Assemblée législative de l'Ontario

ECONOMIC STATEMENT

CONTENTS

Thursday 5 December 1996

Economic statement

Ministry of Finance

Mr Michael Gourley, Deputy Minister

Mr Steve Dorey, ADM, office of economic policy

Mr Tony Salerno, CEO, Ontario Financing Authority

Ms Anne Evans, ADM and controller, fiscal and financial policy division

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

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

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

*Mr TedArnott (Wellington PC)

*Ms IsabelBassett (St Andrew-St Patrick PC)

*Mr JimBrown (Scarborough West / -Ouest PC)

Ms AnnamarieCastrilli (Downsview L)

*Mr TedChudleigh (Halton North / -Nord PC)

*Mr Douglas B. Ford (Etobicoke-Humber PC)

*Mr TimHudak (Niagara South / -Sud PC)

*Mr MonteKwinter (Wilson Heights L)

*Mr TonyMartin (Sault Ste Marie ND)

Mr GerryMartiniuk (Cambridge PC)

*Mr GerryPhillips (Scarborough-Agincourt L)

*Mr GillesPouliot (Lake Nipigon / Lac-Nipigon ND)

Mr JosephSpina (Brampton North / -Nord PC)

*Mr WayneWettlaufer (Kitchener PC)

*In attendance / présents

Substitutions present / Membres remplaçants présents:

Mr E.J. DouglasRollins (Quinte) for Mr Martiniuk

Clerk / Greffier: Mr Franco Carrozza

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

The committee met at 1550 in committee room 2.

ECONOMIC STATEMENT

The Chair (Mr Ted Chudleigh): I'd like to call the standing committee on finance and economic affairs to order. Would the members please take their seats.

The purpose of the meeting today is to hear a report from the Deputy Minister of Finance on the economic statement made by the minister last week before this committee. Mr Gourley, if you are prepared, I would ask you to proceed with your report. I understand that you'll be assisted by some of your assistant deputy ministers and executive directors as time goes by. I will leave the introduction of those individuals to you. If you would introduce them for the purposes of Hansard, I'd appreciate that.

Mr Michael Gourley: I'll do that. With me are Mr Tony Salerno, the assistant deputy minister in the ministry and CEO of the Ontario Financing Authority; Mr Steve Dorey, the assistant deputy minister, office of economic policy; Ms Anne Evans, the assistant deputy minister of finance and fiscal policy and controller with the ministry; and Mr Bob Christie, the assistant deputy minister, office of the budget and taxation. As you indicated, once we get into the questioning period, I may be asking those individuals to assist me with elaboration on any answers I might have.

In the meantime, what I would propose to do is to give a brief presentation and hope that it provides an opportunity for a better understanding of the two documents which were presented by the minister last week to the committee.

One item I thought would be useful, which is really not contained in the documents in the formal sense but is understood to be part of the formal document -- this is a slide which tries to untangle some of the confusion about which quarter it is that we are talking about when we are releasing economic data and what results we have in hand to corroborate the statements we're making.

The top line shows the scale of the normal calendar year, which is the year for which we do all of our economic reporting. The first quarter of a calendar year, January through March, is the first quarter of the Ontario economic accounts or the national economic accounts, so when people talk about the results from the first quarter in economic terms, they are talking about the January-through-March period. But as you all know, our fiscal year for the province begins on April 1, and therefore the first quarter for the fiscal year runs from April through to the end of June. As a result, in any one year we can be talking about the first quarter and mean two different things, one if we're talking about the economic results and the other if we're talking about the fiscal results.

Just to confuse things a bit further, I thought I would illustrate the environment in which we are trying to understand the economics and fiscal situation of Ontario today. The study and the material you were presented with last week by the minister are based on the economic results we had up to the end of the second quarter, so up to the end of this period -- the beginning of July, end of June -- we had results in detail for Ontario.

What I tried to show here under this arrow was that the national results come out, say, one and a half months after the end of the quarter, so we hear results for Canada for the second quarter. If this were an ideal world and we were able to do so, we would obviously release the Ontario data for the same period. But unfortunately, we get the national results in aggregate form and then it takes Statistics Canada, working with our staff and particularly the staff of the office of economic policy, to elaborate and extract the Ontario-based results from the national statistics.

As you can see, that actually takes about a month and a half on its own and it wasn't until mid-October that we were actually able to release the specific Ontario results. Even though we had the national results in August or so, it wasn't until mid-October that we had the specific results for Ontario.

As it turns out, in mid-October we also had the financial results for the second quarter for Ontario's fiscal year. At the same time as we were releasing the economic results for the second quarter of the calendar year, if you like, we were releasing the fiscal results of the fiscal year for the second quarter. These were both the second quarter, but they are for different time periods.

It's a very significant what I'll call background bit of information. It's important to note that this very week, the day after the minister presented the statements and documents he presented to this committee, the next day we had the results for the third quarter presented. They were the Canadian results and it will take us another month and a half or so to extract the Ontario results. In January we will be, in public forum, as we do releasing every quarter, releasing the results of the Ontario economy performing up to the end of the third quarter. Even though the results for the third quarter nationally were announced last week, it will take us that long to provide the details, and we will be releasing the third-quarter financial results at about the same time.

I think this becomes particularly acute around year-end when someone says, "Why are you only telling me what happened in the third quarter of last year when the year has clearly ended?" They're talking about the calendar year and the economic year and of course we have this delay in data. We don't have it there.

It's important to know that the documents we were looking at were based on the second quarter of the fiscal year covering this period, and the second quarter of the calendar year covering the first six months of the year. We were able to incorporate Ontario labour market and inflation information into the material that was presented.

With that understanding, I'll quickly go through some of these slides.

The presentation on the growth in Ontario's economy: We have, as you know, adopted a prudent projections policy where we are trying to use cautious and prudent projections in all the work we do our fiscal planning on. They aren't targets for the economy; they are projections that we then use to base our fiscal plans on. As a result, we hope we will always be in a position of appearing before the committee to say that we're prudent and cautious and that our prudence and caution showed up in the form of improved, that is to say, higher-than-projected economic results.

Our overall growth estimate in the budget for the Ontario economy was 1.9% and, in the documents you have before you, you now see that our current forecast is 2.3%. To illustrate the situation, I believe it's fair to say that we continue to have a prudent perspective on even that revised forecast. For example, I believe the University of Toronto has a projection which has the total real growth rate for 1996 at somewhere in the order of 2.6%. There are others out there, other forecasters, who are currently updating their forecasts based on the third-quarter results that I talked about, who will be revising 1996; but at the time at least one other forecaster was looking at 2.6% for 1996.

We've tried to illustrate this in the forward-looking sense of showing the range of our survey, as we call it. The survey of the forecasters is from this bar to this bar, where the private sector averages about 3.3% for 1997 and our current forecast, based on the material we presented in the documents last week, is 2.9%. Using a similar approach, the private sector forecasters for 1998 are showing an average of 3.4% growth. We are using 3.0% growth in our fiscal projections in underpinning the fiscal plan we have.

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The next slide may actually be out of order in your material, so I'd ask you to check in the handouts. This slide should start with the real gross domestic product. What I've done here is provide a comparison with the budget numbers side by side with the numbers in the document last week, that is to say, our current outlook versus the budget. We have the outlook on the right-hand side, and there you see the 2.3% growth revised and the 1.9% which was our original forecast for the real growth in Ontario's economy.

Overall consumption is perhaps the best economic indicator for our purposes of planning retail sales tax. You may recall from reading Ontario finances second-quarter report -- I believe our total retail sales tax revenue is about $9.2 billion, and in the second quarter we did not change that. That's what it was originally forecast to be and it continues to be forecast at that level. Consumption increasing at 1.2%, in both the budget forecast and our current outlook, for our purposes is the best indicator of retail sales tax revenue.

As I mentioned, we're using these projections not to set targets for the economy, but rather to establish a basis for our projections for our underlying fiscal revenues.

Residential construction: We had forecast a 3.4% growth and we've talked about housing starts and so on, and now see that growing at a rate of 10.6% a year. Non-residential construction is similarly up. Low interest rates and a number of factors are influencing that statistic.

Investment in machinery and equipment is still growing in a robust way. We've shown both exports and imports here, and obviously the level of exports is down and the level of imports is down. The true picture and the important picture showing an actual increase in the net exports, from Ontario's economic perspective, is the more significant statistic.

The next set of economic indicators that we compare is retail sales. In the budget we were forecasting a growth of 1.3% and we're now projecting a slight decline of 0.5%. Here we get into the fact that it's well known that the retail sales economic indicator does not include any of the purchases that go on in the large box stores, for example, the big box stores such as Home Depot or Price Club or any of those. Those are all classified in wholesale sales. If anybody is buying goods in those stores, as many people are today, those sales are not showing up at all as retail sales, they're showing up as so-called wholesale sales.

Similarly with computer purchases, for whatever reason -- and there is a long history -- Statistics Canada has been classifying computer sales as wholesale sales. I can tell you that computer sales are up in the order 15.6%. The fact that they are up is not reflected at all in retail sales. In fact, if you were to inject computer sales alone into the retail sales base you would find a slight increase in retail sales rather than the decline.

So there's a bit of a problem with the measurement process we have here. Statistics Canada is going to change this, and I think it takes about three years or so. My understanding is that it will result in effect in an actual tripling of the base for retail sales, but we won't be out of this confusion for another two or three years. We'll still be appearing before this committee to say, "Yes, retail sales is doing what it's doing but it doesn't mean what it appears to mean." The retail sales measure doesn't help us with retail sales tax. You have to look at consumption, which better incorporates the other features.

Housing starts from the budget forecast are up slightly from 42.6% to 43.2%. Personal income growth is down. Pre-tax corporate profits are at 6.2%. Inflation: We've maintained our projections for inflation at 1.4%, and employment growth increased slightly, to 1.6% from 1.5%. Then, if we compare the yield on three-month treasury bills, and this obviously reflects what has happened to interest rates generally, there's a decline in the yield of three-month treasury bills and a decline from 8.2% to 7.2% in 10-year government of Canada bonds.

This continues to be illustrated on the next slide. This is simply a graphic presentation of the three-month treasury bill decline over this period, and that is a dramatic decline by any measure and any comparison. We show the March statistics for both the three-month treasury bills and the 10-year government of Canada bonds with our current forecast of 3.2% and 6.5%, respectively, for each of those areas.

As I mentioned, we had the day after our statement a release, and I expect tomorrow there will be labour data available after this presentation that will be slightly different. I don't know what it's going to be because it doesn't get released until 7 o'clock tomorrow morning, but it will be released, and every day of every week there is a new economic statistic out, meaning that what you thought was reasonable yesterday may be different tomorrow.

Post-statement, the national count showed that the national growth was accelerating to 3.3% in the third quarter of the economic year, the calendar year, and it's led by investment, growth in exports and housing, all areas in which Ontario, obviously, has a major stake and is a major player. Corporate profits jump by 52% in the third quarter. The housing market in Toronto, and I referred to that earlier: Resales are up at 78%, and that has increased 40% year-to-date. Home building permits were up 4.3% in October alone. Total year-to-date is a growth of 17.4%. November car and truck sales: up 11% from last November and total sales up, year-to-date, 2.4%.

All this is post the documents we released last week, but it is certainly good news for Ontario's economy and will be good news for all the measures I've been talking about earlier that provide a description of the underlying activity in Ontario's economy.

This slide talks to the issue of employment generally and employment growth projections over the forecast period that was covered in the statement from 1996 through 1998. The minister talked about the 127,000 jobs created since June 1995. I don't think it's necessary to go into any more details, although we have introduced a feature here which tries to provide a better understanding of the notion of estimate, so we've got a range for the projected growth in employment, as reflected in this light bar, where we use in the document an expression of 200,000 to 300,000 jobs that could be created over the next two to three years.

Moving that from employment to real investment, I mentioned the third quarter showed, nationally, very important and significant results, and we know from the surveys that have been done in businesses that Ontario is favoured as an investment location by something in the order of 53% of businesses. This describes both the investment in non-residential construction, which is this dotted line, and the investment in machinery and equipment, represented by the bars, all continuing to grow at very healthy rates in our projections, and I think very good news for Ontario's economy and for the situation with respect to employment, personal income and so on.

The next slide covers an important phenomenon in terms of overall governmental fiscal policy across the country. There has been a uniform effort, a unison of effort, in the absence of a formal agreement to do so, that would suggest there must be a formal agreement, because you've seen deficits as a share of GDP decline from a high in 1994 of about 5.3% to the point where they're projected to be below 1%. This has a rough parallel, obviously, at the national level, but in every government across Canada you can see this effort to either increase the surpluses in the case of some jurisdictions or reduce the deficit in the case of Canada, Quebec and Ontario.

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We've provided here a comparison of the payroll tax. If you look at the situation in 1990 and look at Ontario's payroll tax burden on payrolls of $30,000 or so and you see the federal payroll tax burden, what has happened here is that Ontario has cut its payroll taxes and federal payroll taxes, including UI. CPP could well be increasing, although no final decisions have been made on these. We simply have provided in here a comparison to show what would happen if the EI reductions that had been suggested by the CFIB and other groups were implemented, a lower reduction than the full amount they had projected.

We've all seen this slide many times. The only point I would make here, and I think it's important for the committee, is that even though the downward trend is there, we are still at $8.2 billion. We are still in a situation where we are at two and three times the level of the deficit in the early 1980s, for example. We are by no means complete in the task, and there is still a long way to get to the balanced budget in the year 2000-01.

Medium-term targets: I think they're well known and have been clearly presented. I would just show the fiscal performance for 1995-96, illustrating that in a number of areas there were significant changes. We provided a detailed explanation of both the restructuring and other charges that resulted from decisions made by the government and also the decline in public debt interest, which, as this slide indicates, was $714 million lower last year than originally projected. So the final deficit, rather than being $9.3 billion, as was projected on November 29, was $8.7 billion.

Moving on to this fiscal year, our current outlook is the second-quarter Ontario finances, so this is after six months of operation during the fiscal year. We see a slight decline in the deficit. I simply point out that we continue to maintain, and the minister pointed it out last week, that given that there haven't been the unforeseen economic circumstances for which this reserve was set up, it's unlikely that the reserve will have to be used. You'll recall that it was set up in the budget such that if it's not used, it will go to the bottom line and be used to reduce the deficit.

We also have in this slide the $900 million in restructuring for assisting the government and its transfer partners in adjusting to the new restructured program arrangements the government has been planning. Just to provide some detail, this again is on second-quarter Ontario finances: small changes but nevertheless changes in the outlook for corporations tax; the land transfer tax, with new housing starts and so on; and other taxation, totalling $60 million; a reduction in our forecast for revenues from the Ontario Lottery Corp as a result of a delay in the implementation of the video lottery program; then on the expenditure side, almost traditional perhaps, additional firefighting costs. Because of a delay in the implementation of the agreement with the horse racing industry there was a need for an increase of $20 million, which was completely offset by increased revenues and further savings in public debt interest of $25 million that were recognized in second-quarter Ontario finances.

Capital expense: I don't think it's necessary to dwell on that. I would like to spend just a moment, though, if I could, on another important change in what our past practice was in reporting the budget results. We were using a modified cash basis. We've adopted a modified accrual basis, and this is always simply presented as revenues and expenditures recognized when they are incurred, that is to say, expenditures when incurred and revenues when they are earned, and government operations now include on a consolidated basis the agencies, boards and commissions.

That means transfers from the government to its agencies or vice versa are not reflected unless they are external to the government. If the money comes in from the lottery corporation, that cash transfer as a profit can happen at any time, but we will recognize the results as they are recognized in the corporation. So there is a consolidation and this change.

What does that mean in terms of programs that people can understand? On a cash basis, under the Ontario student loan program, expenditures were recognized when payments were made to the lending institutions for interest or forgiveness of loans. So only at the period when those loans were forgiven, as obviously they were defaulted loans to institutions, on an accrual basis we record the interest expense, recognize when it's incurred, and we must set up provisions for loan forgiveness; we can't wait until it actually happens. We must now recognize it in advance, therefore you will see a more accurate picture of a steady state of that program.

Similarly in legal aid, it was previously the situation that we only recorded expenditures when those dollars actually flowed to the legal aid plan. We now record them when the individuals who are receiving those services in legal aid, the legal aid clients themselves, actually get the services, and we are recording those as an expense on Ontario's books in our statement of operations. There's a similar situations on pensions, and I'll leave that. I talked about consolidation and crown corporations.

I'll talk for a moment about financing requirements. Here we have about 10 different numbers that tend to get confused in discussions, but if I could start with the deficit at $8.2 billion, and with certain cash timing adjustments, that becomes $8.6 billion; we have to refinance maturing debt of about $6.1 billion; and we do some borrowing on behalf of agencies, in this year about half a billion dollars, so our total financing requirements are $15.2 billion. During the year we intend to decrease in this case our liquid reserves by about $6.1 billion and we will receive revenues from non-public sources of about $100 million, resulting in total borrowing requirements of $9 billion for the fiscal year 1996-97, and our public borrowing completed to date is $5.9 billion, so we have remaining to borrow for this fiscal year $3.1 billion.

The document provides a breakdown of where we are sourcing those funds, as it were. We have the Ontario savings bond campaign, domestic borrowing of $1.6 billion in Canadian dollars, short-term borrowing of $700 million, and this wedge at the bottom of the pie here is showing as $3.1 billion, the remaining amount.

I won't go through the individual actual transactions here. That's not my intent. It's simply to provide you with the listing to show the variety, the timing, which are a matter of market strategy that is overseen by Mr Salerno and the Ontario Financing Authority. I'll skip the Eurobonds and the Samurai bonds slide, and I think with that I have completed my presentation. I'd be happy to answer questions.

The Chair: Thank you very much, Mr Gourley. It's always interesting to know where all those numbers come from.

I to suggest to the members that we starts with 10-minute rounds. We have about 90 minutes available for questions. We'll start with the official opposition with a 10-minute question period and then move in rotation to use up that time, if that's acceptable to the members.

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Mr Gerry Phillips (Scarborough-Agincourt): I thank the staff very much for being here. For me at least and for our party it's very helpful. I realize there's lots going on in the ministry, so I know it's a big chunk of time.

The first question really is that I think we've all been pleased to see the growth in the economy and the increase of real growth of 1.9% to 2.3%. The surprise we had was that it hasn't reflected itself as much as we thought in growth in retail sales, personal income, corporate profits. Exports were, for us at least, surprisingly low relative to the budget. Is there something happening that is unusual here?

Mr Gourley: I'll start, and then I'll ask Mr Dorey to continue. In my own comments I made reference to the fact that what is being measured in the retail sales line obviously excludes important activities with the rise in big box retailing. That clearly gets shown under measures of wholesale sales. I also made reference to the in excess of 15% increase in computer sales, which are also captured under wholesale sales. I don't know whether, Steve, you'd care to add on in terms of the actual measures and how consumption better reflects retail activity than the actual retail sales line itself.

Mr Steve Dorey: A lot of things are consumed that are obviously not captured by the retail sales numbers. Also, as you're well aware, if you're concerned about the retail sales tax base, a lot of business inputs are not captured in consumption but are part of our retail sales tax base. When you look, for example, at machinery and equipment investment, it's quite strong, so that's obviously part of why our RST revenue is performing well.

Mr Gourley: I think there's the issue of goods as well as services and the fact that in the retail sales line, you see there goods which exclude services.

Mr Phillips: Nothing's changed over six months. Six months ago, you predicted, I gather, one thing. Box stores weren't in six months ago, they're not in now. Computer sales weren't in six months ago. It's just curious to us. We had expected a much more buoyant export number. It looks like it's down about $8 billion or $7.5 billion from the budget. Retail sales are down considerably from the budget. It's just that the explanation that box stores aren't in was known at the budget, is known now.

Mr Dorey: Yes. It's just a very difficult indicator to measure, because trying to measure the movement between those parts of retail sales makes it difficult to measure in this environment. We think consumption is a much better indicator. When we look at the behaviour to build our retail sales tax model, that's the indicator we would use.

With respect to exports, and imports for that matter, as you know, we've had two auto strikes this year and they've had a significant impact on trade both ways.

Mr Phillips: In the document, you say, "Lower inflation adds an additional element of caution, since this implies lower revenues." What should the committee think about in terms of that statement as we look at lower inflation? What is the kind of impact that we should expect on revenues?

Mr Dorey: What's intended by that is simply we've talked a number of times about how much caution is built into the economic projections. The fact that our inflation projections are lower than the consensus simply suggests that if the consensus were to play out, we would get more revenues. That's all that's intended to indicate.

Mr Phillips: Last year in the fiscal and economic statement there was the statement that "The actions announced in this statement, coupled with permanent savings from measures announced...will achieve total savings of approximately $4.5 billion to $5.5 billion in 1996-97." What should the committee conclude is going to be the actual? Are we at that number, or is it $4.5 billion, $5.5 billion?

Mr Gourley: I think the committee should accept that on the face value, saying that this in fact has been achieved during this year.

Mr Phillips: I gather the government target total is $8 billion, so we are three and a half to two and a half away --

Mr Gourley: The Premier's indicated about $3 billion more.

Mr Phillips: Moving along here, I think the Minister of Education and Training announced that it was his intent to have quite an aggressive program on capital expansion for schools. I think I remember him saying something like including the possibility of the private sector building and then leasing schools. I just alert you that our caucus has some significant concerns, not around the concept of leasing but around the fiscal implications of where we're going on that, because we'd like to debate anyway that we aren't heading into a brand-new debt trap.

Theoretically, the province should be spending $4 billion a year on capital. I gather the province says it can't afford that. I guess my question is, can you tell us anything about the capital plans, and is the ministry looking at the implications of build/lease on perhaps jails, schools -- I don't know -- hospitals?

Mr Gourley: I'm not aware that the government has actually made any decision. I am aware, though, that the Minister of Education said he was looking at that concept. I think a number of jurisdictions have looked at it and, to be frank, some have gone with it and others have said, "No, that's not for us." But no decision has been made yet by the government on it.

I take your point about what this may mean for the future, and I'm sure that as we advise the government on various financing options we will be raising points similar to the one that you were implying in your comment.

Mr Phillips: I think we have to have that debate clearly, in my opinion, just so we don't fool ourselves into thinking we can't afford to build it ourselves so we can afford to lease it. We've talked with your staff actually about, could they amortize it, and what are the tax implications for various levels of governments on that?

I'll assume, Mr Chair, you'll cut us off when the 10 minutes is up.

The Chair: Yes. You have about two minutes left.

Mr Phillips: Thank you. In last year's statement there were some statements around the Ontario municipal support programs and the transit programs, that the funding for one would be $736 million and for the transit, $218 million. I think the minister indicated to us those decisions stand. I think he did, but I'm not sure. Is that the assumption we should make, that those are the numbers for those two programs?

Mr Gourley: The minister clearly indicated that the announcement on the municipal support plan had been made. I'll just have to check with my staff on the $218 million --

Ms Anne Evans: Yes.

Mr Gourley: Thanks, Anne -- the $218 million also stands. Those were announced basically in November of last year for the coming calendar year and what turns out to be the municipal fiscal year.

The Chair: That might be a good chance to change to the third party. Mr Pouliot, would you like to ask some questions?

Mr Gilles Pouliot (Lake Nipigon): Thank you very kindly for your time and your excellent presentation. Of course, with the briefing you help keep us alive and we have a better understanding of what takes place.

I want to pursue the leasing kind of arrangement. I just wish to have your candid opinion. You tell me where I am wrong in my impression. Ordinary people, when they read "lease" and "buyback," say there's no free lunch. People who are perhaps a little more in the know, by virtue of that being the tenure they must address, see the best possibility in leasing with a large pool. It has be substantial. They also like to factor in foreign currency, for the margin of profit is very, very small so the sum has to be consequential in order to make it worthwhile. Those marriages are best consummated under tax haven jurisdictions, and when all is said and done, they will only pick or deal with your best assets, after having paid members of the second-most-honourable profession, that of faculties of law emanating from all over the place.

Our experience, because we did GO Transit -- Tony Salerno will attest to that -- is that after 15 years you're going to pay more unless you use the lease and buyback as a scheme to open another set of books so it gives you a little more time.

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Is this a style that you're proposing to the government? Is that the kind of last resort bazaar that you would advise the government on? Some will see it as another indication of privatization and yet it gives them one more option. Why should you have a capital expenditure of $8 million to buy a mid-sized public school when someone can lease it for you, coming out of your operating capital, and you don't feel the pain until you get into your fourth term of office?

Mr Gourley: I think I was with you until "last resort" and "fourth term of office."

Mr Pouliot: Well, I've been here for 12 years, and one term with these people. You can't say this; I appreciate that. Just basically, what is your caution vis-à-vis lease and buyback?

Mr Gourley: There are a couple of things I should be saying. Not only is there no free lunch, but the sale and leaseback of any facility is a decision that has to be made knowing the full, long-term consequences of it, and who is actually taking the risk. One of the advantages for individuals leasing the capital, as it were, is that a portion of that capital may be written off by the leasing company and therefore the taxpayer, through tax expenditures, is helping to support that lower lease cost. If it's being done in a foreign currency and foreign markets and there's a foreign currency risk exposure, certainly I would be one who would be cautioning on at least making sure that everyone was clear on the level of risk that was being taken, since foreign currency risk has been known in Canadian public finance to be a major source of aggravation for those who followed.

I think also the Public Sector Accounting and Auditing Board accounting rules that we are now obliged to follow make it very clear that if the leasing arrangement is simply an alternative way of financing capital, then it has to be recognized up front as such. If, on the other hand, there is a pure transfer of risk and responsibility, then I think we have a different arrangement and a different possibility. With those dimensions, I think once the government sees those as choices, it will be able to make a decision.

Mr Pouliot: Thank you kindly. I look at your forecast, and it's not easy for anyone vis-à-vis the GDP, and yet when I look at the inflation performance and the futures market I have some difficulties. Sometimes I'm under the impression that if you have both core and non-core in your weighing measures -- for instance, the recent round that gives it to 1.4% does not factor in, under liquor and tobacco, the most recent announcement, that of last week or 10 days ago. The price of oil, both the London and the New York crude, you have to project those into the future. It doesn't seem that it's going to go away.

I have some difficulties when I look at your more than cautiously optimistic performance on the gross domestic product and yet a very conservative estimate in terms of inflation from 1996 reality to projection up to the year 2000. I think you're at the consistent 1.7%. From past performances, my understanding has been that if you have, in French we say une surchauffe, a heated economy, it's an invitation for inflation to show more than the 1.7%. How do you reconcile being quite rosy on your projection for growth and yet so conservative on low inflation?

Mr Dorey: I think our projection for inflation is slightly lower than most private sector forecasters, but virtually everyone at this point is expecting less than 2% inflation.

A principal factor there is the size of the unused capacity in the economy at this point. We have gone through, as you know, five years of very sluggish growth and there's a lot of unused capacity and that should prevent inflation. Even if we have 4% growth, it shouldn't bring the unemployment rate down enough to create any significant inflation pressure.

Mr Pouliot: I see. Nowhere -- maybe I've missed it in your analysis, in your forecasting -- do you factor in what I think is a very low rate of savings at present among Ontarians. We know that personal and small business bankruptcies are almost at a record level. We also know that the relationship between household debt and household income does not leave room for a lot of flexibility. When I look at your forecast of consumer purchase, I think you've reflected that caution, and that is welcome.

Having said this, if we're to keep growing, how much more room do you see in the export market? The so-called recovery now is mainly driven by the export market. You're forecasting quite a bit of growth in your export market, if the slack is not going to be picked by consumer performance for those reasons, plus add to it the demographics. How do you see your export market? It's your only line of defence, is it not?

Mr Dorey: I think the general expectation again, among private forecasters and in our case, is that the export performance will continue to improve. We have an extremely competitive economy at this point; partly it's the exchange rate, partly it's because our wage settlements are relatively low and the costs of doing business here are very attractive. Our view is that the domestic sector will come back, that we will see stronger growth in the domestic sector than we've seen in the last several years. For the reasons you've stated, it won't come back to the kinds of growth rates we saw in the 1980s, but certainly it will come back from the levels we've seen in the last few years. You'll see more balanced growth over the next three or four years than you've seen in the last three or four.

Mr Pouliot: So you don't feel that the excesses of the 1980s will repeat themselves. The yuppies are 10 years older; they must save for retirement. You're right.

The provincial government takes in what, $46 billion or $47 billion, the money that comes in in a year, grosso modo, approximately? The PIT, the provincial income tax, what is it, about $15.5 billion?

Mr Dorey: Yes.

Mr Pouliot: So a little less than one third of the total take is from the PIT, right?

Mr Dorey: Right.

Mr Pouliot: You've had the first instalment of the tax cut now in place since July, and I understand you can only do it in July and January. By this time, you should have a fairly exact figure for the cost of the first instalment. They will also honour the commitment of the second instalment of roughly the equivalent starting in January. So by January you will have had six months of the first instalment of the tax cut to the PIT, and starting in January you have the second instalment, which will represent roughly 15% of the commitment. Once you factor these in -- six months at seven-and-some-odd per cent, and then you'll be into your seventh month and you will start the first month of the second seven-and-so-on per cent -- what will be the cost per year in terms of revenue? How much is the PIT cost?

Mr Dorey: In the budget, we showed that the cost of the PIT cut would be about $4.55 billion on a fully annualized basis in 1996. If we were to annualize half of it -- I'm just going to take half of that number, although it phases in over time. You were looking for grosso modo, and that's in the ballpark of grosso modo at any rate. I'm sure I can get a more precise answer on the actual 15%-plus reduction we made, but in the budget it was clearly costed at $4.555 billion.

The Chair: Thank you very much. We'll move on to the government for a 10-minute round.

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Mr Douglas B. Ford (Etobicoke-Humber): Ontario's budget plan, on page 14 -- I just read that -- is very optimistic. According to the figures your ministry has announced, the government overachieved its deficit target in 1995-96 by almost $600 million.

Last week before the standing committee, the minister said that with the improving economic performance he fully expects that the government will improve on the 1996-97 deficit target of $8.2 billion. Given the positive economic outlook over the next few years, will the government be in a positive position to balance the budget in the year 2000-01, or will it achieve that before that time?

Mr Gourley: I believe the government will. I also would cite the Dominion Bond Rating Service, which looked at the figures the government produced and said that the government's forecasts -- prudent, cautious and so on -- would enable it to achieve its deficit reduction, and went on to say that if the government had been wrong in its economic forecast to the tune of 1% for each year, 1% overestimating the growth in the economy, that would result in a $2.8-billion deficit at the end of the period. I think it's obvious that if the opposite is true there would be a $2.8-billion gain.

From our experience so far and using the prudent projection approach that we have, we hope to be able to be back at this table every year -- presumably we'll be here twice a year or so -- saying that our cautious projections were in fact too cautious and that the economy has outperformed.

I think everyone is looking at forecasting as an art as opposed to a science, and we are simply trying to stay on the side of caution as we go through. On that basis, the plan is still predicated on very cautious projections.

I showed the range we're looking for over the next three years, and we are well below the average of the consensus of forecasters. I would love to be able to stay up at the high end of the forecasters and say, for example, that this year, 1996, is going to be 2.6%, but that's not the basis on which we are going to do our planning or make decisions. They are going to be based on the prudent projections and if additional moneys come in they will do so.

I also pointed out in my remarks that the government has built in this $650-million reserve, and that's sufficient to accommodate in any one year a reduction in economic growth of 1.5%. In that one year, $650 million would be sufficient and still have the government meet its target for that one year. It's also true that if we were to lose 7% of our retail sales tax revenue in one year, for whatever reason, that $650 million would still enable the government to meet its target in that year, and the same is true if it were to be the case of a 12% reduction in corporate income tax revenue; corporate income tax revenue tends to be much more volatile than retail sales tax. I think those magnitudes show how much caution and how much protection is built into meeting our targets.

I should also mention that our interest rate assumptions tend to be anywhere from 75 to 100 basis points higher. We are projecting higher interest rates and building our fiscal plan on higher interest rate assumptions than is the case in the private sector forecasters. We've got additional caution built in there, and therefore I feel confident that we will be able to meet those targets.

Mr Ford: They look very positive rather than optimistic, then.

Mr Wayne Wettlaufer (Kitchener): Mr Pouliot of the NDP has expressed some concern about the possibilities of export development shrinking and the possibility that our numbers wouldn't be as great as what we have projected. We've heard a number of economists in the last year, including Patti Croft, chief economist with Canada Trust, indicate that the tax cuts will increase demand on the part of the consumer. I think many of us are willing to accept that. I wonder if you could give us an up-to-date number on who will be the chief beneficiary of the Ontario tax cuts.

Mr Gourley: I certainly think "every taxpayer" has got to be the beginning of that answer. Every taxpayer in Ontario will see either a 17% reduction in tax or a 40% reduction in Ontario tax when the tax reduction plan is fully implemented. That reduction in strict personal income tax terms would mean about $4.5 billion, so there will be $4.5 billion worth of benefits spread across all taxpayers in Ontario, and I think that speaks well for the economy. Whether the individual actually spends the money, saves the money or invests the money, I think it's all going to have a positive impact on the Ontario economy.

Mr Wettlaufer: In terms of actual percentage of dollars being returned, is it not true that the chief beneficiary will be the lower-middle and lower class of income?

Mr Gourley: The percentage reductions that I mentioned were, obviously, at the higher-income level the 17% reduction, versus the 40% reduction at the lower- and modest-income levels, so the majority of the benefits actually fall to middle- and lower-income people in Ontario.

Mr Ted Arnott (Wellington): Thank you very much, Mr Gourley, for your presentation. It's been very interesting for me and I appreciate it.

I want to ask you about interest rates. I was just looking at the paper today and the prime rate in Canada is about 4.75%. In the States it's 8.25%, a difference of about 350 basis points. Looking at the public debt interest costs for the province of Ontario, thinking in terms of the significant reduction in interest rates that we've experienced in the last couple of years -- in the fiscal plan we were looking at $8.9 billion in interest costs, but the actual is $8.2 billion, a reduction of $714 million. I remember reading somewhere that a lot of our outstanding debt in the province of Ontario is longer-term debt and that's why we're not really seeing more interest rate relief. Is that correct?

Mr Gourley: That's correct. I could ask Mr Salerno to talk about that, but you're quite correct that the vast majority of our debt is in fact in long-term debt rather than short-term debt --

Mr Arnott: So when do we expect to see a little more relief in terms of the public debt interest costs?

Mr Tony Salerno: I think we're seeing some of the benefits of the lower interest rates already. As you saw last year --

Mr Arnott: In our economy we are, sure.

Mr Salerno: In the economy, yes, and for that we turn to Mr Dorey. But in terms of the impact on the province's public debt interest costs, we certainly saw some of the benefits last year and that's continuing this year. However, you'll recall that interest rates after the budget went up for a little period of time; the big decrease since the budget has really occurred in the third quarter, actually since the beginning of September. I think it's fair to say that to the extent that we have floating debt, and that currently is about 10% of the total, as we renew that, as we roll it over, and it tends to roll over every three to six months, we will be enjoying the benefits of the lower interest rates. As well, as you saw in one of the tables Mr Gourley displayed, we have done some issues over the last three months and those certainly will reflect in lower PDI as we make those payments.

The Chair: Thank you very much. We'll move to the opposition.

Mr Monte Kwinter (Wilson Heights): I'd like to stay on the same topic of the interest rates. When we take a look at the 1995-96 fiscal performance, you see an actual revenue that's up $1.573 billion, you see a public debt interest that's down by $714 million. When you consider that had the revenue not grown to the point that it did in excess of your estimate, and had the interest rate not declined, you would have been in pretty bad shape overall against your fiscal plan. You would have had a situation where your deficit would have actually gone up higher than your projections.

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My concern is that, notwithstanding that you have factored into the interest rate, I think you said, 75 to 100 basis points and you've got projections for 1996-97 that are pretty modest in comparison to what you had last year, and I assume that reflects the tax rebate, what happens if the spending goes up at the same level, in program spending and as part of the restructuring, as it did in the 1995-96 period?

Everything worked for you this time. You got a break in the interest, you got a break in the revenue. What happens if that reverses itself? What happens if the interest rates go up and your revenue goes down, as you're anticipating?

Mr Gourley: The first comment there that I should make is: an overall level of caution. We've got caution built into our assumptions, and I've pointed that out earlier. We have the reserve, and I commented about that. But that reserve is there to deal with unforeseen economic circumstances, and that might include, I'll say, a downturn in the economy that therefore causes spending to increase, as it had in the past. So, for example, social assistance recipients, the number of people dependent on social assistance, may go up. To the extent of $650 million, we would still be able to meet our deficit targets.

Obviously, if we were to see a repeat of the worst downturn in the economy in 40 years, which occurred in the 1990-91 period, we would have difficulty meeting the targets we've set out for ourselves. But generally speaking, we have, I'll say, cautious forecast compounded by prudent projections on top of reserves, as well as interest rate pessimism, if you like, that leads us to say these are completely achievable and realistic targets. They are achievable through either the reserve or other means in terms of dealing with them.

But primarily, the caution is there and the reserve is there to deal with what I would consider in any one year a very significant caution of $650 million on a $40-to-$50-billion base.

Mr Phillips: Switching to the job area, the economists I talk to say that job growth is related to GDP; they say a combination of productivity improvement and job growth equals GDP. I don't know whether that's how you people look at it or not, but I'm looking at what a reasonable expectation around job growth versus the economy is. The economists I talk to tell me that you can't grow jobs faster than economic growth and if you grow at the same rate, there's no productivity improvement. I'm just trying to get a feeling for what we regard as the number one issue, and that is jobs. What's reasonable to expect in terms of job growth? I gather you're looking at 3% real growth in 1998. What's the relationship there?

Mr Gourley: On the slides that I presented on page 9, we tried to, I'll say, bound expectations in a prudent and cautious way by suggesting that if our employment grows as it is projected to grow, by 1.6% in 1996 and then 2% to 3% in 1997, followed by a further 2% to 3% in 1998, this would produce between 200,000 and 300,000 net new jobs in that period. We think that's a reasonable and cautious projection in terms of a rule of thumb.

Mr Phillips: I'm sorry, Michael, that's for the two years 1997 and 1998, and if I add the two together, it's 200,000 to 300,000?

Mr Gourley: Yes, that's right. Just to illustrate, in the early 1980s Ontario's economy grew, from 1984 to 1988, at a rate such that it created 170,000 to 175,000 new jobs a year for each of those five years in that period. This sort of level of job creation occurred in the 1980s. The projections that we have here I think are reasonably prudent and cautious, and we've introduced this concept of a range to try and help people understand the variability. Your point about productivity --

Mr Phillips: Can job growth occur faster than GDP?

Mr Gourley: I'll just make the point, if I could, before asking Mr Dorey to comment on that, that the issue of capacity in the economy is a significant factor. Steve, perhaps you could comment on job growth.

Mr Dorey: There certainly have been instances of job growth being faster than output growth, but that's not sustainable over any reasonable period when an economy is becoming more productive. I think that relationship is correct. I think trend productivity is probably around 1%. That's certainly the consensus of private forecasters. That's a reasonable relationship.

The GDP numbers that we've produced, because they're the basis of fiscal planning, are intentionally very cautious. If you were, for example, to use consensus numbers, you would have a higher number and the corresponding job growth would probably be higher. Probably a reasonable relationship over a reasonable period of time is about a 1% difference between the two.

Mr Gourley: If I could just add, I think that's a point: We have shifted. As long as we are producing economic projections that are used to construct a fiscal plan, that's different from forecasting what the economy is actually going to do. That's a very significant difference from the past, in which I was involved as ADM, office of the budget and finance and so on, where we were looking more to project what the budget would actually do. We are looking for what we should be using as the basis for building a fiscal plan, and that's quite a different story from saying: "This is where inflation is going to go. This is where interest rates are going to go."

Mr Phillips: I'm just thinking that if economic growth is 3% over the next five years or four years, and if there is a 1% spread between job growth and economic growth, we're not going to come close on the job numbers.

Mr Gourley: A net 2% growth would generate 200,000 and 3% over those two periods.

Mr Phillips: But I'm saying that 200,000 growth is about 110,000 jobs. You've got to do 145,000 jobs a year to hit the numbers, so we're going to shortfall by a couple of hundred thousand jobs. That's all I'm saying, if that is the case.

Mr Gourley: If you start with 127,000 and then you add the 300,000 over each of the periods, you get to beyond the 725,000.

Mr Phillips: I'm just saying, if it is true, Michael, that there is a 1% difference between job growth and economic growth, and 3% economic growth is, according DBRS, optimistic to sustain over this period of time -- they think there's a high risk of that not happening -- we're not going to come close in the jobs.

Mr Gourley: But if we used DRI or some other forecaster who tends to be on the high end of our range, we would have higher forecasts than DBRS.

Mr Phillips: But what is reasonable for us to think about real growth over the next four years?

Mr Gourley: To be quite frank, I think everybody has to make a judgement as to whether indicators such as consumer confidence increasing by 19% are actually going to be reflected in people's behaviour. If it is reflected in people's behaviour in terms of purchasing and investing and making long-term commitments, then we will see that job creation there with no difficulty at all. If it's not, if it's just, "I feel better, but I'm not spending or investing," then I think -- so, to that extent, I think each person is able to make their own projection. Obviously these various private sector forecasts spend a lot more time than any one individual, but you are certainly entitled to your view as to where you think the economy is going and whether this is reasonable.

Mr Phillips: I gather 3% is reasonable; I don't know.

The Chair: Thank you very much. We'll move on. Mr Pouliot please.

Mr Pouliot: I appreciate your contribution and your ongoing loyalty to the government of the day. That's well taken. Personally, I have a great deal of difficulty, if my credit card or credit cards reach saturation, constantly asking that the borrowing limit be extended. I for one do not subscribe to the theory that the money will filter through nearly to the same extent as if it was directly applied against the debt. I think the psychological impact perhaps is just as important, and I will give you this, as the actual dollars filtering through. No question, you don't get 100% return because people are diverse and they have the liberty, the facility, the latitude, to do whatever they wish. But if you take the money and you place it against the debt, then it's so much against it.

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One of the problems you have with the debt, and maybe Mr Salerno can help us, is that government debts are long term, which allows for better planning, and they're also non-callable. You can't call the debt back, right? You have to wait till maturity.

Mr Salerno: That's correct. There would be no benefit to cashing it. It wouldn't go on the open market.

Mr Pouliot: Even if you were to call the debt back, you would have to pay the applicable premium, depending on market conditions.

Mr Salerno: That's correct.

Mr Pouliot: It happened recently -- and I wish to know the date and what issue. Incidentally, it seems that Ontarians can no longer shoulder their debts, that we have to be at the mercy of others to a larger and larger extent, friends maybe, but others. My experience is that when you are at the mercy of others, in the worst case, in a catastrophic scenario, you could become almost dependent. In a best-case scenario, you should at least be a little nervous, for you don't control the emotions and you're also competing with others that are tapping the marketplace.

One of the last issues, would I be right in assuming that the Minister of Finance, the Treasurer, borrowed more than what was needed, like a European issue, borrowed almost $3 billion more?

Mr Gourley: On a particular issue?

Mr Pouliot: I mean on overall issues.

Mr Gourley: No, I don't think that would be a correct statement. I think you could say that in the past, and depending on conditions in the future, we have borrowed when market conditions have dictated that it's advantageous to the province to borrow moneys. Last year, I believe that we -- and the expression we used was "pre-borrowed" -- borrowed in advance of the actual fiscal year in which it was required. But that was because the rates were advantageous at the time, and that results in long-term savings.

We will continue to borrow at a time which we think is to the province's advantage rather than waiting until we actually are forced to borrow the moneys. But we have liquid reserves. They have been as high as $12 billion, and we're proposing to take them down to $6 billion or $7 billion, I've forgotten the exact number, to as low as $5 billion, and that will mean that we will be borrowing, if I could put it this way, on a more timely basis than we have in the recent past when conditions were less certain.

Mr Pouliot: But if you are able to forecast this way -- I mean, listening to what you've said, you go beyond the cautiously optimistic. If I were to meet you tomorrow and say, "How are you, sir?" you probably would tell me, "Best one yet." So, I'm going to go home tonight and I'm going to borrow money and I'm going to enter that NASDAQ market, because I'm sure you can justify the high price earning ratio and the debt equity ratio. We're going to have a great year next year on the New York market, aren't we?

Mr Gourley: I'll tell you, I did not personally benefit from the bull market we've seen and the extent to which it has taken place, but I also must tell you that when you meet me tomorrow it's my mother who must take the credit for my cautiously optimistic attitude; it's a genetic encoding.

Mr Pouliot: Yes, and you have no merit. Sir, a person your age, with respect, must have lived through a bear market. You see, there are people like you, they're always bullish and bullish and bullish. I mean, the sky's the limit. There are people like me, who tend to be a little bearish, and it makes them a little bit -- because I want to save the money for when the big revolution comes; I can divide it evenly among all the workers, but that's another story.

I want to draw your attention to what one of my friends and colleagues, Mr Phillips, said about the bond rating agency, Dominion. Those people don't go into the public domain easily. They did not downgrade our rating because they know of the commitment, the zeal, to chop, chop, chop. We have 14 chopping days till Christmas, and the government strikes with a vengeance; that's okay. Well, it's not okay, but it's their philosophy. But yet the Dominion Bond Rating Service says if you lose one percentage point on your forecast, if you shave one percentage point off, not a hell of a lot, it means you would have to borrow another $2.8 billion. They go on to say that government is most vulnerable by virtue of the albatross, the tax cut: 30% on the PIT month after month as it takes place makes them quite prone to being vulnerable.

How would you reconcile that? On the one hand you say, "The bond rating agency says yes," but there again, are you going to be positive on me and exceed and surpass all expectations and say, "Trust me till Monday and you'll see it go this way," or are you going to be more realistic and say, "Those are professional people; cold, true statistics," and we could be on the hook for another $2.8 billion?

Mr Gourley: I'd like to try and use two statistics to illustrate the point and perhaps respond to both your and Mr Phillips's concern about what is the future and what it holds for us.

The document that we presented clearly shows that throughout the 1970s, Ontario's economy was able to average an annual growth rate of 4%; throughout the 1980s, 3.6%. Obviously in the early 1990s we had much less. So whether 3% is the right number or 4% is the number, you don't have to be much of an optimist; you simply have to have lived through the 1970s or 1980s to see that 3.6% or 4.6% is quite achievable for Ontario's economy.

I'd ask Mr Salerno to talk about the premium or the so-called spreads that we are now not paying as a result of the kind of fiscal plan we have here. Mr Schroeder of the Dominion Bond Rating Service, with whom we have spent many hours going over our plans in detail, I think understands very well what our public finance situation is. Tony, could you talk a bit about the gain we've seen as a result of reducing spreads?

Mr Salerno: In fact, the Dominion Bond Rating Service last spring, following the budget, did move marginally on the province's rating. It raised the rating on our short-term paper by one notch.

More importantly, it's the reaction of the market to what's happening in Ontario, the confidence that the market is demonstrating in Ontario's economy and in Ontario's fiscal situation. The spreads -- that is, the difference between what we pay, the premium over the government of Canada, what Ontario pays now over the government of Canada borrowing, is about the lowest it's ever been. I believe it's even lower than Ontario enjoyed when we were AAA. So the market is speaking volumes.

I'm not suggesting that the credit is all to Ontario's rosy picture. It's a Canada story, because we do borrow, and not just in the Canadian market but internationally, as you know. The market consistently is expressing a great deal of confidence simply by buying our paper and reducing the costs of our borrowing.

Mr Pouliot: Thank you very kindly. On that, a consensus of economists in the United States says that the first-quarter growth projection is about three quarters of what yours is, about 75 for every 100. They say we'll only grow by three quarters of what you say. The presidential and House elections are over in the States. Mr Greenspan has been salivating, has been waiting for the right moment to issue some cautious -- it seems to me that we're so privileged, that all the stars are aligned in perfect fashion. We have a low interest rate. The economy's going fast enough but not too fast. And everything is okay. I went to the Ontario savings office the other day and I see 2.75% on a one-year note and 4.75% on a personal GIC of five years.

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When you did oversubscribe, by the way, in June 1995, the rate on a personal five-year GIC was 8%. Knowing what you know now, how much money would you have saved when you over-borrowed, when you over-capacitated on your European issue? If you had waited another seven or eight months, you would have saved that much more. When can I expect the charters to come knocking on my door and to say, "Gilles, come and borrow money from us and we will pay you"? Don't you feel that in the next year or two there will be a rise in short-term rates? And whoever moves first, that will be an invitation to hit the spread, because one has to follow the other, and we're the one who has to respond to Greenspan. That's inevitable; otherwise the exports will benefit for a short time, but what we import, what we buy, will cost us more. One third of everything we consume comes from outside. It would be too easy.

My question is, what happens when the interest rates start rising?

The Chair: I believe there's a question in there somewhere.

Mr Gourley: The comment I would like to make on the issue is that one of the things we have done this year is dramatically reduce our level of liquid reserves. So it means we will not be borrowing this year about $6 billion that we would otherwise have borrowed to maintain our level of liquid reserves. You might well have asked me, "Why are you borrowing to maintain such a high level of liquid reserves?" In our view, it can be lowered to the $5 billion. So there are savings to be achieved on that alone by not borrowing to maintain our level of liquid reserves at a level that it was in the recent past.

I'm afraid the answer to your question about how much we would have saved if we had borrowed at the lowest point is a lot of money. None of us, certainly anyone working at the financing authority, would actually be working there today if they were able to say when that magic point was that you were looking for us to find, yet I have every confidence in the staff of the financing authority.

Mr Pouliot: You should keep that in mind in your future forecasts.

Mr Gourley: You should keep in mind that the future forecast is a collection of individuals looking at data, not a crystal ball, trying to understand where the economy is going.

The Chair: Thank you. We move to the government side.

Ms Isabel Bassett (St Andrew-St Patrick): Thanks, gentlemen, for coming out today. To pick up on what you were saying about the economy, Mr Gourley, you say, or the minister points out in the statement, that you expect jobs will accelerate. To make a very direct question, can you tell us, in addition to some of the things you've already touched on, what specifically we are doing as a government to increase the number of jobs?

Mr Gourley: I think if we look back to the measures introduced in the budget, there are several. Obviously the personal income tax reduction itself and the commitment to future reductions is, I believe, going to have an influence on people's behaviour and on their confidence about making investments.

If we look specifically at such measures as the reduction in the employer health tax and the impact that's had on small business, I don't believe there's any doubt that there's a consensus in our economy that a reduction in payroll taxes is a good thing for job creation. The payroll taxes are job-killing, if you like; they do affect employment. They particularly affect small business. The government's reduction of the employer health tax is one effort there. The reduction in workers' compensation premiums, the reduction in and the freezing of hydro rates, all these are good things for business.

I won't get into the issues of elimination of red tape, but generally speaking, to be quite frank, the fact that the government is meeting its plan has a very major effect on boosting the confidence of business. So we're not coming into this forum and saying, "We were optimistic and therefore we're going to have to cut back" or "We were too optimistic and therefore we're going to have to change our plans." The fact that we have a plan that is credible and that is working has a major impact, I believe, on the confidence levels in the economy, and therefore on the behaviour of both business and individual consumers and taxpayers.

Mr Tim Hudak (Niagara South): Thank you, Deputy Minister, for your presentation today. I have a question concerning how Ontario's economic performance has compared to other provinces and to other jurisdictions in terms of real GDP, which would be a good comparator, or anything else you can come up with. Throughout the early 1990s, compared to the Canadian growth rate and other industrialized nations, I understand that Ontario's performance was poor, almost always worse than those averages.

Since this government took office in 1995, have we seen any changes in that trend, and what are the expectations on where we're going in the future?

Mr Gourley: Looking forward, certainly all the private sector forecasters see Ontario's economy outpacing the growth rates of all G-7 countries, obviously including Canada in that respect, and we are leading in at least those forecast projections the performance that is seen over the next four to five years. So Ontario is facing a very optimistic outlook vis-à-vis the G-7, vis-à-vis Canada and other provinces. I don't know if Mr Dorey would care to add any comments to that.

Mr Dorey: Just in terms of the numbers, for 1995 the Canadian economy grew 2.3% and Ontario grew 3.2%. For 1996 we're projecting 2.3% growth for the Ontario economy, which is probably cautious. The national figure is 1.4% or 1.5%. For the 1997-2000 period, among private forecasters, the expectation is that Ontario will grow about 3.5% a year compared to about 3% for Canada. So from 1995 to 2000, the general consensus is that Ontario will outperform the rest of the country.

Mr Hudak: If I could follow up on that and I guess on Ms Bassett's questions too, what can account for that, this sudden change where Ontario's now above the bar compared to below the bar in the early 1990s? What is it about Ontario's fiscal policy that can account for this change? What does this have to do with tax rates? What does this have to do with the commitment to reducing the deficit?

Mr Gourley: My view at least is that the government's plan, the achievement of its plan, the overachievement of its plan, the commitment in respect of no tax increases, the commitment in respect of reducing the size of government, of creating opportunity for the private sector to grow and to invest, the encouragement to make investment in Ontario and the encouragement the government is providing in terms of easier access to capital will all mean that Ontario's economy will be outperforming other jurisdictions as we make, I'll say, greater certainty in Ontario's economy. In terms of the conditions that people will be operating in, we will be able to offer that as a plus, as an advantage over other jurisdictions.

Steve, I don't know if you want make any comment about capacity or the typical, I would say, fundamentals in addition to workforce and other locational advantages that Ontario has.

Mr Dorey: Just that the trade performance of Ontario, particularly over the last couple of years, has been quite striking compared to the rest of the country. As you know, the Ontario manufacturing sector went through a fairly wrenching adjustment to free trade and is now reaping the benefits of that, and we see that in a strong manufacturing sector.

Mr E.J. Douglas Rollins (Quinte): Thanks, gentlemen, for coming. I think one of the things that you look at on these forecasts and the economic turnout for 1996 and what really the current outlook is is particularly on the housing and in the construction department. In both of those, we have outgrown our numbers quite substantially, and it's one of the more positive signs.

I think those kinds of turnarounds in that department allow the private sector, because a lot of private sectors build individual houses and things of that nature. Do you see that kind of growth continuing in the housing market? We certainly have outjumped our numbers this year. Will it continue down the road, in terms of what you're forecasting?

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Mr Gourley: I think it's fair to say in the case of the Toronto market that the statistic I quoted earlier about a 78% growth in resales is not a sustainable rate of growth. Obviously, from a relatively low base of activity, it is a wonderful percentage growth rate, but it's not sustainable.

Continued growth in the housing market as people see investment opportunities, as people see affordability, mortgage rates at the lowest they've been in a decade -- the affordability index, if you like, of owning a home versus renting is just there, so all the conditions are favourable to people making those investments. I certainly see, with the combination of interest rates, tax reductions and just generally favourable conditions that the government is fostering, a greater investment by individuals in homes, whether they be new or resale. I see that as a continuing trend, not at the current rates, but continuing growth certainly in housing, in the residential area.

Mr Dorey: In terms of gain, private sector forecasts in general are from the 42,000 or so housing starts this year to about 52,000 next year and 60,000 starts in 1998. The expectation is for pretty steady growth in that.

The other thing that those statistics don't quite capture is the massive amount of renovation that's going on, whether it's ripping the guts out of old office towers in Toronto and turning those into housing or people simply fixing up their houses. The residential renovation sector is particularly strong, and interest rates clearly contribute to that.

The Chair: Thank you very much. We'll start on the third leg of our question round.

Mr Kwinter: Just to make a comment, it really concerns me when I hear the government side taking a look at the results happening in 1996 and somehow thinking it has anything to do with what they have done.

There's a time lag in all these investments. If you just take a look at page 10 and see the massive investment in machinery and equipment that took place in 1994-95, that was as a result of the major restructuring that had to take place. When the recession hit Ontario was the hardest hit, not because it was poorly managed but because it had the most vulnerable industries; that has totally been restructured and we are now seeing the benefits of it.

There has to be a reality check. The things this government is doing, many of which are positive -- you won't see the results for another while yet. I just think it's important that that be put in its proper context.

One of the other things I'd like to really get a feeling for is in that same general area. We often hear about the net new jobs created and the projection that if everything goes right we will hit the 725,000 target. There doesn't seem to be a lot of attention being paid to not necessarily the net new jobs but the net new employment. There's a whole range where the workforce is growing and we have this anomaly of net new jobs being created but higher unemployment. That's on one side; I'd like to get a comment on that.

The other is on the expenditure, particularly on high-ticket items like health care. The government goes to great pains to say, "We are keeping our health care spending at" -- what is it?

Mr Ford: It's $17.4 billion

Mr Kwinter: That's right, $17.4 billion, but they're saying it's now $17.7 billion. They're saying $17.7 billion, but what is happening is that notwithstanding that the health care dollars may be the same, the demographics of our client base or our patient base are changing and the size of that patient base is changing. What you're really getting is less expenditure per capita, and not only that, but a skew in an aging population where just by keeping the dollar level at the same level you're actually falling behind because you're not providing the service and you're not providing the same per capita expenditure.

Has that been factored in so we don't get a situation like Ralph Klein where he suddenly comes to the realization, that someone is going to point this out and, going into an election, we're going to have to play catch-up, with what that does to all the figures?

Mr Gourley: I have two or three comments, and I'd like to ask Steve to add comments about the growth in employment overall and the labour force.

I would like to comment on your first remark about investment and take your point in the graphic we've shown here that the growth in investment in 1994 and 1995 was very high in rate terms. The key, at least for our projection, is that that relatively steady and in our case prudent projection is for continued investment. I think that's important.

I agree that a lot of the measures the government has put in place will take time to bear fruit in terms of benefits, but they will bear fruit, and they will bear fruit in part because of the choice of measures such as personal income tax that the government has chosen to use, but also the consistency of a context, and you mentioned that. A context that favours investment, that provides business with a known environment, a consistent environment over a period of time will, I believe, lead to continued growth and real investment in machinery and equipment and in non-residential construction, as illustrated on page 10.

The higher unemployment and the interplay between the size of the labour force and individuals seeing that there are more jobs being created and therefore presumably more opportunities for them and therefore presenting themselves into the job market, saying, "I would like to be able to find a job as well," means that the government will have to deal with this somewhat conflicting statistic, where more people enter the labour force than jobs have been created, and therefore you see that rise.

Steve, I don't know if you want to talk about that, and then we'll come back to the comment about demographics and health care.

Mr Dorey: On the investment side, the one number that is striking in 1996 is the performance of the non-residential construction sector. That sector has performed very badly over the last five years and is now up about 10% in Ontario versus virtually nothing in the rest of the country. For whatever reason, whether it's low interest rates or the government's policies or whatever, people are building factories and office buildings much more now than they have been in the past few years.

On the job side, as you may have noted, the job projection we now have, with two months' data to go for the year, is that the job growth number will come in slightly higher, 1.6%, versus the 1.5% job growth we were expecting in the spring, and yet we're showing an unemployment rate that's somewhat higher. That's your point, that unemployment is rising while jobs are rising.

The reason of course is more people entering the labour force. We see the labour force growth about 0.3% faster than we had expected in the spring. We take that as a positive sign, that people are coming back to the labour force, because they do think there are opportunities to get jobs. While in the near term that's reflected in higher unemployment and a higher unemployment rate, over time, clearly, if people are looking for work that's a good sign.

Mr Gourley: Coming back to the issue of health care and demographics, in a shrinking government expenditure pie, if you like, if you're maintaining in absolute terms the level of spending for health, whether it be $17.4 billion or $17.7 billion or whatever, clearly a larger portion of the government resource in percentage terms will be going to health care as the total pie shrinks with the absolute amount staying the same.

I don't think it's possible, in a fiscal planning sense, to reflect the shifts which over the long term are not settled but on a year-to-year basis are settled as demographic changes in the population change the demands on the health care system. We all know, perhaps only too well, about the aging population and what that means in our own personal sense for health care needs and what that will mean for the future needs of the health care system in Ontario.

What will have to happen, by deduction, if you like, and by policy is that we will have to spend the money we are spending differently, providing services to people in their own homes and ensuring that the rather expensive facilities we have, such as acute care hospitals, are used as efficiently and effectively as possible so that people can get the services they need on the one hand, but so that more efficient and effective hospitals can be constructed so that the cost of those services is lower than it has been in the past.

There's no doubt that there's going to have to be more money dedicated to home care services or health care in the community than has been the case in the past as we move away from institutional care to personal care or individual care in the community.

But in terms of our fiscal planning, we are working on this commitment of $17.4 billion and maintaining it, as was mentioned, at $17.7 billion this year.

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Mr Phillips: The size of the civil service: As I recall it, you were predicting 11,000 fewer in this fiscal year, and we're about four months from the end of it. What is your expectation in terms of the size of the civil service at the end of this fiscal year?

Mr Gourley: I'm sorry, I don't have that data at hand. I know Management Board does. Unless we have the most recent information, that's a statistic that I don't tend to have readily at hand; it tends to be Minister Johnson or his deputy who would have that. I don't have it. I could get it for you.

Mr Phillips: That's fine. If you could send it to the committee I would appreciate it.

Ms Evans: I can give you a little bit of information. I can't give you the end-of-the-year number, but between June 1995 and September 1996, the OPS was decreased by 11% or 9,446 full-time equivalent positions. That's the status that's been achieved as of September 1996. The size has decreased.

Mr Phillips: From what to what, the total?

Ms Evans: The changed number is 9,446 staff, and I believe that's reduced from 84,981 full-time equivalent positions.

Mr Phillips: As of March 31?

Ms Evans: No, that would be as of September 1996.

Mr Gourley: It's the base we started with. We should be clear on the base and the date of the base, and then --

Mr Phillips: Isn't the most useful one, I seem to think, March to March to March? What is the most useful number?

Ms Evans: Normally, I guess we use the end of the fiscal year. These numbers were used to show what's happened since this government took office, so it's from June 1995 to -- the latest is September 1996.

Mr Phillips: I think it would be useful to have it from the time the government took office till now and what you project for year-end.

The Chair: Thank you very much. We'll move to the NDP.

Mr Tony Martin (Sault Ste Marie): I would like to follow a somewhat similar track to Mr Kwinter in my questioning. I have some concern about the numbers, more in what they don't say than in what they do say, particularly about the impact all this has on the communities we all are so concerned about in Ontario; the numbers that aren't in the report you presented that are obviously out there and that people are concerned about and talking about and trying to get some answers to.

The picture you present us here is one of optimism and sun. The picture I get when I go back to my community and look at the numbers we're generating out there and when I talk to people is in rather stark contrast. I was talking to somebody the other day and they said they've never seen as much poverty in this city as they see today. They've never in their history in Ontario seen as many people struggling to put bread on the table, struggling to pay the rent and to stay in a decent place.

Certainly there have been statements by some pretty reputable organizations in the country and in the province about the whole question of poverty. One of those groups is the Canadian bishops; they put a statement out in October of this year that talks about poverty. There's another statement put out by the Social Planning Council of Metropolitan Toronto on child poverty. That's an indicator that I don't see reflected here. It's an indicator that I don't seen tied in to the statements you're making. There are other statements being made by folks that have been around for a while that I think have some credibility: Bankruptcies are at a record pace; the income gap swallows most of humanity.

How do the numbers you're presenting and the picture you're painting here square with the impact the economy has on the communities we all live and work in and belong to?

Mr Gourley: I don't wish, in any presentation we make or in any of the documents we present, to say we are not very clearly aware of circumstances faced by people, individuals in communities such as Cornwall or St Catharines or London, Ontario. These communities have all experienced difficulties where individuals who felt they were perhaps secure in employment see plant closures and so on. Those facts are taking place.

But by the same token, there is in Ontario, and this is across a broad base, investment in machinery and equipment, in non-residential construction and housing construction. That will mean jobs and that is meaning jobs for individuals. What we are indicating, with 127,000 jobs being created since June 1995, with low interest rates, with opportunities being created, is that there are signs of hope. But that's not to say that any one of us as individuals or as advisers to the government presents a Pollyanna-ish picture that this situation is uniform.

What I think the government is working towards is ensuring that more people are able to benefit from its policies. In fact, I know, from having advised the government on the personal income tax reduction design, the 40% reduction for the low- and modest-income individuals was clearly intended to deal with some of the issues you've described.

Mr Martin: That's all well and good if you have a job. There was a gentleman before us here a few minutes ago who suggested that unemployment was going up slightly, and he rationalized that by saying that more people are coming into the workplace looking for work. Whether they're looking for work or they're off the chart not looking for work, there are still people out there who don't have work. However you play the numbers, the reality is still the same: Numbers are up re unemployment.

We did a study in our community not so long ago. We've talked here a little about the export market. What about the domestic market being destroyed in the country by way of the downsizing in government and the spinoff effect? We did a study in our community that showed that by the time we're finished, given the budget of last year, we will have lost somewhere between 1,600 and 1,700 jobs in Sault Ste Marie. That computes to probably $50 million or $60 million out of the community annually. The reduction to the lowest-income people in our community of 22% of their income computed to $2 million a month out of the small stores and grocery stores and the retail businesses of our community, $24 million a year. The impact that's having is quite dramatic.

There was a study done in North Bay, just released last week, that indicates that in that city, by the time --

The Chair: Your question, please? Your time is running out.

Mr Martin: By the time we're finished in North Bay, they'll be short about 2,200 jobs. We're also talking about another $3 billion in cuts. We don't know where that's going to happen yet, but it's going to happen, because to meet the targets this government has set for itself we have to take another $3 billion out. That translates into jobs and money out of our communities. Have you factored in here the impact that's going to have on the domestic market? Have you gone beyond that to factor in the extraneous costs, the social upheaval?

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Mr Gourley: We've done our best to project the expenditures and the revenues of the government, obviously, in the terms in which you are describing it. I don't think there is anyone who doesn't understand the difficulties in the economy, whether it be restructuring due to economic forces that result from freer trade or more competition domestically. These are all factors affecting every community. We have done our best to provide the government with prudent and cautious forecasts, including the forecasts on the programs needed to support those individuals whom you are describing.

The Chair: Thank you very much. We move to the government side.

Mr Jim Brown (Scarborough West): For most of the people in my riding, one of the big things on their hit parade is jobs, and during the campaign all they talked about was jobs.

Being a former small business person, I know I could create three jobs for, say, $10,000 worth of capital, and I know too that large companies create one job for, say, $200,000 worth of capital. Small business creates maybe 80% to 90% of all new jobs. Yet I know that in spite of that the banks, of which there are only six, controlled by the Liberals in Ottawa, have been very hard on small business and have really contributed to unemployment by their harsh credit policies. Even though the interest rate may be low, they still require collateralization of loans of maybe five or six times.

In the Report on Business this morning, "Royal Sets Profit Record." They're making a lot of money, but my constituents are worried about jobs. The banks are federally operated. What are we doing, what are you doing, about getting help to small business, helping small business access capital? I know one labour-sponsored investment fund is sitting with $800 million in treasury bills when it was supposed to be into small and medium-sized enterprises. They've misrepresented, really, the whole intent of what they were supposed to do. What are we doing about getting access to capital for small and medium-sized enterprises?

Mr Gourley: I think there were a number of initiatives in the budget that tried to focus on ensuring that the environment in which small business is operating was as conducive as possible to the creation of jobs. I'll start with the employer health tax reduction on the first $400,000 of payroll that will be phased in and the parallel reduction on the employer health tax on self-employed small business people, obviously.

The access to capital: Clearly, the government sent a signal to the banks with the extension of the surtax which can be offset by making available capital to small business and therefore is re-earnable, as it were; by making and requiring tighter investment rules in the labour-sponsored investment funds, ensuring that those funds invest their capital sooner rather than keep them, as you mentioned, in safe investments or safe instruments such as treasury bills.

The whole series of initiatives was designed to assist small business, whether it be -- I mentioned previously the government's policies with respect to power rates or others. These were all intended to create an environment in which investment would be easy, in which employment would be supported. Include there the co-op student assistance we provided, encouraging the creation of cooperative student placements in small business, in fact in any business; the tax credit that's available for the creation of those positions.

Steve, I don't know if you want to talk about other conditions or other situations.

Mr Dorey: You may be aware that the Canadian Federation of Independent Business recently did a survey of its membership across the country and asked them about their expectations in terms of job creation for 1997. The results showed that 74,000 jobs were expected to be created by existing small businesses in Ontario next year, and historically we've seen that new small businesses create a number that's roughly equivalent to what's created by existing small businesses. So it does seem like the small business sector has responded to the conditions it's seeing and is stepping up its job creation.

Mr Gourley: I should also mention the film tax credit and the focusing there on new producers and new individuals; that would help. I mentioned in previous remarks the land transfer tax for new purchases, which will obviously benefit the construction industry. There are somewhere between 15 and 20 separate measures that the government has undertaken that will encourage small business to create employment and to create an environment in which small business can flourish. I didn't mention the personal income tax reduction, although I mentioned the employer health tax. I could have mentioned the personal income tax reduction, which will actually affect small business owners as well.

Mr Arnott: I want to ask you a question about the provincial debt. Most people in Wellington county are appalled that we have a $100-billion debt. They feel very strongly that the government has to live within its means, and I think, by and large, most people in Wellington county would support the government's balanced budget plan so that by the year 2000-01 we're not adding to the debt any more, we're not borrowing any more money. They'd probably support a plan to run surpluses to try and retire some of that debt.

Most provinces have balanced budgets or very close to them. Some of them even have balanced budget laws and some take it to the next step and have debt retirement laws. Without asking for your opinion on that sort of plan, I say that it would be desirable to have a balanced budget law as well as a debt retirement law.

Do you think that if the government took that step, consumer and business confidence would be enhanced somewhat? Would people have more confidence that we were dealing with our debt over the long term in a responsible way?

Mr Gourley: There's no doubt that one of the significant factors in consumer and business confidence is a government's plan overall, and whether that includes a balanced budget plan or debt retirement law I think is just a matter of the quality, I'll call it, of the plan. But where governments make plans and then aren't able to deliver on them, I think that creates an environment in which you have uncertainty about where the government is going, where taxes are going, where support programs, where assistance is going, where support for needed services is going, where infrastructure investments are needed.

The balanced budget plan itself, the five-year plan, represents a major statement, a major confidence booster for the economy for investors and for individuals. At least it's my view that that alone is sufficient to begin to set the right environment.

I certainly do hope we get to the day when our concern is about how to deal with the surplus in Ontario and what to do with that. I would look forward to that day with obvious delight, as I'm sure everybody would, because the province needs investment and it needs to know that we are not going to be facing this mountain of debt.

I did make in my remarks the point that we are still at $8.2 billion in terms of a deficit. We have a long way to go and very challenging and difficult times ahead of us which need consumers with confidence and business with confidence as to where we are going in terms of our plan, and whether the plan is going to be achieved is the most important message.

The Chair: Mr Ford, you have time for one short question.

Mr Ford: What effect does the underground economy have on the Ontario economy?

Mr Gourley: Most people who talk about the underground economy, except for the criminal portion, I'll call it, refer to people who aren't paying their fair share. I think that causes resentment to the extent that we don't have sufficient enforcement. You'll know that the Ministry of Finance is investing in additional auditors to ensure that corporations and businesses and individuals pay their proper share of tax. But generally speaking, there's an undermining of confidence in the systems we have, and this is not good for our system because it tends to mean that people will seek to avoid paying taxes and that that would be acceptable behaviour.

I don't believe it is as widespread, although there are frequent reports about its growth. It is something we have to guard against and ensure that our systems require individuals to pay their fair share of taxes.

Mr Ford: Is there an estimate of the size of it? I'm not trying to put you on the spot.

The Chair: You won't have time to put them on the spot. We do have time for one brief comment, if you have one.

Mr Dorey: A number of the members on the committee did look at it last year, and the range is everywhere from 3% of the economy to 15%.

Mr Ford: That's a lot of money.

The Chair: I'd like to thank you, Mr Deputy, and the ADMs and the entire staff of the finance department who joined us today. We appreciate your presentation. We appreciate the knowledge.

This committee stands adjourned until the next meeting.

The committee adjourned at 1752.