special one-time adjustments which increased the federal deficit, the fact remains that we added $65 billion this current fiscal year, which ends in March, plus about $65 billion the previous year. So that means we've added $130 billion to the debt stock in Canada in the past two years. That takes us to 93% of GDP and rising. The fact is that the GDP increase in Canada will be less than the reasonably forecast deficits in the coming year. So that ratio will rise; that's just arithmetic.
Now, it's clear to us that both levels of government are going to have to work much more closely together and we're going to see more restraint measures, we think, through the balance of the decade. To this end, we took a very unusual step in this forecast. Typically, the Conference Board of Canada does not anticipate what politicians are likely to do in their budgets, because we have learned that they tend not to do what they say they're going to do. Most of the time, that has been our experience.
But what have we done this time? We've taken $1 billion out of goods and services spending at the federal level and at the provincial level in each of this year and next year. If you're interested, we did not take it out of transfers to provinces for the federal government; we just took it out of goods and services spending. So that's not where it will all occur, but we have taken some money out of the forecast, and that's one of the reasons that our forecast is down there at around 3%.
On the monetary policy side, we don't have much change in interest rates over the coming year. There's really no reason for that to occur. We do think that rates pretty well have bottomed out, but I think if you listened to me speak here last year, and I see some of you were here, I told you that last year, and we were wrong on that one. Things have been a lot weaker than we thought. We don't think the change at the Bank of Canada is going to affect policy really very much. The government of Canada is, if you like, signalling pretty clearly that it's in charge of monetary policy in Canada by that change it introduced.
So just let me wrap it up momentarily here. We think that 1994 is going to feel much like 1993 to most people. I think as politicians that's going to be important for you, because we think the hopes that we've all had that there will be a mood upswing and everyone will feel more optimistic are pretty unlikely. Job hunting is going to still be very difficult.
Now, all of that said, the numbers are going to be better. We think that there will be gains overall in employment in Canada of about 250,000; about 85,000 or so in Ontario. That's still pretty weak, by the way, but it's still heading in the right direction.
Two downside risks: The situation in Quebec obviously could cause some heartburn; and then secondly, and this is really important, larger than we expect, provincial government or federal government deficit reduction packages could put this forecast down further.
To just illustrate the point, last year when we were forecasting at this time for the year, we had a fairly decent growth rate. By the time Ontario and Quebec in particular were finished, plus all the other provinces of course, we had to take 0.7% off our growth rate for Canada as a result of those provincial budgets.
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So the irony of it was that because of that, the federal deficit rose. As I told you, we've taken out $2 billion this year, $2 billion next year. Some people would say that's small but at least it's a start in the right direction because we got blindsided a bit last year by what happened. We think the federal deficit will probably drop about $10 billion from the so-called estimate of $45 billion, as a combination of the normal growth of the economy and additional measures that are going to be put into place.
So with those comments, I'd be happy to try and answer any questions or address any issues you'd like to put to me.
Mr Sutherland: I have a couple of questions. Employment's going to rise but not strong, you said that consumer spending would be weak, yet you're predicting some significant increases both on personal income tax and on retail sales tax. If you could just reconcile those two, as to how they come together.
Regarding consumer spending, obviously the concerns about employment are the serious ones. I know you have mentioned much about personal debt and where that is these days as to whether that's come down substantially, and if you could make some comments or if you have some information on that, that would be appreciated as well.
Mr Frank: First of all, in terms of the retail numbers, that's a nominal gain that we're talking about here. So it includes the volumes of about 2% plus a small amount of inflation and then the tax generated on that that comes from a growing population that has increased consumption plus what's happening throughout the whole country. I can't give you numbers for Ontario on retail sales. So there could be a difference there.
Your question about debt, the level of debt is not dropping. What is happening is the growth rates have slowed down, that's the first thing. Most consumer debt is held in mortgages and the stock of that is not falling, but what is happening is that as people refinance, of course, they are paying lower interest rates. The key thing that we look at when we do our analytics on this is the interest component of disposable income. In other words, what percentage of your take-home pay do you pay in interest costs? That ratio peaked at, as I recall, a little over 10% in the worst of the recession; this time it's now down to just a bit over 8%. When it reaches somewhere between 7% and 8%, historically -- this is important -- people tend to be willing to borrow a bit more.
The thing that's happening now is that there is so much concern about losing jobs, wage cutbacks, freezes and all that, that maybe it's going to have to fall a lot further before people will be willing to borrow.
Mr Sutherland: You mentioned mortgages. What about other forms of personal debt: credit cards etc? Has that all dropped significantly?
Mr Frank: People are drawing that down but that's a smaller proportion of the debt stock by quite a margin.
Mr Wiseman: One of the comments that you made earlier about the impact of the deficit reductions by government, this really throws us into a conundrum here because, as the opposition is saying, "Cut, cut, cut, cut" -- that's on one day, but anyway -- if we do this in a way that it's drastic or not careful, we could wind up throwing the whole economy back into a recession. Is that a fair statement or would you like to comment on that?
Mr Frank: Sure. Let me answer it two ways. If reducing deficits could cause growth in an economy, then there would never be a deficit; right? Because we would have reduced them to zero and we'd be running surpluses and the economy growing like crazy. So the first fact of life is, reducing deficits reduces the growth rate and it's because you are borrowing effectively and in the end less from abroad, other sources. If you borrow to meet your financial needs, for example, just within the country, then the impact of that is only on the differential between the spending patterns of the people you borrow from and the spending patterns in the people you give it to. But when you go and bring new money in from abroad, that is a net direct stimulus. So cutting deficits does slow the economy down, even with reducing interest rates.
The second thing is about the pace of this, and I think you're putting your finger on the issue that's important. During the federal election campaign the Reform Party was proposing to reduce the deficit at the federal level to zero in three years. The conference board does not make a habit of commenting on these things, but I found myself in a conference in town here and we just finally felt that we had to say this was simply impossible, that you could technically not do it. It would be too fast. The impact on people's confidence, on incomes in the economy, would have been so severe that it would have just put us back too much. Now, that said, the art of doing this requires the balance between monetary and fiscal policy, it requires a balance between the federal government and the provinces, probably a lot more cooperation between the two levels of government than has occurred over the past number of years, without being pejorative one way or the other on it, and I think it requires a gradual process. Really sharp moves on this front can rebound and work against you.
Mr Wiseman: If the borrowing requirements for both Ontario and the nation get to the point where we're not having to go offshore in the kind of amounts that we currently are, is it then possible to accelerate the deficit reduction?
Mr Frank: That's a good question and I think the answer would be yes to that, because what you would be doing is, for example, by reducing your borrowing requirements, which is essentially your deficit, you would be leaving that money in the hands of one segment of the society from which you would normally borrow it, and they either have to spend it or save it, which finds its way into investment. So I think off the top of my head, that would be the case.
Mr Wiseman: My last --
The Chair: We have to move on.
Mr Wiseman: Oh, this was the important question.
The Chair: Unless committee members would allow you time to ask it. We are running short of time.
Mr Phillips: If it's urgent, I don't mind.
Mr Wiseman: I was just going to ask at what point the leakage of money out of the economy to pay the interest on the debt becomes a liability and starts to act in a counterproductive way to the economy as a whole.
Mr Frank: That's the challenge. I don't know where that actually happens. You'll hear people talking about "hitting the wall" and all that, and I think that the truth is we don't know when that happens. It's very risky to assume that it never will happen or that you can carry on. I frankly think we could not as a country add $65 billion a year for much longer. I think the jig is up.
Mr Phillips: Again, I say that my take on your economic forecast is that it's in the same range as the government. Is that fair?
Mr Frank: I would say it is. I have not got numbers here for 1995. I would suggest to the committee that when we have this forecast completed, which should be within the next couple of weeks, you look at the 1995 forecast and also the government's 1995 forecast.
Typically, where we find governments a bit more optimistic is in the out years. They usually will have forecasts that are fairly similar to mainstream forecasting within the current year. I would say to you that we are a little less optimistic, I think, than Ontario treasury, if I gathered from the conversation earlier.
Mr Phillips: For 1994?
Mr Frank: Yes. Just a bit less optimistic.
Mr Phillips: They were saying 3.4% real growth.
Mr Frank: We're at 3.3%. I would say for practical purposes there's no difference there.
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Mr Phillips: Yes, and I think on housing starts you're actually a little more optimistic than they are.
Mr Frank: That's fine.
Mr Phillips: I always appreciated your comment on the deficit and certainly my memory from the conference board was that it gave the government, with its first budget, a lot of confidence, I think, because I remember the conference board said by and large you thought it was a pretty good budget, the first $10-billion deficit one, and I can remember they always called you, "The prestigious conference board supports us."
Mr Carr: They were the only ones.
Mr Phillips: I think it was the only one.
Mrs Caplan: And you didn't support them, they say.
Mr Phillips: It was "the prestigious conference board."
Mr Frank: I must say, before you continue to repeat these horrid rumours, you should look at the article that I actually wrote. The headline in the Globe and Mail was something to the effect that, "Board Lauds Ontario Budget," and it was a bit misleading in terms of what we were trying to say there.
Mr Carr: It was the Premier that we heard.
Mr Kwinter: It didn't stop them from using it.
Mr Phillips: Yes, always it was "the prestigious conference board." But anyway, I want to get to the substance of the argument or the debate. There are two questions I would like your advice on. One is the one that Mr Sutherland raised. That is that we're perplexed about the revenue numbers that are coming in. They almost are unexplainable on any normal basis, so I would appreciate you expanding on your revenue estimates in terms of personal income tax and what not, because as the previous speaker said, which I support, I think the combination of the informal economy, which I regard as legal but as one designed to minimize tax paid, and then the underground economy, the inflation and the weak economy are all having an impact on revenues. But you're more optimistic, I think, on the revenue side.
The second one is just, I appreciate your view on the deficit and if I understand the argument you just made, if deficits were reduced and that made sense, then the economy would be growing. The converse of that is sort of, we have been running record deficits at a time when the economy has been as weak, over a three-year period, as it's ever been, I think. So one could argue that these large deficits have not seemed to help the economy and that maybe there's something besides just in terms of consumer confidence, business confidence, when governments run large deficits, that have a countervailing negative impact. Anyway, I'm just saying I know the government listens carefully to your advice, the prestigious conference board. Is it possible that the converse argument could be made, that these large deficits may have had something to do with the weak economy over the last three years?
Mr Frank: Let me address that one last and I'll come back to the revenue thing. You have to ask the question not on the basis of the observed growth rates that you've got in the economy now but what would have happened had the government in Ontario or the federal government or any other government cut its deficit significantly over the past three years. Would we have observed the growth rates that we currently observe, as modest as they are? That's the question. You can try and speculate about that answer if you like, but I would simply say to you that if it were possible to stimulate the economy with growth or get it to grow more quickly by cutting back, then most people would say we would have found that answer now.
To go to your second question, though, about the size of deficits and the duration during which you run them, that point, I think, is the serious point at this stage. We find ourselves, I think, in a situation where we have lost the degrees of freedom to stimulate in a big way at this point. So this is why we find ourselves with discussions about infrastructure spending and reallocating money from this envelope to that envelope, where we say we will get a better hit for it. The classic example, of course, is the helicopter issue. But as we now move into this recovery period, and we are recovering and we have been since -- we have actually been expanding since the second quarter of this past year, it's now time to start to turn that around. I don't think that you could consider, for example, moving ahead with a program that would increase deficits as a matter of policy. I think that's going in a wrong direction at this stage and I think that's what most people are arguing. But you can't sort of just say, well, I look at the situation now, and what would it have been otherwise? That's the really hard thing to answer, and you threw up your hands. You can do some analytical work on that and it will tell you the answer that I think you probably would anticipate.
On the issue of the economy and what has happened in the past couple of years --
Mr Phillips: The revenue.
Mr Frank: -- on revenue, yes -- I can't answer this well. One thing that seems to be showing up to us as to the source of the shortfalls on personal incomes taxes is that the kinds of people who have lost jobs this time have been more so high-income people, older people who have moved from fairly high-tax-paying jobs out of work or on to early retirement. I think that if we had access to the microdata to analyse that, we would find that in this recession more higher-paid, older people have been put out of work than was the case before. So when you look then at employment in gross numbers, X hundred thousand people working or not working, you miss the point, because you've got to look at how much money they were earning prior to losing their job or going on to early retirement. I think there's something in that that is here.
The other aspect of it, of course, is something that you have been talking about, this underground economy. Again, I have no way of analysing that. I don't know how large it is. I would reject assertions that people make that it's 20% of GDP. I think that's absurd. That would be $150 billion. You cannot lose $150 billion in this economy; it would show up in somebody's bank book somewhere. It's just too much. Could it be as much as 10% or 5%? I think that's the range we're really talking about here.
The second point about it is more important: Has it been increasing? I think most people would agree that it is, and I would agree that it is. But I sure don't fall into the camp that says it's 15% or 20% of GDP. That's way, way, way overstated.
If you're talking about 5%, you're looking at $35 billion of unreported income, and then take the tax on that. This is still a large amount of money. So I think those are the factors. I think there's distribution on employment loss. There is this underground economy. I think also on the corporate tax side, the fact that you can bring losses ahead for so many years is a major factor there in terms of the corporate tax state.
Mr Carr: You said consumer confidence is going to be down next year.
Mr Frank: No, I didn't say it was going to be down.
Mr Carr: Or the same as this year. The only good news is that we're going to be a step closer to a provincial election and the great socialist experiment in the province of Ontario will be rapidly coming to a conclusion.
Mr Frank: What party are you with?
Mr Sutherland: They're getting pretty confident over there.
Mr Carr: I'm not with the socialists.
Mr Frank: Is he a Liberal or a Tory?
Mr Wiseman: You notice there's only one here.
Mr Carr: Mr Wiseman will be preparing to go back to the classroom. Anyway, one of the things that is being looked at by governments federally and provincially is the whole issue of government projects and capital projects. You may have heard the Treasurer say that they're going to announce within the next couple of weeks the federal-Ontario government program, money being spent.
Looking at it as an economist and looking at the spending and so on, and knowing that the number one issue is creating jobs, is that how we should be spending the money, and do you agree with the program that the federal and the provincial governments seem to be going ahead with in terms of the capital projects? Do you agree with it and should we be doing that?
Mr Frank: I'm going to cop out a little bit on that because I don't want to get into the value judgements on these things. That's your job as politicians.
Mr Carr: Can't you do it as an economist?
Mr Frank: As an economist, is it going to make a difference? The answer is yes. If you look at this little table here, you'll see that we have government investment growing at 6.9 last year here in Canada; 6.7 here in Ontario. A goodly chunk of that comes from additional moneys brought in in these infrastructure spending programs.
The catch, in our judgement, and the reason that we're not quite as bullish, shall I say, on the impact in Ontario or in other provinces is that the municipalities and the provinces have to come up with their third of the action. We believe it's going to be hard for them to do that short of taking it from other things they were going to spend on initially. To put it another way, it's not new money. Consequently, when you look at the macroeconomic effect, you're looking at the difference you get from spending, say, $1 billion on roads, schools, bridges and so on as opposed to, say, $1 billion on the helicopter program, where there are a lot of leakages there.
Mr Carr: Politically of course what it does is allow politicians to go out and cut ribbons and say, "We created jobs." As an economist, you seem to be saying one thing, and all governments of all political stripes do that and try to take credit for the job. I laughed at the Treasurer this morning talking about jobs. He was trying to take credit for the jobs being created at the Ford plant. It was sort of like the rooster trying to take credit for the dawn coming up. They're scratching their heads, trying to find -- but that would be political.
You seem to be saying revenue is going to grow. You seem to be saying we shouldn't be cutting more spending here and the deficit isn't really a problem. Is your recommendation to the Treasurer then more of the status quo, of what we're doing presently, and letting the revenue grow us out of this? If not, what would your recommendations be?
Mr Frank: We're not recommending to the Treasurer; we are forecasting that what will happen is that there will be additional expenditure reductions among provinces and at the federal level in 1994-95. As I said in my opening comments, we are not in the business of telling people or recommending to them what to do. I think it is pretty clear to us though, analytically, that you cannot grow out of these deficits. The record of the 1980s is I think crystal clear to anybody regardless of their political persuasion. The hope that may have been there in 1990 that this would take care of itself just isn't there. The level of the total debt now is, as I said, 93%, 94% of GDP, and it is not going to turn around as a share of GDP because there's too much stock there now. I think that simply is going to force governments, no matter who they are, to reduce spending.
Mr Carr: Thank you. That's very helpful.
The Chair: Thank you very much, Mr Frank, for making your presentation before the committee on behalf of the Conference Board of Canada. Mr Wiseman has a question for the researcher.
Mr Wiseman: We've been talking a lot about the spending of government money, where it was spent and the implication that there is a difference in multiplier effect from where you spend the money. I have never really seen any kind of breakdown of what the multipliers are for the various kinds of spending that governments do. If it's around, if it's possible, I would like to see the difference in the multiplier effect on spending money in construction of roads or of buildings and money being spent on other programs, if that's possible, if that's anywhere.
The Chair: The research officer has that question. I would just like to inform committee members that tomorrow afternoon we have Informetrica here. Mike McCracken's a forecaster and he's going to have the opportunity to have 45 minutes. So that will take us beyond 5 o'clock to 5:15. That's what I wanted to tell you.
If there isn't anything else, then this committee stands adjourned until 10 am tomorrow morning.
The committee adjourned at 1635.