CANADIAN FEDERATION OF STUDENTS -- ONTARIO
ONTARIO ROAD BUILDERS' ASSOCIATION
ALLIANCE OF MANUFACTURERS AND EXPORTERS CANADA, ONTARIO DIVISION
INTERFAITH SOCIAL ASSISTANCE REFORM COALITION
MIDDLESEX FEDERATION OF AGRICULTURE
CONTENTS
Wednesday 12 February 1997
Pre-budget consultations
Ministry of Finance
Mr Michael Gourley
Mr Steve Dorey
Mr Michael Manford
Ms Patti Croft
Canadian Federation of Students--Ontario
Ms Vicky Smallman
Ontario Road Builders' Association
Mr Rob Bradford
Alliance of Manufacturers and Exporters Canada, Ontario division
Mr John Allinotte
Mr Brian Collinson
Interfaith Social Assistance Reform Association
Ms Gabrielle Mandell
Brother Michael Maher
Sister Doryne Kirby
Middlesex Federation of Agriculture
Mrs Loretta Smith
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
Chair / Président: Mr TedChudleigh (Halton North / -Nord PC)
Vice-Chair / Vice-Président: Mr TimHudak (Niagara South / -Sud PC)
*Ms IsabelBassett (St Andrew-St Patrick PC)
*Mr JimBrown (Scarborough West / -Ouest PC)
*Mr TedChudleigh (Halton North / -Nord PC)
*Mr JosephCordiano (Lawrence L)
*Mr Douglas B. Ford (Etobicoke-Humber PC)
*Mr TimHudak (Niagara South / -Sud PC)
*Mr MonteKwinter (Wilson Heights L)
*Mr TonyMartin (Sault Ste Marie ND)
*Mr GerryMartiniuk (Cambridge PC)
Mr GerryPhillips (Scarborough-Agincourt L)
Mr GillesPouliot (Lake Nipigon / Lac-Nipigon ND)
*Mr E.J. DouglasRollins (Quinte PC)
Mr JosephSpina (Brampton North / -Nord PC)
*Mr WayneWettlaufer (Kitchener PC)
*In attendance / présents
Substitutions present /Membres remplaçants présents:
Mr RonJohnson (Brantford PC) for Mr Spina (morning)
Mr Peter L. Preston (Brant-Haldimand PC) for Mr Spina (afternoon)
Clerk / Greffier: Mr Franco Carrozza
Staff / Personnel: Ms Alison Drummond, research officer, Legislative Research Service
The committee met at 0905 in committee room 1.
PRE-BUDGET CONSULTATIONS
The Chair (Mr Ted Chudleigh): I call the committee to order. In the continuing saga of the pre-budget consultations, we have this morning the privilege and the honour of welcoming Mr Gourley, Deputy Minister of Finance, who I believe will be with us for an hour this morning and again for an hour tomorrow morning to make up for the two hours we lost last week. Thank you very much for taking into consideration our difficult scheduling times. I'll turn it over to you for a presentation, and then we'll fill up the rest of the hour with questions.
Mr Michael Gourley: Thank you very much. I'd like to begin with a couple of remarks, first of all to introduce the assistant deputy minister in the office of economic policy, Mr Steve Dorey. He will be here with me this morning, and then tomorrow we will have the assistant deputy ministers responsible for financing, on the one hand Mr Tony Salerno, the CEO and vice-chair of the Ontario Financing Authority, who will be here to talk about some of the details of Ontario's financing program. Ms Anne Evans, who is the assistant deputy minister responsible for fiscal and financial policy, as well as being the controller, will be here tomorrow to discuss the fiscal plan.
Before Steve gets into his presentation, I just want to remind the committee of the presentation we gave last fall, in which we spent some time illustrating the potential confusion that arises each time we present quarterly results. In the case of the presentation we gave last week, we were presenting the third-quarter Ontario economic accounts results and the third-quarter Ontario finances accounts. These are, in the case of the economic accounts, a detailed breakdown of Ontario's economic performance for the third quarter which, members will recall, actually constitutes the three months from July through September. The third quarter in the economic presentation consists of the three months from July through September. The third quarter for Ontario finances is still the third quarter, but it is a different set of months, October through December. Both reports are for the third quarter, but they're for a different set of months. I think it's important as we get into the detailed discussion that we understand that important distinction.
I'd ask Steve to begin his presentation, to talk about performance and Ontario's economy.
Mr Steve Dorey: First, I apologize for the date marked February 6. We had planned to be here last week, and we haven't changed the date on the first slide.
The minister presented the third-quarter Ontario economic accounts to you last week. As he indicated, the economy grew quite strongly in the third quarter, 3.8% real growth, led by 38% annual rate of growth in machinery and equipment investment, strong non-residential construction and strong housing. Because the third quarter of the 1996 calendar year is obviously some distance behind us, I'd like to go beyond that and talk about what we've seen; we obviously don't have fourth-quarter accounts at this point, but we'll talk about the indicators we have seen and what they say about where the economy is as we enter 1997 and prepare for the budget.
The second slide gives you a comparison of our budget forecasts with the outlook, either actuals if we do have final data for the year 1996 or, in the cases where we don't have actual data, the numbers we presented in November. I'll talk about how good those numbers are at the present time, whether they should be higher or lower.
With respect to real GDP, at the time of the budget we were projecting 1.9% real growth for 1996. Given the strength we saw in the third quarter, it looks like it will now be somewhat over 2% for the year. The November statement projected 2.3%, and I think we'll get there by the end of the year; we may be slightly higher than that. In terms of nominal GDP, we projected 3.4% growth for the year in the budget. In November it looked somewhat lower, 3.3%; given the 6%-plus growth in the third quarter, it now looks like nominal GDP will come in closer to 4% than the 3.3% we had expected in the fall.
Retail sales: The number we presented in November was significantly below the budget number. We were looking at a decline of half a percent for the year, but we pointed out at that time that retail sales is an indicator that has some problems with it: It doesn't really capture computer sales, which are growing very strongly; it doesn't capture home renovation activity, which is also growing quite strongly. Nevertheless, through the fourth quarter of this year, at least through November and given early indications for the Christmas season, we did see quite strong sales both of the things outside that retail sales base and the retail sales base itself. We would expect that number to be better than the minus 0.5% we had projected in the fall.
One point there: Obviously, the third-quarter finances projecting that retail sales tax revenue will be $160 million higher this year than we had projected at budget time is a clear indication that retail consumer activity is stronger than we had expected at the time of the budget, in spite of the fact that retail sales growth is lower. Again, it's simply a distorted indicator.
With respect to housing starts for the year, they came in at virtually what we had projected at the time of the budget: 43,100 housing starts versus 42,600 at the time of the budget.
Corporate profits: We reduced our projection in the November statement from the budget, from 8.3% growth to 6.2%. Subsequently, in the third quarter, we had a corporate profits growth of over 50% at an annualized rate, and we would expect that number will come in better than the budget number at the end of the year. Again, that's consistent with the fact that we've moved up our projection for corporate income tax substantially in the third-quarter finances.
CPI inflation came in slightly higher than we had expected on the year.
The employment numbers came in virtually in line with the budget projection. The unemployment rate was slightly higher, and that's because the labour force grew more quickly than we had projected, and therefore the number of unemployed and the unemployment rate are slightly higher than we had expected at the time of the budget.
To go quickly through the most recent indicators other than the national accounts, you can see there that department store sales surged in the fourth quarter of the year, rising at an annual rate of 7%, which is the strongest fourth-quarterly growth in department store sales since 1989. On the right you see computer and auto sales. Again you can see strong growth in the dollar value of auto sales in 1996 -- this is through 11 months; and computer sales, which tend to get excluded from the retail sales base but not the retail sales tax base, are up this year by 17.6%.
Additional indicators of consumer spending: Consumer confidence has risen 22% this year and rose over the course of the year. Again, you can see in the fourth quarter strong growth in the retail sales themselves, up 3.9% in the fourth quarter.
The housing market: Housing had a strong year and finished the year particularly strongly. We had housing starts rising 22.4% in the fourth quarter, giving us a strong starting point going into the new year. With respect to home sales, you can see that home sales finished -- December ended up 77% over a year ago, and were again very strong in January. For the year as a whole, we had home resales up over 30%. Toronto was even stronger than the rest of the province, with resales up 42% over the year and a rise of 83% in January over a year earlier. The housing market is very strong, certainly new home sales and resales are very strong, and that will lead, we expect, to more acceleration in the housing construction industry over the course of the year.
With respect to interest rates and what we're seeing there, you can see that since we appeared here in November, forecasters have raised their projections somewhat with respect to interest rates for 1997, a 13-basis-point increase in the average forecast for three-month treasury bills and a 40-basis-point rise in the 10-year government of Canada bond outlook. That largely reflects stronger growth in the US than we had expected at that time and good growth here.
The other thing to note, though, is that the projection for interest rates at this point is still two full percentage points below where it was at the time of the budget last year and, with respect to long-term interest rates, again a full percentage point below the expectation at the time of the budget last year. The interest rate outlook is still very positive for the economic outlook through 1997.
The outlook for the dollar: There's a fairly wide range of views on the dollar over the next two years, from modest increases to quite substantial increases. The average view is that over the next two years, the dollar will rise from its current level of about 74 cents to about 78 cents. The range of views is anywhere from staying basically flat to rising to about 85 cents, but that's an outlier, I think. The question of whether that does significant harm to our competitiveness has certainly come up. You have to remember that modest increases in the exchange rate in line with improving competitiveness and lower inflation don't hurt our competitiveness; that is, if our inflation rate is lower than our principal trading partner, the US, by 1% and our exchange rate goes up by 1%, the cost position remains unchanged.
This slide gives you a picture of the competitiveness of key industries. This was done by KPMG in 1996 to show the competitiveness of Canadian industries versus their US counterparts. You can see that with a 73.5-cent dollar, which is about where it is, the auto parts industry enjoys about a 7% cost advantage over its US competitor; medical equipment about a 7% advantage; software over a 10% advantage; and overall competitiveness about a 7% advantage.
If the exchange rate were to rise to 80 cents, which is a little above what the average forecaster expects and what we expect over the next couple of years, that would reduce the competitive advantage but it wouldn't eliminate it. The competitive advantage in those industries and overall would remain somewhere in the order of 3% to 4% more competitive in Ontario than in the US.
I'm not sure the final slide is in your package, but it's just the question of where the private forecasters have gone in their view for 1997 since the budget and since November. You can see that private forecasters are consistently raising their projections for growth in both Ontario and Canada. The current outlook for Ontario is 3.5% growth this year on average; that compares to the 2.9% we were showing you in November and which we've built our fiscal plans around.
That's a brief update on what's happened recently.
Mr Gourley: We'd be happy to take questions now on this part of the presentation.
The Chair: Will you go back into making a further presentation on other issues, or will we just go into --
Mr Gourley: We thought we would do that tomorrow. We could have the questions on the economy today, and tomorrow would be about the fiscal plan, if that's acceptable.
The Chair: Good. We have, then, approximately 35 minutes. Would you like to go in four rounds of approximately six minutes each? Okay. For six minutes, we'll start with the opposition.
0920
Mr Joseph Cordiano (Lawrence): I wanted to ask about forecasts and projections on growth rates. While this is obviously something that's come up in the last day or so, the author of the Common Sense Revolution plan, Mark Mullins, chief economist of Midland Walwyn, suggested we're going to be facing a recession in 1998. Now, he is the lone wolf out there.
Mr Tim Hudak (Niagara South): The lone bear.
Mr Cordiano: No, he's a wolf: He came up with the revolution, and that was rather aggressive. His forecast certainly appears to be rather aggressive in terms of its downward trend. Obviously, he's out of sync with other forecasts. What is your projection for 1998? We heard the finance minister talk about a rosy projection for the next three and a half years. Projections being what they are and economists being what they are, you're all over the place in terms of possible scenarios, but he's certainly out of sync with the mainstream in terms of what most economists are projecting.
Do you have any scenarios whereby there's a possible recession factored into any of your projections for growth, job creation -- which, by the way, is what I'm really interested in. Your forecasts on job creation and the actual numbers are not in sync. The job creation number forecast by this current government -- they're certainly not meeting their targets. Can we expect any difference with respect to job creation targets by the time 1999 rolls around? We already see that there's a great gap occurring in the job creation numbers.
Mr Gourley: I'd like to start with a couple of comments. First of all, one of the points we've tried to emphasize is that our projections are for purposes of building a fiscal plan, so we've adopted a policy of being prudent and cautious in respect of our own projections. We're not trying to predict where the economy will go. We are trying, though, to provide a projection which is reasonable for the purposes of building a fiscal plan, because the economy generates the revenues on which we base our fiscal plan.
As a result, in order to demonstrate that prudence and caution, we use a comparison with the leading economic forecasters. Our intent is that we will always be on the small-c conservative, prudent and cautious side of those forecasts. Doing that, we have to use an average of what the private sector forecasts. One forecaster out of the 30 or so people who might arguably be involved in this business is not likely to influence that average very much. Every forecasting group will have its differences on job creation, on inflation, but we try to combine them using this average method we do, to say, what on average are most private sector forecasters saying about where the economy will be going?
Our first instance is to ensure that we have this prudent and cautious approach in our forecasts. In respect of recession scenarios, we've been looking out two years as we've been talking here and providing those forecasts or projections based on that two-year time frame. We are not projecting, in our fiscal plans, a recession scenario for Ontario.
In respect of the jobs numbers, as Mr Dorey indicated, the jobs numbers we projected for 1996 -- I think the number was 81,000 and the net new jobs created in fact ended up being 80,000. We had looked at those projections and it turns out our prudent and cautious projections were reasonable. In terms of growth, our prudent and cautious projections were just that; they were well below what actually has happened and that is something we will be looking at even now, as we get fourth-quarter results and fourth-quarter details. Our real GDP growth was projected at 1.9%; the presentation last week showed that our projection -- again, since we don't have the full data for 1996 -- is 2.3%, which may, because of a very strong quarter, yet be cautious. It may be higher when we've finished.
Mr Cordiano: Well --
Mr Gourley: Sorry. I wanted to give Steve an opportunity to respond to some parts of your question that I haven't answered.
Mr Cordiano: I just want to be clear about this: Will you be on target? The government has made a commitment that 720,000 jobs will be created during their mandate. That is a target that I think is unachievable now, and I want to understand from you how you will achieve that target in the four years this government will be in office in its first mandate.
Mr Gourley: I wanted to respond specifically. I thought you were indicating that the projections we had made were not being achieved, but we're happy to respond to that. I'd like to have Steve respond to comments with respect to Mr Mullins's projections and his view of particularly the US economy and how that translates into the Canadian economy.
Mr Dorey: There is nothing in the Canadian economy that would produce a domestic-produced recession, and I think Mr Mullins agrees with that. If you remember, the two large recessions we saw in the early 1980s and early 1990s were preceded by, in the first case, interest rates of 20% and, in the second case, interest rates of 14% and a dollar that was valued at close to 90 cents. We're a long way from that kind of situation.
I think the scenario Dr Mullins has laid out is a situation where growth in the US is significantly stronger than we've built in or than most people expect in 1997. That then produces a reaction from the Federal Reserve Board that drives up interest rates and produces a mild recession in the first part of 1998. That gets him a growth rate for the US that -- you mentioned that he's a lone bear, or lone wolf. The 40 forecasters that the blue chip consensus, which is the principal survey of US forecasters -- none of them has a growth rate as low as Mr Mullins for 1998, so he really is in the far extreme.
The other point I'd like to make, though: Certainly a slowdown of that magnitude in the US would have some impact. You should remember we built into our fiscal planning a provision of, at this point, a $650-million reserve to cope with unanticipated slowdown in the economy. That's enough to cope with about a 1.5% slower growth than we anticipate, if it were to happen.
Mr Mullins doesn't do a forecast for Ontario, but if you look at his Canadian data and look at 1997, which is stronger than our projection in 1998, together, he's talking about approximately 4% growth over those two years. Our underlying forecast would be a little less than 5.5% for Canada over the same period, so even if his scenario were to come true, we've got the caution built into our forecast to accommodate that kind of difference. While it's highly unlikely, we think we've prepared for that eventuality.
The Chair: We'll move to Mr Martin and the third party.
Mr Tony Martin (Sault Ste Marie): I was wondering if we were also going to get any information on the debt, a breakdown of the debt costs.
Mr Gourley: Yes, we will. Tomorrow's presentation will cover that in some detail: a financing plan, sources of financing, the denomination of our borrowing and so on. Mr Salerno will be presenting that tomorrow.
Mr Martin: So we will have a breakdown of the debt by issue and interest rate material.
Mr Gourley: Yes.
Mr Martin: Okay. I'd like to follow up on Mr Cordiano's line of questioning, maybe back up a little. It seems to me from what I've looked at, the improved revenue picture is partially a result of about $578 million from 1995 tax returns being posted this year. Is that correct?
0930
Mr Gourley: I'd like Mr Dorey to address that issue. It is in respect of 1995 collections, but there are other-year adjustments in there as well, so it think it bears some detailed explanation.
Mr Dorey: Each year, at the end of the year, you make either positive or negative adjustments for prior years. The $578 million is mostly associated with adjustments for 1995, but there are adjustments for previous years too. About $430 million, I think, is the number associated directly with 1995.
Mr Gourley: I'd just point out that we got into this discussion somewhat last time. It simply is a requirement of the Public Service Accounting and Auditing Board rules that even though we've taken in the money this year and even though we know a portion of it is attributable to the 1995 tax year and a portion of it is attributable to the 1994 tax year and so on, we have to record it as revenue in this particular fiscal year.
Even though the number, as you correctly point out, is $578 million, Mr Dorey has indicated that just over $430 million is actually attributable to the 1995 tax year. The federal government in its collections is constantly making adjustments and making settlements with individual taxpayers and therefore adjusting the collections data it has provided. They basically go through all returns once and say, based on that first pass-through, "This is what Ontario is entitled to," and then there are appeals and reviews and audits and so on that create differences. There are still, if you like, appeals being heard about 1993 taxation year, and their resolution resulted in this case in additional money for Ontario. As was pointed out last week, it could result in less money for Ontario, depending on what happens with individual taxpayers.
This is a constant feature every year, and next year at this time we'll be saying, "There are adjustments vis-à-vis 1996, some for 1995," because not all of 1995 is completed. Basically, they've just gone through 1995's returns once, as of today, and they're going to start getting through audits and appeals. So next year, we will have a mixture of three to four years of returns impacting on our revenues. This is just at the margin, remember. The basic data we receive in respect of the 1995 year, the year we're talking about -- the numbers are the vast majority. It's just at the margin, but in this case the margin's a very big one: $570 million-plus.
Mr Dorey: To add just one more element of clarification there, when we come to the year-end, we have to make a judgement, given the amount of information we have from Revenue Canada and our desire to be cautious about how much provision we continue to keep for possible upward or downward adjustments. Once we have the final information -- well, it's never final, but as final as it gets -- in this case, we realized that the caution we had kept was probably excessive.
Mr Martin: All that being said, still, the very rosy picture the minister painted here last week was based on some money that was going to flow this year because of revenue generated back in 1995. The bottom line for a lot of us is that it seems the revenue generated, as presented by the minister, was not a reflection in any way of, for example, the tax break; that is, the impact on revenues this year was not as positive as it was because of the impact of the tax break or actually anything this government has done, but was a reflection of things that were already in place and happening. Would that be correct?
Mr Gourley: No, I don't think it would be, in the following sense: We did try to present and make sure that everyone was as clear as possible that a portion of the revenues we were reporting was one-time revenue we received in respect to prior years, but also that generally the Ontario base was underestimated in our projections, and therefore that base both for 1995 and subsequent years, 1996 and beyond, has to be increased to reflect that improved performance.
In respect of 1995, the actual 1995 data certainly contained the impact of the first step of the tax reduction; that was included in there. The strength of the economy and the positive picture that the minister presented was, I'll say, largely a reflection of the economic data Mr Dorey has just taken us through in his presentation, whether it be vis-à-vis housing or auto sales or consumer confidence or business confidence or business investment. All these signs are positive and therefore supportive of a positive outlook for the economy.
We did endeavour, in the material we provided to the committee, to be clear that the personal income tax revenue increase was made up of several components, one of which was an improved and improving economic performance of Ontario, but one of which was clearly one-time money that relates to audits and denied appeals for 1992 -- a very tiny bit. We tried to be clear, and if we weren't that clear we certainly would want to make it clear to the committee today that some of those moneys were received on a one-time basis, but others were actually reflective of an increased base and therefore a greater revenue base on which to build our fiscal plan.
Mr Dorey: I'd like to make two quick points on that. One is that with respect to 1995, we obviously don't know -- people file annual income tax returns, and we can't necessarily associate the revenue with particular parts of the year, but we do know that economic activity picked up quite sharply in the second half of 1995 and confidence rose, that obviously there had been a change at that point.
The other point is that revenues are up $1.5 billion. That includes significant increases in retail sales tax revenue, corporate income tax revenue, land transfer tax, tobacco tax. Across the board, revenues are up, and a large part of the increase in personal income tax is associated with 1995. Generally, revenues do reflect a strong economy.
The Chair: Thank you very much. We'll move to the government side.
Ms Isabel Bassett (St Andrew-St Patrick): Thanks, gentlemen, for your presentation. I was going to follow up on consumer confidence, which is so important to our recovery. You've touched on it in most of your answers, but could you put together the signs that make it obvious that consumer confidence is improving?
Also, I'd like to pick up on what Mr Dorey mentioned about computer sales not being factored into retail sales. I understand that retail sales would be far higher if you factored in computer sales, and retail sales are of course one sign that the economy is picking up.
Mr Gourley: In terms of the general situation with respect to consumer confidence, frankly I would link in business confidence, because to the extent that businesses are confident and increase investment in machinery and equipment -- as in the non-residential construction data Mr Dorey presented, we see companies investing in plant expansion and refurbishing existing plants. What that means for individuals is obviously jobs and the prospect of jobs, which reflects again on consumer confidence.
Once you see that influence in the economy, you then say, what signs do we have? Steve took us through the housing starts, where developers are saying: "Now's the time. There is a market. There are people looking. We've got to get product on the market so we can take advantage of the people looking for new housing. We've got to get those houses in the market so that people who want to take advantage of the low interest rates, the most affordable housing index in decades, can be there."
0940
You see the market responding in terms of resales. You see our largest market, in Toronto, outstripping the rest of the province, saying that in this particular part of the province, there are very positive signs that can tend to influence behaviour in the rest of the province. How Toronto goes is a good signal to the rest of the province, and there will be an impact on confidence across the province in that.
Auto sales are another clear example. People are willing to invest in automobiles, to renew their automobiles. I happen to know of one individual who bought two new cars this year, saying that this is the time to do it, interest rates and in his case the age of his vehicles being a consideration.
I think all these factors are influencing consumer confidence. We see record business confidence, we see strong growth in several quarters on consumer confidence. I'll ask Steve to add to that.
Mr Dorey: The link to business confidence I think is important. We've seen the plans for business investment; we don't have the final numbers, but in plans for business investment for 1996, we see the first increase in investment in plant in five years. That's particularly important, because it's not just replacing old machinery and equipment that's wearing out; it's bringing new capacity to the province, which obviously creates jobs. The examples of Toyota and Honda and so on undertaking major expansions are signs of confidence.
That's tied to the conference board survey of business confidence which asked people, "Which province is the most desirable place to invest?" or "Where you intend to do most of your investment?" and "Ontario" was the answer to that question for 59%, which was a record level and clearly a sign that business is looking favourably upon the province at this point.
Mr Wayne Wettlaufer (Kitchener): I'd like to pick up on what you just said, Steve, about business confidence, that 59% would invest in Ontario. There are those of us on this committee, I dare say all on this side of the room, who believe that our government policies are responsible for the level of confidence. I wonder if you could comment on that.
Mr Dorey: It's difficult to isolate precisely what drives business confidence. For example, when you look at the international perspective on Ontario and on Canada, you can look at the macroeconomic policies of bringing deficits down and the impact that has on interest rates and so on, and that's obviously a major contributor to confidence. With respect to some of the institutional changes, whether it's red tape or labour law, in general the reaction seems to be quite positive. It's difficult to quantify that, but certainly we're seeing a pickup in both plant and equipment investment, so that would tend to support the view that those are positive.
Mr Wettlaufer: What about the way the foreign countries and the foreign investors view us?
Mr Dorey: That's obviously become much more positive. Major international investment houses like Goldman Sachs, for example, when they look at how the outlook for Canada compares to other G-7 countries, in their latest publication you can go down the list of indicators comparing Canada to the G-7 countries, and for both 1997 and 1998 Canada ranks number one in terms of output growth, industrial production growth, job growth, the largest decline in unemployment rates, the lowest deficit-to-GDP ratio, the biggest improvement in debt, the strongest consumer spending in 1997 and second to Japan in 1998, the strongest investment. It's right down the list. Those things go together, and they indicate the view of that one particular company, a view generally shared by the investment community at this point.
Mr Wettlaufer: And we're still the province that drives the national economy.
Mr Dorey: That's right.
The Chair: Thank you very much. We'll go back to the official opposition. Mr Kwinter, four minutes will use up the hour.
Mr Monte Kwinter (Wilson Heights): I want to talk about Ontario's relative position, just talking about how Canada is perceived in the G-7. When you take a look at the debt of Ontario, notwithstanding the reduction in deficits over the last three or four years, over the next four years the debt of Ontario is probably going to reach about $120 billion. Would you say that's about the right number? It's $102 billion now, and it's probably going to increase by --
Mr Gourley: The number given that the government meets its target and doesn't overachieve beyond that, which it already has, in terms of its deficit reduction plan would be more on the order of $115 billion rather than $120 billion. The $120-billion figure was making certain assumptions, but obviously the government has announced a $500-million improvement in the deficit this year, lower than its targets. But the $115-billion number assumes that the government meets its targets and does not use the reserve which Mr Dorey referred to, the $650 million.
If you take today's debt and add the targets less the reserve for each year and assume that is the only improvement that the government makes each year, not to use the economic reserve, you get in the order of $114 billion or $115 billion as to where the debt would be.
Mr Kwinter: Right now the debt of Ontario is about 31% of GDP. Is that a figure that you agree with?
Mr Dorey: It sounds about right. GDP is a little over 300, so that sounds about right.
Mr Kwinter: And it uses up about 17% of our revenues just to service that debt. The point I am trying to make is that this year you had sort of a windfall, and the government is taking credit for it. You have a $400-million stabilization fund payment that is going to terminate this year; you are not going to get that again. You had a $195-million benefit from the interest rate. I'm sure the government wants to take credit for greater corporate income tax revenues, but they get reported -- that was certainly a year or maybe a year and a half before that, depending on the fiscal year-ends of various corporations that report their profits.
My concern is that this year everything went right for the government, and that's great; you have to take the good with the bad, and if you're lucky enough to have that happen to you, that's fine. But what happens next year if Mark Mullins is right, and I'm not saying he is, but if he is? You don't have the $400 million. Your interest rates go up somewhat. You've had an increase in operating expenses this year, for a government that prides itself on cutting, of about $218 million. When you add up all those numbers, the rosiness of the picture isn't quite there. Do you agree with that, or do you feel that isn't the case?
Mr Gourley: I actually don't agree with it, on the following basis. What we have tried to do, and I can't emphasize this enough, is to ensure we have a fiscal plan that is achievable, that when we do our projections -- not our forecasts for the economy but our projections of economic performance that will support the fiscal plan -- we are on the prudent and cautious side. So it's not a rosy outlook, it's not an optimistic outlook that we're using for Ontario's economic performance. There are all sorts of signs that would, I'll say, encourage me as a planner to say I think we're being too cautious. I think we're being overly pessimistic about Ontario's economy.
The best measure we have is what other people are saying, and Steve read off what Goldman Sachs is saying about Canada relative to the other G-7 countries. If you look at every forecaster who does an Ontario forecast relative to Canadian performances, Ontario in their view is leading, is outperforming the rest of Canada in almost all the major indicators. So I view that as optimistic, perhaps rosy, on the one hand, but that will not be the basis for our fiscal plan projections. Our fiscal plan projections will be: "That's very nice that Ontario is going to lead. Thank you very much. However, we're going to take some caution and introduce it in there, significant caution." In the budget this year, we had interest rate forecasts that were basically 100 basis points below most forecasters' view of where interest rates were going. We had a Canadian dollar that was higher in our assessment and projection of where exports were going than most forecasters.
What we're seeing is that that approach is paying off, and we will continue that approach, so we don't see the numbers you were citing of one-time payments that are stopping this year and, say, corporate income tax revenues that may change next year. Those phenomena happen every year and on the base of revenue that we have, I don't see them as being major contributors to a less than prudent and cautious but overall positive view of the Ontario economy and of our fiscal plan. It's still very achievable and still quite attainable, particularly when we get this compounding of caution.
0950
We have other people saying we're going to outperform. We say, "No, no, that's fine." We're going to take a notch below that and then we're going to say, "Let's have this prudent and cautious approach, compounded or supplemented by $650 million," which means we can lose 12% of our corporate income tax revenue and still achieve our plan; we can lose 7% of our retail sales tax and still achieve our plan; we can have interest rates higher than we've forecast and still achieve our plan. The $650 million is a very significant cushion, and as the minister has said, in this year we don't expect to use any of it.
Mr Martin: Just a couple of questions on your medium-term fiscal plan: What are the revenue numbers you expect for next year?
Mr Gourley: We're going to be presenting those in the budget. The fiscal plan forecast, that's what we will be doing in the budget. So we were reporting on this year's performance.
Mr Martin: So you wouldn't be able to comment then either on the expected growth in personal income tax for 1997-98.
Mr Gourley: Not at this stage.
Mr Martin: Nor would you be able to comment on, I suppose, how much we expect to lose by way of the next stage of the tax cut implementation.
Mr Gourley: No, the decisions on the future tax reductions have not actually been made. There have obviously been a number of statements that the government intends to implement its full tax reduction program, but how that's implemented is still to be decided, whether it's all at once or spread out over a period of time. Different staging of it is quite possible and that will influence the revenue forecast.
Mr Martin: Okay. We had a bit of a discussion here this morning, I think stimulated somewhat by the Midland Walwyn report. How much growth do we expect in the next year? I guess there are differing opinions on that.
Mr Gourley: Yes. If one were to say that one wanted to take the opinion of one of 30 or 40 major forecasters and thereby build a fiscal plan, then one might choose an even more cautious approach than has been projected. The government could have obviously implemented the entire tax reduction commitment in the very first year. It chose not to do that. It chose to provide a balance of 10 tax reductions in combination with expenditure reductions, and I'm sure it will have the opportunity, as we go through the budget-setting process, to hear views on how it should proceed with the balance of its commitment.
Mr Martin: Last week the minister presented a very positive statement here based on revenue they received, a big chunk of it at one time because of the way that's reported, and an economy that was better than perhaps expected because, as we were presented, interest rates were low and that stimulates the economy. That causes people to go out and buy, particularly in the housing market, I would suggest.
A number of other factors came together, fortunately -- the level of the dollar. All of this is stuff that we as a province don't have much control over; it's controlled primarily by the federal government. All of those pieces came together to be very helpful. Would it be fair to say that the government, and perhaps yourselves, are sitting now with your fingers crossed under the counter, hoping those pieces continue to be that positive into next year; that in fact there really isn't much activity happening in the Ontario government except a cutting of taxes and a cutting of revenue to improve the economy of Ontario and that you're hoping we will still continue to ride the crest of a little bit of a wave that's happening right now, and that if that wave should collapse, as is predicted by this fellow from Midland Walwyn, a lot of people in this province could be hurt?
Mr Gourley: I think it's important to emphasize that in our revenue forecast we are obviously going to take out from our future forecast any one-time moneys we have received this year as adjustments and are not going to put in provision for one-time adjustments next year, although we could do that. But the prudent and cautious approach says: Wait until you see that adjustment. If Ontario outperforms the rest of Canada, if the incomes that people are earning in Ontario are by and large higher and therefore the personal income tax collections are by and large higher than were projected in our base, that will be good for us. We will wait until we see proof of that in the actual returns as reported to us by Revenue Canada.
I have to admit that I don't have my fingers crossed below the table or above the table, and that is because we have adopted this approach which allows me to say with a great deal of confidence that the plans the government put forward in the fiscal plan are achievable.
In terms of the control and the influence, the Ontario government's fiscal policy and the coincidence, the consistency of our policies with those of the federal government and every jurisdiction in Canada is phenomenal and is remarked upon when we go to foreign jurisdictions and talk to foreign investors. They understand that Canada -- the federal government and all of the provinces -- has its act together vis-à-vis a fiscal policy. This means good things for Ontario, so that if the Ontario government were out of step with the rest of Canada, we would have a serious problem. But we don't have that serious problem, and because we don't have that serious problem, interest rates are lower. If we were out of phase with the federal government, in my view interest rates would be higher. Therefore, I would argue that the behaviour of the Ontario government and its policies do influence people's attitudes and their confidence in both the Ontario economy and the Canadian economy.
Mr Gerry Martiniuk (Cambridge): Mr Gourley, we have a very optimistic statement. Things are happening. However, we seem to have a lag in unemployment rates. They stay stagnant or even go up a bit, and yet we know we're creating jobs. Could you comment on any lag times and what this government is doing to create jobs in Ontario?
Mr Gourley: I think the presentation indicated 90,000 net new jobs created in the private sector, with a loss of 10,000 jobs in the government sector, which I think everybody would expect; that is to say, the loss. We also talked about the fact that we see, I'll say, a lag in people's behaviour in that the labour force grew greater than we expected it to grow. In part, that's in response to people saying: "There are jobs being created. There are jobs for me. I heard my friend got a job. I want a job."
So 107,000 new people came into the labour force looking for those jobs. I view that as a lag, and as we pointed out last week, as a result of more people coming into the labour force looking for jobs than actually found jobs in the form of the 90,000 created in the private sector, the net 80,000 new jobs, we had 27,000 people who did not find jobs but are still looking for jobs, a sign of hope for them, and as a result the unemployment rate went up from 8.9% to 9.1%.
Now, the irony is that in the most recent job figures we have for Ontario, even though Ontario lost, on the three-month rolling average basis, 5,000 jobs, the unemployment rate actually went down because of the change in the labour force. We see what might be otherwise a positive statistic, but from my point of view I would like to see more people looking for jobs, which is reflective of the confidence individuals should have in the Ontario economy.
1000
We have certainly a lag. People's confidence is something that is built up over time. It doesn't change instantaneously because the Leafs -- well, I should say if they make the playoffs, as opposed to winning the Stanley Cup. People's confidence is going to be influenced by any number of factors, not the least of which is whether positive signs continue to come from the economy. If positive signs don't continue to come from the economy, people's growing confidence will begin to dampen.
What we've seen is several quarters in a row, I think it's six, in which the consumer confidence has increased. That's very good for Ontario. With that kind of sustained increase in confidence we will see much more by way of direct and concrete results in terms of both the housing starts and auto sales we've seen.
We need not only positive developments; we need sustained positive developments. The best kind are steady, small improvements. They don't need to be dramatic, because if you have dramatic ups, quite often you have dramatic downs, and that's not good. What you want is a nice, steady growth in the economy and in the prospects of people. I, at least, for one, find any time you see a dramatic change, you then have to worry, because of experience, about when that dramatic positive is going to turn around and become a dramatic down in a short term.
If it builds up over time, a year or a two, then I think that's a much more sustainable approach, a much more positive development for Ontario's economy, a much better indication of the strength of Ontario's economy, and therefore I think we will see it reflected in a generalized behaviour. There are not enough people who are feeling confident enough now, as reflected in consumer consumption. Growth is only 0.5%, whereas auto sales are up substantially, as are housing sales and so on.
The Chair: Thank you very much, Mr Gourley. I appreciate your coming back to appear before us today. We look forward to the third instalment, tomorrow morning.
MICHAEL MANFORD
The Chair: We welcome at this time Mr Michael Manford, who is the chief economist with ScotiaMcLeod. Welcome to the standing committee on finance and economic affairs. Your being an expert witness, we have one hour to spend together. If you would like to make a presentation, we will then go into a round of questions from the three parties.
Mr Michael Manford: Thank you very much for inviting me to come today. I brought with me a little package that I'm going to refer to in a minute, but if I may, I'd like to address a little bit of the view that was put forward about a recession occurring in the United States and talk about something very different. But first maybe I will just set the global stage here because I think that as we go planning the future we all need to realize that the world is a very different place than it was 10 years ago.
We sit here in the midst of a massive global restructuring which is hitting every economy we can look at. In fact, I was just recently in Germany and was absolutely puzzled at the fact that they are still debating whether they have to restructure or not. My comment was that they'd better learn from North America. Everywhere in the world we are seeing a very similar pattern, and that is that after the last 10-year business cycle we had every economy, including the vaunted Japanese economy and the German economy, had built up enormous stocks of, shall we say, unwanted labour.
All governments basically, when we look globally, did the same thing, and that was that they did not see the slowdown in global economic activity coming. They got caught with huge deficits and have been trying, especially in the last few years, to continually cut back spending but also raise taxes. The result has been, if you look at Germany as a prime example, that an economy that was just absolutely on fire three years ago with its unification is now crawling. Real growth in Germany might get to 1.5%, if they're very lucky. France, the same situation.
Looking at Europe as a whole, France has restructured. Actually, they are in one of the best-looking economies in the G-7 right now, which has the Germans rather upset. The issue really comes down to: The engine behind Europe as we know it is Germany, and Germany, in our mind, is where Canada was in 1989. It is going to, at least in our view, take another three years to restructure, and it's going to be slow progress. Wage rates have started to slow down; they're running at about 2.5%, which has the Bundesbank very heartened.
Again, the problem is going to be that German industry has a tremendous number of people to lay off. Just look at the layoffs at Daimler-Benz as an example. The German fiscal area is slowing. The German improvement certainly has slowed down; their economy, especially the tax base, is not growing. This is again a symptom, and I want to bring this back to Canada and look at these charts. I think it's interesting to look at the rest of the world first.
The only country in Europe that is really going anywhere -- the UK will get very upset that I've made it part of Europe -- is the UK, a restructured economy that has gone through the pain, has gone through the cutbacks, has gone through the corporate restructuring and has a nice little recovery going. It looks like it's going to grow about 2.5% per year forever, the way it's going. It's a nice, balanced recovery. It's a lesson that is going to come back to Canada, that the one economy in Europe doing well is the UK. They maybe have a little bit of an inflation problem; they've had to raise interest rates and they will probably will do it again, but it's a nice problem to have compared to what's going on in continental Europe.
When we in Canada look at these countries, the one thing we have to remember is that 43% of the GDP of this country is tied up in exports. Sure, 85% of them go to the United States, but the influence of the global recovery on the United States is also large. Their export growth has gone from -- when I went to school it was 3% of the GNP; it's now 12%. It's become very important.
Let me just talk to the point: I think when we're all looking for the magic European economic recovery, it isn't there yet and it won't be there probably for another two years. You're going to be looking at tortuously slow growth. Just jumping across the world to the other side, the other area is to look at Asia, because there again is a very different country. Japan, the star of the 1970s and the 1980s, the place Canada was looking to for great things in terms of real trade export potential, has become a mature economy. They are through their financial depression which was caused by the real state collapse and the problems the banking system had. Their banking system is still very fragile, as witnessed by the fact that the Bank of Japan continues to pump money into the economy at what most people would call an outrageous level, yet inflation in Japan is extremely well controlled.
The problem for us is going to be that Japan is now also in need of restructuring. The estimates are -- I've looked at this and I think they may be a little high -- that they need to shed one third of their white-collar labour force in the next business cycle, which is an enormous hit by anybody's measure. When we look at Japan too as a trading partner or as an influence on the United States, which is our major trading partner, what I see is 3% real growth, which by our measure looks pretty good but which by Japanese measure is very substandard. When we look around the world at potential trading partners, the Chinese trade has slowed down because of technical and other problems. Most important, for basically the US and us, the Seven Tigers, led by Korea, seem to again be going through restructuring. In fact, if you've looked recently at the news, the demonstrations going on in Korea are all about job cutbacks and who's going to be allowed to scale back on what in benefits and job security -- from an economy that was one of the stars of the rapid-growth phase.
1010
That leaves us with a world that, instead of being able to grow at 5% or 6% and drive US and world trade at huge levels, is a world that grows at 2% or 3%. There is one huge -- and I would underline the word "huge" -- outlier in this whole story, and that's the United States. A recent article I saw in the paper about the US having a recession I think links back to the fact that a year ago the consensus forecast for the United States had it at 1.8% to 2% by the end of last year. The US economy grew at 4.7% in the fourth quarter, and the first quarter looks very strong too.
Since 85% of our exports go to the United States, let me spend a little bit of time on what we see in the US. What I see is a very powerful, broad-based sustainable recovery that is surprising even the bulls. Let me be very brief.
US export growth is running at about 8% year over year in real terms, driven by their largest trading partner, Canada. The Latin American component, which is about 30% of their trade, has picked up as things have stabilized and picked up, especially led by Argentina, while the Seven Tigers, as I mentioned, have picked up and they do a tremendous amount of business with the US. I think that will get stronger. We saw a huge increase in net trade towards the end of last year which we think will continue through this year and add as much as half a per cent growth to the US economy.
The other thing that is very interesting to us in the US is that they are in a phase of what I call overinvesting. The US underinvested for a period of about 10 years, and over the last five years we have seen investment spending as a per cent of GNP. This hit record highs. The US is using technology, they're using computers and new equipment (1) to avoid hiring new people, which is legitimate, but (2) to beat the daylights out of the world trade community. The US has gained markedly when we look at world trade.
Finally you have to talk about the consumer. Everybody points to the consumer's debt load; everybody points to the low saving rate. Let me point instead to the employment record of the United States. Employment in the US is at almost 2.5% growth year over year. These are full-time, good-quality jobs, and the service sector, where they are, is in the high-paid area, especially in technology areas.
Our real wages in the US have been growing for years. They're up about 1% as average real earnings take-home pay. Add the two together and you're close to about 3% real income growth in the United States. While I think the saving rate in the United States, which is currently about 5.4%, will work its way up to roughly 6% at the end of the year, it still doesn't stop consumer spending from growing about 3%. When I look at this economy, I look at an economy that is winning on the trade side, that is seeing tremendous investment growth and is also now beginning to see the consumer just consistently be there. Consumer spending rose 3.5% in the fourth quarter. The early numbers in the first quarter look excellent.
I don't think this is an economy that has a problem. The problem it has is whether it's going to generate inflation. It's been growing for a long time. Unemployment in the US is at an enviable 5.2%, depending which number you look at. They're running out of labour. They're beginning to see wage rates pick up. I think the issue is going to be whether the Federal Reserve Board needs to raise interest rates. Our view is that they will raise rates three to four times this year, probably by 75 to 100 basis points.
Where I vehemently disagree with the article in the paper about a recession is that this is not enough to create a recession. It's enough to knock a point to 1.5 points off the growth rate of the US economy, be sure about that, which is exactly what the Federal Reserve Board wants. What I think you're looking at is a midcourse correction. We think interest rates will rise fairly dramatically, maybe 75 basis points, maybe in three months. Then as the economy begins to slow down to about 2%, I think Alan Greenspan will start dropping rates, and that's the key here.
The last time we had a recession in the United States they raised rates 350 basis points, 3.5 points, not 75; 75 is simply not enough to do it. So we're looking for a very powerful economy.
What I'd like to do now is maybe turn to some of the charts I have in here and just basically look at the first chart, which is the total government deficit, all levels, everybody included. This is just dollars and billions. I'd ask you a question: Name me a country that has cleaned up its fiscal act this fast. People will say New Zealand. Wrong. Canada has cleaned it up faster. I took this chart over to the UK recently and to Germany and to the United States. Eyebrows go up when I throw it up on the wall through the projector and say that progress has been huge. Everybody says: "Sure, but how did you do it? How is the average person in Canada preparing for this?" The average person is the tax base of the Ontario government.
Let me look at the next chart. The problem we have had in this country is that the average person who's had a job all the way through this business cycle has been through three and a half years of negative real income growth. Income per capita, which I'll show you in a minute, has stalled out. Part of the problem, admittedly, is that the fiscal drag the country has used to get its government deficits down obviously has an impact on this area.
Canadian consumers are tapped. We are not going to see Canadian consumers using up their balance sheets to help support spending. Their saving rate is too low. We think it must rise by a point in the next 12 months.
The debt load looks high, but luckily Mr Thiessen has given us a break on interest rates, and what we're actually paying on that mountain of debt is lower than it was in 1989, which is small comfort.
But the real issue in Canada, I think, if you look at this next chart, is to say that since 1990 we have not seen real income per person employed increasing. This is how Canada has restructured. This is how Canada has managed to have the slowest unit-labour-cost growth of any G-7 country. It's done it at the expense of the consumer. When you look at the fundamentals of economics, it's the only group large enough that was ever going to pay for this.
I see this year the metamorphosis of the Canadian consumer. This is why I really differ from the consensus forecast. I picked up my Statistics Canada Daily the other day and I noticed that weekly earnings in this country were up by 4.3% in the last 12 months. Admittedly a lot of that is overtime, but that means the average worker out there now has 4.3% more money in his jeans than he did a year ago. The inflation rate is only 2%. So that three and a half years of negative real income growth has come to an end.
The other thing that's happening -- and I just caught the tail end of the last conversation -- is that we are seeing an interesting job market. We've generated a tremendous number of full-time, high-quality jobs. We've been swapping some of those for part-time jobs and we're still going through government layoffs. Our estimates are that there are probably another 25,000 to 50,000 in total, which would bring the total up to about 400,000 people, if my memory serves me right. Let me put that in perspective: That would be like wiping four million people off the US employment rolls. It's a huge number. That peak is being hit. We think by May or June we will probably be beyond it.
The important thing for Canada is, with the US growing -- US industrial production growth is up by about 4.5%; we think it will hit 6% by the spring -- that is the driving force behind Canada's exports. We're looking for Canadian exports to be up somewhere around 15% this year. That's 43% of the Canadian economy going into launch mode.
Let me flip over two charts and just look at the investment spending. The other wave that's beginning to hit Canada is two things. One is that if it moves in this country, we're restructuring it. We're seeing a huge amount of investment spending in machinery and equipment in this country that has just produced galloping productivity growth.
Also what we're now beginning to see is foreign investment. Foreign-directed investment in this country is up about 20% from the lowest. We think it will expand dramatically in the next 12 months, because the US is effectively out of labour and when they run out of labour they discover Canada. Especially they seem to have discovered Ontario and BC recently. A lot of that is in the high-tech area, which is interesting. So what we would be looking for is Canada to go into this overinvestment mode too.
That and the fact that we're short of inventories, we suggest, will probably drive employment in the private sector up by about 3% this year; a little slow in the first part of the year, gaining force as we go through.
By the time I get to the end of the year, I can look at a consumer whose real income last year was up by 0.6%, which is why there were very few retail sales, and I think by the end of this year can be up around 3%. All of a sudden, I'm talking about a very different consumer.
Does the central bank tighten right away to stop all our good fun? The answer is no. In fact, I would think the central bank in this country will skip the first two moves by the Fed. Inflation in Canada is very well controlled. The recovery domestically is six months old. There is no reason to nip it in the bud. The Canadian dollar will probably do the bank's tightening for it, because we think the dollar will still rise. The Canadian dollar is 15% undervalued. We think it will end the year 10% undervalued, which is not a huge crimp on our exporting abilities.
I guess what I'm saying is describing to you an economy that is in what I would call the payoff mode for the grief of the last five years. We have very low inflation. We're enjoying very low interest rates. We're finally beginning to see the consumer get his share, if you want, of the pie as we begin to get this recovery more into the domestic sector.
1020
Finally, on the last chart here, we're seeing the impact in terms of financial markets and the credibility that is being lent to Canada. I always gauge this by how many people show up to lunch when I go to London, England. It's either 100 or 12. The last time we had 60. There is a lot of interest in Canada. The story about Canada's fiscal responsibility is there, the story about Canada's ability to clean up its act is there and the payoff is there.
I looked at my screen just before I came and I noticed that 10-year Canadian bonds are now yielding nine basis points below the United States. They were yielding 190 basis points above the United States several years ago. If you look at the spread between Ontario bonds and government bonds, the same thing has happened. There's been a huge compression that is a payoff.
Before I get too bullish on the payoffs, let me leave you with three things that I think are extremely important. I've talked to many foreign investors who still own 39% of Canada's debt, and they are focused almost exclusively on spending. They want to see spending cuts. They want to see spending decline. It is their main knock basically of the federal government so far.
Second is that this has become a very competitive world. Whatever fiscal policies we set, whatever industrial changes we make in budgets, we have to be very aware of the effect of that on competitiveness, especially in a free trade world as we begin to open up more and more. Being mercantilistish, if you want, in this sort of world is a very good thing to be, just practically.
The final piece of the puzzle is -- go back to the first chart -- we've come a long way but we still have a massive debt load in this country. The debt-to-GDP ratio may get down to 60%, which is the Maastricht number, in three years, but the process requires that we stick to it. I think a lot of talk has been made about Canada having room to give money back to the consumer at the federal level. I think you're going to find that what the foreign investors want and what the capital markets want and what the people who are going to buy our bonds want is for us to keep at it. Yes, we've come a long way, but we have a long way to go.
My only other comment is that if we do have a recession -- and I do not expect one probably before the year 2000, and maybe even later than that depending on how clever the Fed is in the US -- government deficits double in recessions. The problem is going to be that we want to start from the lowest base we can. I think from the point of view of the capital markets, everybody is very pleased with Canada, but they're also keeping a very close eye on what we do.
I think that was my 20 minutes.
The Chair: We'll move into a question period, starting with the third party in rotation. Maybe we could have five-minute rounds; we'll probably have two of them if we can stay within our five-minute limit.
Mr Martin: I certainly found everything you had to say very interesting and enlightening. I'm buoyed by the projections and the forecasting that we are, as a jurisdiction and a country, in fairly good shape, with an economy that is looked at by the world as strong and having potential. That's all good. You talk about the bond traders and the people who own our debt and the impact of a global economy and free trade and all of that on everything that we do.
I guess what concerns me, and perhaps you can help me understand more fully how it connects, is the impact of this drive to clear off debt so quickly and to generate an economy that, by your own admission, I think -- and you can comment on this when you answer -- that large corporations are investing in and generating more profit. A lot of that is based on getting into new technologies, which means getting out of the employment field in ways that are quite significant. You'll know that even though Britain is doing well right now, according to yourself and its economy, they're about to turf their government, and that's not for no good reason.
I guess the question I have of you is, how does all this play out in the lives of ordinary Ontario citizens, people who want jobs, people who are concerned right now about the future as it unfolds for their children, about the quality of our health care, which is being diminished as we speak, and the fact that communities such as -- I'll just give you two because they're the numbers I have in front of me right now. North Bay stands to lose up to 852 jobs by way of the downsizing in government. That's not a very big community; 852 jobs are a lot of jobs and that will have a tremendously negative impact, in my mind, on the economy of that community and contribute to some significant impact on the economy of Ontario.
The Chair: Would you get to the question, Mr Martin, please.
Mr Martin: If you'd just let me do this, I will get there. You've done this to me before.
The Chair: We have five minutes.
Mr Martin: Yes, that's fine.
The Chair: We're going to stay on time. If you stay within your five minutes, you'll get to ask the question; if you don't, you'll be cut off. I just wanted to warn you on that.
Mr Martin: That doesn't surprise me.
We also look at what's happening in my own community of Sault Ste Marie, where a study that the Economic Development Corp, the chamber of commerce and the labour council had done projects, even with the cuts and with the tax break, that we will end up at the end of the day probably about 1,700 jobs down. Have you factored that in and the impact that will have? What can we expect will happen in that area as life unfolds?
Mr Manford: I think the problem we're all having is that when you look at the reality of economics, and there is some reality, it is that we spent 15 years getting this country and this economy completely out of line in competitiveness and everything else. The cost of restructuring has been large, there's no doubt about it, and the cost is still there. I think what we're now beginning to see is that the cost/benefits are shifting towards the benefit side of things.
Admittedly that chart I showed you on real income per person employed indicates that we've had a tough five years, but the payoffs I think are just starting to hit us now. We're still going to see government layoffs. As I said before, we expect between 25,000 and 50,000 to be lost, but we expect the economy to add a lot more because of the export growth that we're getting out of the US. The fact that Canada has had the slowest unit-labour-cost growth of any country in G-7 for six years running means that we have now turned this economy from what I would call in 1989 fat, lazy and overpaid to a very lean and mean machine which is starting to generate some high-quality jobs.
In my opening remarks I was trying to drive home that this is not the economy of the 1970s or 1980s, globally. Everybody is facing the same problem, and that is that we ran our debt levels so high that we simply did not have the ability -- and the federal government is a prime example of this. They are actually running an operational surplus and yet they're running a deficit, and the difference is interest payments. That's why it's so crucial to get the debt down. It's to give us the degree of freedom so the next time we hit a recession we've got a surplus to dig into. We can go back to the old style of policy: You put money away for the tough times.
The trouble we're having is that it's been a very hard road, but it's a road that we just had to take. We had no choice. We would have lost more jobs and our children would have been in much worse shape if we had not gone through this package.
What I also would say to you is that one of the reasons there's been such a loud cry for tax cuts is that basically we have aimed all of the policy of the country -- I don't just mean Ontario, I mean all of the policy of the country -- at one group of people, and that's the consumers. At one point in time fiscal drag, that wonderful combination of tax increases and spending cuts, hit 5% of personal income. That's too high. It's been reduced, thanks to the tax cut in Ontario and elsewhere, and it will be reduced in the future, but it must be.
1030
Part of what's really hurting the economy is that tax rates in this country are too high. I've looked at Germany, I've looked at the UK examples, the US examples, and I've looked at Canada too. What I find is that when governments run their top marginal rates at about 44%, they start slowing the economy down. I think that's part of the problem that we have in this country, and you cannot fault any single government for this. I want to be very careful about that. But in total we really loaded the fiscal drag in this economy. The UK hit a peak of 3% of income; we hit 5%. That's why I think the tax cuts as they go through, and hopefully at some point in time also out of the federal government, are important to get at some of the problems you're looking at, because consumers are two thirds of the GNP. If anybody's going to drive this economy, it's going to be you and I as consumers.
Mr Douglas B. Ford (Etobicoke-Humber): Looking down here, I've got just a few questions myself. How do we keep control of this fiscal policy? From the federal and provincial governments it's a rosy picture now, but it's like a beauty contest: They have a different winner every year. I always have that expression that every economy gets its turn off the bat. We've seen the Germans, we've seen the Japanese, and now the Americans are back in ring condition. We're still struggling here but we're back in condition too and we're trimming down. But how we do keep those spenders in line in the governments?
Mr Manford: That's an excellent question. If you look back in history, these things move in 20-year cycles. You tend to spend five years getting good, you get three years to five years of good times, and then you start giving it away.
The answer, and this is my personal view of this, is that things like balanced budget amendments don't work. The Gramm-Rudman rules in the United States -- remember them? -- didn't work, the balanced budget amendment won't. But I think the realization is that what fiscal policy should be doing is acting as a mild break to the economy in the good times by building up surpluses, especially in this country with so much of our GDP tied up in exports to the United States. An accident in the United States is an accident in Canada. Then you use the surplus to avoid a recession, as the federal government did in fact in 1974, which was the last time we could do this. Statistics Canada tells us, although I lived through it and I still don't believe it, that there was no recession in that period, even though the United States had a pretty serious recession.
What we need to do is remember that first of all we have to get to a balanced budget, then we have to start paying down some of that debt, and then we need to realize that there is a time for fiscal policy to step in. There's nothing wrong with governments running surpluses in the last phase of a business cycle, because it acts as a brake and it helps the Bank of Canada. There's a concert here. What I just described to you is old-fashioned Keynesian economics from what we all learned in the textbooks. But you know what? It works.
Mr Ford: I concern myself sometimes with the Fortune 500, different things, that Canada or Toronto is the best place in the world. I'm frightened of that because people get overconfident, they get caught in. They sit on their backsides and they don't want to move any more. They think, "We're the greatest." But it's, like I said, a beauty contest: You win one year and you may slide behind the next year. You don't win two beauty contests in a row. The same with the economy. You've got to keep a tight fiscal budget all the time so that you get the thing down to a rock-bottom, hard surface, like they did in Germany for a long time, and in Japan. Now they've let the cat out of the bag.
This is what I'm concerned with. All these glowing reports are great, but we still have that massive debt, like you mentioned, behind us. If we could get rid of that and we have the same glowing reports, happy days are here again. That's all I'm saying.
Mr E.J. Douglas Rollins (Quinte): Thanks for your view on things. I know you told us that it took us 15 years to get into the position that we are in. Do you predict it's going to take us 15 years to get to that point when we don't have a mortgage?
Mr Manford: Actually, I think that what we're going to be looking at is it took us basically 15 years to give it away. That was 1989. It's taken us five years to get back to being a lean, mean machine. My suspicion is, and I've written about this in the past, that we've paid such a huge price for this restructuring that it's going to be remembered for a long time. The history of these things is that the good times, if you want to call them that, last five years and up to 10 years.
If you look at the New Zealand situation as an example of winning and keeping control over deficits -- I was at the New Zealand Web site on the Internet the other day and they actually have a tax cut calculator in there. You can figure out how much the next tax cut is going to save you. It's an economy and the way they kept control over it was they did the tough things. They cut back and then they cut taxes.
I think that's the key to keeping the good times rolling, if you want to come back to your questions. It's basically that we now have to work on making the government sector smaller and the private sector bigger and aiming our policy -- I said this earlier but it's very important -- at not harming the competitiveness of this country, because it's been hard won. I think that's the answer to both your questions. I think it will go five years. Canada is gaining enormous market share in the world. The problem is going to be eventually the Canadian dollar is going to go up and take some of that away from us because we're almost getting too good. But I think that the answer is five years of good times.
Mr Rollins: Our whole problem isn't solved just because we have a balanced budget. I think some people believe that the minute the budget is balanced then we're into good times again. We're into better times, but we still haven't paid off the mortgage.
Mr Manford: You're very right. By balancing the budgets, we give ourselves a level of stability. By paying off the debt, we give ourselves the freedom to basically run our country on our own. The biggest problem we see in this country at this point is still the 39% of our debt that's held offshore, which means that while we don't necessarily need the foreigner to buy a lot of our bonds, we still need that foreigner to keep the bonds that he has, and that means we've got to watch our fiscal situation.
The Chair: If we could move to the official opposition.
Mr Kwinter: Thank you, Mr Manford. If I could just get to the first chart you provided, could you just explain to me what that is again? It seems obvious, but I have a reason for asking you that.
Mr Manford: It's Statistics Canada's measure of the total government deficit in this country, all levels, on a national accounts basis.
Mr Kwinter: According to this the total deficit is just over $10 billion.
Mr Manford: It's $11.4 billion, yes.
Mr Kwinter: How can that be, when I have a chart here that says that the total deficit of everybody, 1996-97, is $33 billion? I'll show you how that's made up. You've got Ontario at $8.173 billion, you've got Quebec at $3.275 billion and you've got the feds at $24 billion. How does that add up?
Mr Manford: Because you're looking at different -- this is one the great problems we always have. This is a national accounts concept. It's consistent with the GDP numbers that come out and it's by United Nations treaty measured in that way. The numbers you were mentioning are what are known as the budgetary deficits, which are higher.
The total borrowing requirements, net requirements, in this country are running very much in line with this kind of trend and the difference is, as always, there are three different sets of books in the country, the national accounts, the public accounts and the budgetary deficits, and none of them agrees. This is the StatsCan measure. It's just a good indication because it's consistent right across the place. This also includes the surpluses that are being run in the other levels of government, including some of the municipalities, at least on this basis.
1040
Mr Kwinter: I don't want to belabour this, but what is the deficit of the province of Ontario under your terms?
Mr Manford: The number you mentioned is the budgetary deficit, but on the national accounts basis the government sector as a whole, the others, other than the feds, are actually at surplus and that's why this number's lower.
Mr Cordiano: What is it for Ontario?
Mr Manford: In here they don't measure it, but the budgetary number is the number that you'd go to as a guide. You don't have a national accounts deficit for Ontario. They don't publish it anyway. I've never seen it. This is one of the big problems with economics. We've got different books.
Mr Kwinter: Something is not right. We have the treasurer of Ontario coming to us and showing us that the deficit of Ontario is $8.173 billion. That's his number. He doesn't say this is the number. We have revenues of X, we have expenditures of Y, the shortfall is $8.173 billion. We have the province of Quebec coming to us and saying, "This year we are going to have revenues that are short of our expenditures by $3.275 billion," and we have the federal government coming to us and saying, "We have revenues that are going to be short of our expenditures by $24.275 billion." Just those three jurisdictions happen to be the only three that are having deficits that total $33 billion. I don't understand how you could possibly under any definition say that isn't the number.
Mr Manford: The point behind this is that I'm not saying that, Statistics Canada is. This has always been a problem. But let me put it in another way that would relate back to your numbers but still relate to the progress. The peak level of borrowing requirements in this country was hit back in 1992 at $108 billion. The number is now in the mid-thirties and that indicates that whatever measure you're using, the improvement is there. There is always a difference and this is always going to be a problem.
No matter which deficit number you look at, as I said, there are three legitimate ways of measuring the deficit. This is StatsCan's way of doing it. It's the same way it is done in France, Germany and other places on a national accounts basis. There's a budgetary deficit, the numbers you were talking about, and the federal government also has a set of public sector accounts, which is a completely different set of books.
This is one of the issues that we get at with the United States. The United States has the same problem. Their government deficit is running about $100 billion and their borrowing requirement is running about $167 billion. Your numbers are correct and so are these. We're just looking at it from a different direction. But again, the progress is there.
Mr Kwinter: My reason for asking the question is that it would seem to me that any reasonable person -- you say that when you go to Germany and you show people these figures, it blows their minds that we've done such an incredible job. I don't think it would be so mind-blowing if they knew that the actual deficit of all governments was in the $33-billion range.
Regardless of what standard you're using, this gives the impression that the combined deficits of all the jurisdictions in Ontario -- and I haven't even talked about any of the municipalities where most municipalities by law can't have a deficit. Who knows, maybe in some jurisdictions they do. But when I look at this, how could that possibly be?
Mr Manford: If I showed you the number on the budgetary side, it would end up higher, but the progress is actually larger and as a per cent of GNP the progress is actually larger on that basis. No matter how you measure it, this country fiscally -- I agree with you. The number you're looking at is $34 billion or somewhat, depending on what measure you're looking at. That is about the borrowing requirement that exists. The number though, as I said, was $108 billion at the peak whereas this was, I believe, $57.7 billion and so the progress is startling, no matter which set of books you look at. Your point is well taken because we've got to get rid of the $30 billion. We still have work to do.
The Chair: Thank you very much. If we could move to the third party, I think we have time for a three-minute round.
Mr Martin: I want to go back to the line of questioning I was into when we moved on and see if I can get some understanding of where you are in this question of the impact that the policies of governments today, both federal and provincial, are having on communities and on people in Ontario.
You made the point that we're aiming our policy at not harming competitiveness. I suggest to you that as a government -- and I understand the job you have to do and the job you do for your employer -- we have a responsibility that's a bit wider, I think. When it comes right down to it, we should have a concern about the impact of all this on the people who live on our street, who live in our neighbourhood and who are the engine of our community.
We see out there now corporations making historically record profits in some instances. Last year there were at least two or three or more; I actually cut the pieces out of the newspaper. I have no difficulty with that. I think it's wonderful, except that at the same time as they're doing that, they're laying off people at historically record rates. In my community we're going to be down some 1,700 jobs. In North Bay, as I said, they're going to be down some 852 jobs and the services that we have expected will be there to educate our children, to make us better when we get sick, are being diminished at an alarming rate in one heck of a big hurry. It seems to me that we're sacrificing one generation of people here for the good of a larger, global economic plan that you have obviously bought into and believe in. Is that a wrong perspective? Am I reading that wrong?
Mr Manford: I think you have the facts dead right. I think the problem though, in perspective, is to say, what would have happened to Canada if we didn't restructure? This is a very tough question to answer, but it is my opinion, having looked at the numbers, that we would have been in worse shape had we not gone through the pain of the last years and that the problems of how we fend for our children would have been worse because we would be still languishing with huge deficits and huge debt and we would have had to raise taxes, especially on the corporations and other places and anywhere we could have tried to find it, instead of going on a process of cleansing, if you want, the excesses of one of the longest business cycles that we've had, a 10-year or a 12-year business cycle.
It is painful, but I believe, in looking at the realities of trying to go through the economies and looking at other places that have gone through the same kind of pain in the same areas, it would have been a lot worse if we had not embarked on those programs.
Mr Martin: If I could just for a second suggest to you that --
The Chair: I'm afraid your time's up, Mr Martin. Could we move to the government side, please.
Mr Jim Brown (Scarborough West): There's an obvious relationship to looking after our deficit and the foreign markets. What are your comments on what we've done so far and how the foreign markets have responded, the foreign investors? What kind of a lag effect is there and what do we have to keep doing?
Mr Manford: I think the answer is that, as a country, several years ago foreign investors demanded almost 200 basis points more to hold Canadian debt than they did the United States. Today those same people are willing to hold our debt at 10 basis points under the United States. It's a vote of confidence.
I'm just looking at a chart in front of me. In 1990 the spread between Ontario bonds and Canada's peaked out at over 90 basis points. Looking at it today, it's 30 basis points and we as a group think that will narrow as the budget deficit is brought down under control and the debt level is brought under control. So the answer is, that's their opinion. It's a fact, and I think that's the best way of describing it.
1050
When I was in Europe several weeks ago, especially in the UK, the constant theme of questioning, which was obviously sponsored by the Chrétien comments, was: "Okay. Everybody is approaching balanced budgets. When do the politicians start spending and cutting taxes and give up on it?" You have to understand, when you're talking about a UK investor or a European investor, they can be invested in as many as 15 or 20 different currencies at any given time, and they've seen many, many occasions where -- in the Italian case, they started a progress and gave up in other areas. The answer is, they're keeping an eye on us. They want to see the progress and they're focused on the spending side. That's not my opinion; simply, they are looking at the spending side and are very critical of anybody who gives up.
The answer is, just looking over history, we had the widest spread between Ontario and Canada just after 1990, and the same thing in Canada versus the United States. We've made a lot of progress, but there's more to go.
Mr Hudak: Thank you, Mr Manford, for your presentation. I think Mr Martin and I share the same concern in terms of, what does this mean to the average consumer? Your chart shows that the real income per person employed has been pretty constant since the late 1980s, early 1990s. My question to you then is, maybe we can show Mr Martin there's a better future out there. If the government steers the course in terms of deficit reduction and at the same time gives a tax break to increase real disposable income, what does that mean for Joe and Jane who have had constant income since the early 1990s?
Mr Manford: Let me just quickly say why we have not had any real income growth: first, because we gave it away in terms of our productivity. That was in the 1989 fat, lazy, overpaid Canadian economy. The restructuring has cost us the real income growth. There's only one group of people who could ever pay for restructuring, and that's the consumers. They are two thirds of the economy. What happens from here on in is the payoff mode. What is crucial here is to stay the course on the spending side and start, as deficits allow, to cut taxes to allow more of that income to flow into the jeans of the average person out there. After all, they're the people who keep this economy running.
The other thing I would point out as the important part of cutting taxes is that taxes as high as they are in this country really do get in the way of economic efficiency. I don't, in a way, care about the political issues in the sense -- please don't get me wrong. Just looking very narrowly at the economy as a machine, which is what it is, it runs better on high octane. When you raise taxes, it's like putting cheap gas in the car. You raise them too far and the thing just doesn't run right.
The numbers I looked at suggest that top marginal rates of somewhere around 44% all in is a very efficient level. Beyond that, you start slowing economies down. Interestingly enough, the UK, which everybody thinks of as a high-tax economy, has a 42% top marginal rate and the economy is working very, very well, thank you. I think that's the lesson we need to do. The New Zealand so-called miracle was also built on the back of massive spending and matched tax cuts. The difference between just fiscal drag and the program that Ontario has embarked on is to make government smaller. Part of the reason we lost the real-income-per-person-employed game is because governments got too big; they took too much of the pie.
Mr Cordiano: I would like to explore that a little further with you on two fronts. First, the province is, as you've heard recently, offloading some of its costs on to municipalities. It has been suggested that the province's credit rating might be affected by this, or at least the borrowing capacity of municipalities would be affected by it, more to the point, in which case the municipalities will have one of two choices: reduce services or increase the price for those services, namely, through the property tax.
How do you think that will impact on the consumer? Obviously, you've talked about that being critical to fuelling the economy, as you put it, high octane. A tax cut isn't a tax cut if you're taking it away on the other hand by increasing property taxes; or, alternatively, by eliminating those services and requiring people to pay for those services in additional user fees. It comes out of the economy anyway, I'm sure you would agree with me.
Mr Manford: It all is a matter of balance. The secret to making the program work -- I have studied this for many, many years and have been arguing, effectively, for this kind of program for 15 years -- is to make sure that governments are getting smaller. Admittedly, the whole fiscal drag issue is going to loop back on the economy; it has an impact. But by getting governments smaller and transferring more money into the hands of the average person out there, we're working on a basis of increasing the efficiency of the economy.
If you look at other cases, what has happened -- and again, I will admit to you I haven't looked at all the details of this -- in other economies and in the US economy when the Reagan package was foisting all the control first to the states and then to the municipalities was that everybody got lean and mean in a hurry and learned how to do it with less money. Probably what we're looking at in terms of the first impact on this thing is how to do it. In the end you wind up, hopefully and by past history, looking at the UK Thatcher period or the Reagan period in the United States, admitting the fact that Reagan overspent, but looking at what they did, they wound up with leaner and meaner machines down the road.
Mr Cordiano: But if you look at the situation with respect to these costs having to be funded -- let's look at health care, for example. It's threatening the US in terms of its efficiency. Health care is taking more GNP out of the economy; it's taking a bigger bite. They're not as efficient as we are with respect to that. Whether it's private dollars or public dollars is immaterial. It's a question of how much of your GNP you're spending on it. In that case, it then becomes a political choice of how you collectively pay for a service or goods that are provided either through public means or private means. It's a question of how efficient you are. Then that becomes the issue. But ultimately, you end up paying for it in one way or another. The other thing is with respect to tax rates. Obviously, that affects it. It's not just a tax rate, but it's also a necessary expenditure on the part of consumers.
Mr Manford: Le me just say that the United States chooses to spend more of its GNP on health care because they demand instant services. That's a choice. It's not the government that's been driving that particular choice.
I guess the answer is to look at the example of the state of Florida, which has no state income tax. It has a state sales tax, I believe, of 7% and very high property tax, quite high. What's happened is they've chosen to pay for it in a different way. Again, the key comes back to this country for the province of Ontario. As time goes on and the federal deficit gets down, the key here is to make sure that our tax rates are dropping in total. I agree with that.
Mr Cordiano: Right, but you've talked about tax rates. The key thing here is that this government in Ontario, Harris's government, has chosen to combine its expenditure cuts with tax cuts. Before the payoff or before they've undertaken the difficult course of expenditure cuts, they're already paying off consumers, as it were, and our deficit remains that much higher than otherwise would be the case.
Mr Manford: I disagree with that. I think actually the deficit probably would have been slower coming down if the tax cut had not been there.
Mr Cordiano: Wait a minute. Everything that's fuelling growth and consumer spending is not as a result of the tax cut just yet; it hasn't been felt. Everything that's happened in terms of income growth, which you referred to, is as a result of growth south of the border and our exports going through the roof. That's what's happened there. That I think you can agree with me on. The impact of this latest tax cut certainly isn't being felt in the economy in paycheques. That was a January 1 tax cut, and anything before that was marginal at best. So you're seeing an income and wage growth that's not as a result of any tax cuts currently.
1100
Mr Manford: I think what really happened is that everybody looked at the tax cut and it did have an impact on Christmas spending. The polls that were taken suggest that there was an impact and that the future tax cuts are important to people's psychology, very important to consumer confidence.
The Chair: Thank you very much, Mr Manford, for taking the hour and spending it with us. We appreciate your input.
PATTI CROFT
The Chair: Our next deputee is Ms Patti Croft, managing director and chief economist of Canada Trust. Welcome to the committee, Ms Croft. You being an expert witness, we have an hour to spend together this morning. I would appreciate it if you would make a presentation to us, and we will use up any remaining time in questions.
Ms Patti Croft: Thank you and good morning. It's a pleasure to be back again this year. A year ago, I came to the committee to talk about the outlook for 1996 for the Ontario economy, for the Ontario fiscal situation and mainly to talk about the impact of what at that time was the proposed Common Sense Revolution.
When I came to the committee last year I focused most of my comments not on econometric projections for growth, for jobs and the deficits pumped out by these large econometric models. Rather, what I really focused on last year, if you recall, was what the world's financial markets were telling us about how they viewed the prospects for the province of Ontario. In my presentation today I'd like to again speak to you about how the financial markets now take a look at the province of Ontario and in addition I'd like to talk about what I think are some indisputable facts about what has gone on in this province in the last years.
Again this year I do not come to the committee armed with pages and pages of econometric analysis which will tell you with irrefutable, three-decimal-point accuracy where the economy is going, where jobs are going and where the deficit's going in the upcoming year, because for one thing, unlike many of my colleagues, I don't have access to one of those large 200-equation models. But probably of even greater importance for me is that I don't necessarily believe in the predictabilities of many of these economic models. The reason for that, just to give you an example of why I don't put a lot of stock in these modelling results, is that what the models tell you in theory and what actually happens in reality are often two very different things.
If I could just take a moment to explain an example of how this is working right now -- it's outside of our borders, but I think it has a lot of relevance to what's happening here. Right now, in theory, if I looked at an econometric model it would tell you that an economy can only grow so fast and then ultimately you will see inflation rising. This is the theory that if there's strong demand for goods and services in an economy, that will raise the level of job creation, it will drive down the unemployment rate and that will cause wages to move higher.
The reason for that is that if there's a shortage of workers, then what happens is companies have to bid labour away from other companies, entice by higher wages. That sets the stage for what we call the wage-price spiral -- in the past it did anyway -- because what happens is that as wages rise companies then pass along their higher costs into the price of the goods and services they are producing. That sets the stage for higher wages raising prices and then labour looks for even higher wages in order to compensate for the increasing bite of inflation in their take-home pay.
That's the theory, but you see, the problem I have with econometric models is that the theory doesn't work any more. I think that what is happening in the US and I think what's happening in Ontario as well is that we are experiencing what economists are referring to as a paradigm shift. To me, a paradigm shift is just a fancy way of saying that things have fundamentally changed.
Indeed, if we look in the United States right now, inflation has not moved higher, wages have begun to creep up somewhat, but what's happened is that firms in 1997 have a complete inability to pass along those higher costs into the price of their final goods and services because price-conscious consumers simply won't have it. That's just an example, if you will, about why I don't put a lot of stock into econometric models and why I don't come to you today with a lot of econometric analysis.
You may wonder, "Where is she going with all this?" When I came to the committee last year, I remember very clearly that there was a great controversy going on at that point in time, and it was centred, of course, on the government's proposed policy prescription for reducing Ontario's deficit. A lot of economic analysts came to the committee, geared up their models, input the impact of the spending cuts and the tax cuts, and proclaimed that the model said that the tax cuts would not lower deficits; that these two things were mutually exclusive, that this was a classic oxymoron, that you cannot cut taxes and reduce deficits.
That's the theory, but I think again what the theory missed was a paradigm shift in the province of Ontario. Importantly, I think what the models missed was where we are starting in terms of the starting point for the level of taxation in this province. Yes, in theory, if you cut taxes the models will say it will increase the deficit, but I think this antiquated theory no longer applies to the province of Ontario.
Here again I would argue that these models that were predicting these higher deficits should be ignored. What I would urge people to do is take a look at the facts: What has happened in the last year? In the last year, the government cut spending and they cut taxes. What happened? If we look at the economic numbers, the economy took it on the chin. At the start of the year we had a very weak beginning to 1996, but by the third quarter, which unfortunately is the latest data we have, real growth had staged what I would call a dramatic turnaround. After falling at a 1.5% rate at the start of the year, we saw that the economy roared ahead with growth of almost 4% in real terms in the third quarter.
What I find very important in analysing these numbers is that the expansion was broadly based. It was led by business investment, housing was a big contributor and exports continued to be quite strong. I know the finance minister has already gone through these numbers, listing all these impressive facts and figures, so I won't dwell on them, but as an economist I do have to highlight some of my favourite ones.
One of my favourite ones is the facts on business spending. Businesses are spending more on machinery and equipment than they have in the last decade. What they're buying particularly is computers. That's great news for the productivity of the corporations of Ontario and to me the fact that they are spending more is a significant sign of increased business confidence.
No wonder they're feeling confident. We saw the numbers on corporate profits. After a very weak first half, corporate profits in the third quarter rose at an annual rate of over 50%. Again, business confidence is up for a good reason. I think that's very important for Ontario. Signs of renewed investment in this province are hopefully a sign of stronger job gains ahead as well for 1997.
That's one of my favourite numbers on business investment, but probably of greater importance to everyone around the table today is, what about the poor old consumer? What happened when that tax cut did come through? Here again, I'd like to just stick to the facts. The fact is that consumers did not spend that much. They really did not participate in the economic recovery, according to the official data that we have to the end of the third quarter. Real consumer spending was quite soft in both the second and third quarters.
But I do see some signs that there is a light at the end of the tunnel because I think the figures for real disposable income are quite remarkable. After falling, actually declining, in the first part of the year, we did see real disposable income bounce back in the third quarter, rising at almost a 4% rate. This was solely due to the implementation of the tax cut.
But what happened is that debt-laden consumers opted to raise their savings rather than to increase their spending, at least initially. The savings rate nationally and in Ontario has declined significantly. In Ontario, it's fallen from 9% in late 1995 to just 7% in the summer of last year. What happened is that with that disposable income consumers opted to increase their savings rather than spending. The savings rate rose to about 7.5% in the third quarter.
Some people may say: "The tax cut isn't working. It's not helping to increase consumer spending." It is true, if we look at the retail sales number -- and maybe the minister didn't mention this one -- it was an abysmal number for Ontario in 1996. There were only two provinces last year that registered year-over-year declines in retail sales and those two were Ontario and Newfoundland.
However, I believe that by using the tax cut to repair their balance sheets and increase their savings, this still puts the Ontario consumer in a stronger position to spend in 1997. This is particularly true of jobs that continue to stay on track.
1110
I think 1996 was a good year for Ontario, creating 90,000 new jobs, which was half the total for Canada, despite the fact that we only represent about 40% of GDP. The unemployment rate, though, seems stuck, firmly entrenched at around 9%. I think the unemployment rate is one of those lagging indicators. We have got to focus primarily on the pace of job creation, and that was a good-news story for Ontario in 1996.
The official data, unfortunately, as I mentioned, for Ontario are only available to the end of third quarter, but in the meantime we know that the real estate market in Ontario is red hot and that Canadians, both here and across the country, are finally beginning to buy cars again. We had yet another number for December this morning: car sales up 5% month over month.
The housing numbers for Ontario have been nothing short of spectacular and there are no signs of that letting up. We saw the data for Toronto resale home sales. They've roared ahead and, importantly, we're finally seeing that housing starts, construction, digging the holes are also beginning to improve as we're working down the inventory of existing homes. That, coupled with the car sales, are two signs that consumers are finally feeling a little bit more confident and beginning to spend again.
Looking ahead for 1997, with interest rates set to stay low, with job creation improving somewhat, I think we should watch very closely for official signs in the data that consumer spending is contributing more equitably to growth in the economy. I think that is significantly supported by these tax cuts, which are putting money back into the pockets of consumers.
The facts tell us that despite big cuts in government spending, lots of fiscal drag, the Ontario economy performed very well in 1996. It was helped by improving business confidence, by continued strong exports, and I think the data will ultimately tell the tale of the renaissance of the Ontario consumer.
That's the economy, but now what about the deficit? Here again, despite what the model said, tax and spending cuts actually saw the deficit move below target last year. I must admit that fits quite nicely, quite perfectly in my mental model because I believe that the level of taxation in this country and in this province has risen to the point where tax revenues have actually diminished. That's because more and more the economy has been driven underground. In addition I have to say there is something fundamentally flawed about a country where interest rates are at 40-year lows and yet consumers have only very recently begun to spend.
I think the reality for Canadians is that our incomes have declined over the last several years. They haven't kept pace with inflation and, hampered by high unemployment, spotty job growth, record levels of debt, declining real incomes and a 30-year low in the savings rate, Canadian consumers have been in hibernation. I have to admit that I think the only way you're going to get consumers spending again is to put more money back in their pockets. Interest rates don't seem to be doing the job in and of themselves. I think you do that in one of two ways: through a tax cut or through reducing the level of taxation on what is well known to be the job creation engine of Canada, which is small business.
Back to the deficit now: For Ontario, even with the tax cuts we saw in place last year, Ontario's deficit is still running ahead of target. Again let's look at the facts here. You will point out that the receipt of the 1995 federal tax assessment certainly boosted revenues in the current year, but if we look at the individual components, retail sales taxes are still $160 million over budget despite the fact that the official data would tell you that retail sales are weak. Corporate taxes are $320 million over target. So again, despite this tax cut, revenues independent of that federal government windfall are actually running ahead of plan, which I think is quite remarkable.
On the spending side of the ledger, the thing I would focus on is debt servicing because the decline in Canadian interest rates in part I think reflects the tremendous improvement in both our federal and provincial fiscal situation. I travel across the country, I travel around the world telling the story of what I call a true Cinderella story for Canada: that the world is in love with our country.
This happened in 1996 and shows no signs of abating into 1997. They have looked at Canada and they have seen that our deficits are declining. Our inflation is low. Our political waters are calm for now. Our current account is in surplus for the first time in 13 years. They've taken a look at this and they've actually put their money to work, investing in Canadian markets.
What this has done for Canada is that it has allowed us to lower interest rates, and that benefits each and every one of us, not so much if you're in the market for a house or a car, but the other way it benefits us is that all governments are experiencing a decline in their interest costs. This is true for Ontario as well. Because of the low interest rate environment, interest expense for Ontario last year ran about $200 million under target, and I expect that this same phenomenon will continue well into 1997.
Those are some of the facts on the economy and the deficit in terms of the outlook. I expect Ontario will outperform the national economy this year in terms of growth rates. Our forecast for Ontario is about 3.5% real growth ahead of the Canadian economy, and I think that, importantly, it will be broad-based gains in economic activity. This will be helped along by a reduction in the fiscal drag in terms of the spending cuts that were placed upon the economy in 1996.
On the fiscal side the situation is well on track. I think the deficit targets in the next year or two are readily achievable. I don't like to go beyond that time frame because the reality is that the crystal ball beyond that point is not all that clear, but I think in the next year or two that the deficit reduction targets are easily achievable.
I promised the committee that I would talk today about what the rest of the world is telling us about Ontario. I find this to be an important exercise because it removes some of the subjectivity of our political views and also removes the questionability of economists and their forecasting ability. It really focuses on telling us what the world's investors are viewing in terms of the prospects for Ontario both from a financial and economic perspective.
The way we can gauge how investors are looking at Ontario is by looking at the spread of Ontario bonds over government of Canada bonds or over US treasury bonds or Japanese bonds. When the government took office in June 1995, Ontario's 10-year bonds were trading at about 40 basis points over Canada's. Today that spread has been reduced by half; they are trading at only about 20 basis points over government of Canada's. This provides Ontario with a tremendously cost-effective method of financing, and that's very important because, as I'm sure you know, in the next couple of years the debt maturity schedule rises significantly for Ontario. To have these very narrow spreads in place is fundamental for the outlook for our financing.
I would, however, be remiss if I didn't point out that it's true that all provincial spreads have narrowed over Canada's, but the fact is that Ontario is very tied to the federal government, and this indicates that on a domestic perspective investors have a lot of confidence in the fiscal plan.
I spoke of the international view, and to me that's probably the more important one. To get the international view I've spoken to some of my former colleagues in Europe and in New York, and particularly today I'd like to talk for a few minutes about how US investors are viewing Ontario right now. The international view of Ontario has become increasingly important, perhaps even more important than the domestic view, for two key reasons: First, as you know, now the province of Ontario does most of its financing outside our borders, so the international investor's view of what's happening to Ontario has become increasingly important; second, the view from outside the borders of Canada and Ontario is perhaps just a touch more objective than the one we have here at home.
What happened when I talked to my former colleagues in the United States? In short, US investors love Ontario. I have to admit they love Canada too, because that same story I told you about the improvement in our fundamentals applies very much to the provinces, but among the provinces they continue to view Ontario very positively. They are in favour of tax cuts and they're very impressed with the rapidity with which the government has implemented some of the major platforms of the Common Sense Revolution. Don't forget these are the same people who loved Ralph Klein. Now they still love him in Alberta. They look at what's happened in Alberta. Going from a $3-billion deficit to a $2-billion surplus in the space of a few short years is no mean feat, although I would have to say $25-per-barrel oil did a lot to improve that situation. But they view Mr Harris very much as being cut from the same cloth as Mr Klein. From their perspective this is a positive.
US investors for the most part have always been very puzzled by Canada. They can't figure out why we have such high levels of taxation. In their view any government which favours tax cuts and actually enacts them is very positive. Remember, in the States right now they're advocating even deeper tax cuts even though their current level of taxation is well below ours. So tax cuts, in a word, make a lot of sense to US investors.
1120
Many people I spoke to -- I'm not sure if this is a good thing or a bad thing; I'll leave this to you to decide -- view Mr Harris as being very American. They look at him and his no-nonsense approach to cutting spending and cutting taxes and that rings very true in their ears. In 1996, when I spoke to many of my colleagues in the United States and the people who are actually buying the bonds, their biggest concern about Ontario was how you cut taxes and still reduce the deficit, because they look back to Reaganomics when taxes were cut and the deficit exploded.
But the deficit exploded in the US because defence spending rose at that same time, so their concerns were based on their own experience in the United States. They were worried that Reaganomics is going to happen in Ontario as well: "They're going to cut taxes and their deficit will explode," just as it did in the United States. But I have to say that those initial concerns with respect to the tax cut actually increasing the deficit are now non-existent. They've looked at what's happened here, that we've cut taxes but we also cut spending and the deficit is well on track.
Despite the relative size of the deficit, you would think that if they look at Canada -- really when you look at provincial deficits now you only have to add up three numbers: Ontario, Quebec and BC. When you're looking at provincial deficits you may think the relative size of our deficit would perhaps hamper their interest in Ontario, but despite the size of the deficit, they like Ontario. In their words, and this is to quote them, we now trade "like a true, solid AA credit, not like an A any more." Again, what they're using to gauge this is the relative spread of Ontario Yankee bonds, they're called, priced in US dollars, over US treasuries. I'll go over the figures in a minute but those spreads are very tight. They say that Ontario is trading like a solid AA credit and in their minds that means there is no possibility whatsoever of a credit rating downgrade for Ontario.
When I spoke to them -- they've looked at 1996 in perhaps a different light than we look at it -- they said that in 1996 Ontario experienced three shocks, yet the deficit is on track and spreads are very tight. Those three shocks were the GM strike and the impact on the economy, which didn't hurt the deficit; the civil servant discontent, which didn't hurt the fiscal plan; and also the tax cuts and the fact that the deficit ended up being lower than expected. So in the minds of US investors, having experienced what they called three fundamental shocks and spreads were still tight is viewed as a positive development.
If we look at the Yankee spreads, when the government took office in June 1995 the province of Ontario at that point traded 60 basis points over US treasury. This is in the 10-year area. Right now that spread has tightened into 38 basis points. The problem is that they still like Ontario but, believe it or not, the problem for Ontario is competition in the Yankee market. A couple of years ago the provinces in Canada accounted for about 60% of the Yankee bond market. Today, because we're issuing less debt, we only account for about 20% of the Yankee market.
Guess what US investors are buying. They're looking for yield, they're hungry for yield, so guess who is issuing Yankee debt? Countries from South America such as Colombia. They're not issuing at 38 basis points over US treasury bonds; they're issuing at several hundred. The problem for bond investors in the United States is, if I'm sitting at Fidelity, the stock guy across the hall, he earned 25% last year on his portfolio and I only earned maybe 7% or 8%. The province of Ontario: I like the story, I like the developments, I like what's happening but I need higher yield, so I'm buying those Colombian Yankee bonds as opposed to the province of Ontario. But that does not alter whatsoever their fundamental positive view on the developments here. It's just a reflection of market forces. They're hungry for yield so they'll get it wherever they can.
In conclusion, what I've tried to do in speaking to you today is focus, I hope, on the economic and fiscal facts. I haven't done a lot in terms of bold predictions because I don't bring to you today my econometric analysis. I've tried to bring to you hopefully, once again, the international view, the market's view of Ontario in the hope that will help shed some light not so much on what's happening domestically but on how the people who are actually buying our bonds to finance the deficit are currently feeling about the developments in the province of Ontario. Thank you.
The Chair: Thank you very much. If we could start in rotation with questions from the government caucus.
Mr Wettlaufer: Welcome, Ms Croft. Good to see you again this year. A couple of months ago I saw you in an interview, I believe on CTV but it doesn't really matter, and you were being interviewed on your recommendations to the federal government for its upcoming budget. I wish I would have seen the whole thing, because I may take it out of context here; I hope I don't. You recommended a tax cut at that time.
Now I would like to tie that into something else here. I have some newspaper clippings that I've clipped out of the newspapers recently and they talk about debt and high interest rates and the effect on jobs. Lloyd Atkinson: You've probably read recently or talked to him about his prediction that Canada would have 250,000 more jobs. John McCallum recently predicted that there are 400,000 jobs in the pipeline, thanks to low interest rates.
I guess what I would like to have you comment on is our activities in Ontario, what relationship they have to lower interest rates in the country and, generally speaking, an emphasis on the confidence of the Europeans, the US and other investment markets and what this is doing for our jobs in the province.
Ms Croft: I think, as I mentioned, one of the factors that has contributed to the significant decline in our interest rates, perhaps not so much short-term interest rates but long-term interest rates as well, is this global view of what's happening in Canada. When they look at Canada they see a Cinderella story in terms of our fiscal situation, not just in isolation around the federal government but around the provinces as well. If we look at the provinces, as I said, this year seven out of 10 will actually be in budgetary surplus, and the Alberta situation is truly phenomenal, with a $2-billion surplus.
How Ontario is contributing to lower interest rates is through staying the course, focusing on deficit reduction, implementing broad-based spending cuts and tax cuts to achieve that. Even through the situation in 1996, when we had a significant strike and some resistance to the fiscal plan, the government has stayed the course. The global investor looks at that as a very positive element for Canada, that even the two fiscal laggards, which are Ontario and Quebec, are now getting their act together. They've gotten deficit-cutting religion. They're talking the same language as every other province, which is important to get the deficit down and keep it down.
I think Ontario's contribution to the lowering of Canada's interest rates has been significant, because as the largest province, if we went our own way and just allowed the deficit to stay larger or actually to increase, then that would be viewed as a negative, not only for Ontario but for the country as well. I think Ontario has contributed to this positive environment of Canada's turnaround in its fiscal situation and that's helped reduce our interest rates.
Mr Wettlaufer: That's good news. Thank you very much. I know everybody on this side of the room is very happy to hear that good news.
Mr Hudak: Thank you, Ms Croft, for your presentation. I enjoyed it last year and enjoyed it again this year.
It's likely you remember a great deal of debate last year over whether a personal income tax cut made sense. Across the floor it seemed like it would be the apocalypse if we dared to cut the high marginal tax rates that we have in Ontario, but your presentation shows that just the opposite has taken effect, that that was an antiquated theory, that in fact tax cuts lead to better growth, consumer confidence and business investment. I'd like to think that the new front bench across the floor is going to bend in that antiquated theory and embrace tax cuts. That's my hope for the future from across the floor.
I guess your lessons today were that tax cuts have made sense for foreign investors, that tax cuts made sense for domestic investors and tax cuts made sense for business investment and business confidence. My question is, will tax cuts make sense for consumers? You talk about a renaissance late in the year. What will the personal income tax cuts mean for consumers in 1997?
Ms Croft: First of all in terms of the foreign investors, I would have to say that they were as sceptical as perhaps the opposition was at the beginning of 1996. The view I got from around the world was: "Tax cuts and deficit reduction do not go hand in hand. We'll give you guys the benefit of the doubt, but our US-based experience would suggest that it simply does not work."
But importantly today, those fears have been completely unfounded, unwarranted and have disappeared from the radar screen. I think it is fascinating. It's an experiment in the making here, the laboratory of Ontario, where we actually are trying to cut taxes, cut spending and reduce the deficit. In 1996, the facts would indicate that we have achieved that.
1130
What about the Canadian consumer? That's the big problem. As I said, there is something fundamentally wrong in a country where interest rates are at 40-year lows and people have only just begun to spend on houses and cars once again. In my view monetary policy in Canada has almost become like pushing on a string. It doesn't matter how low interest rates are, unless you have a job and security around keeping that job, you're not going to be out there spending, particularly not for houses and cars.
My view, which is the one I guess I expressed on CTV, is that in terms of a policy prescription, maybe monetary policy doesn't work. It certainly doesn't work in isolation. You can't just create jobs out of thin air. Lower interest rates, a positive environment ultimately will create more jobs, but for now that's a forecast; it's not a reality.
How do we increase consumer spending? From a policy point of view, to my way of thinking, the only way you do that is through a tax cut on personal income, which puts money back into the pockets of consumers, or on a payroll tax, a documented job killer. Small business is the job engine growth for Canada, so by reducing payroll taxes perhaps that's another way we can create jobs and income.
Mr Hudak: If this government had listened to the advice from across the floor and decided not to cut personal income taxes, what position would consumers be in today? If we had followed their advice and just abandoned the tax cut pledge, what would that mean for consumers and personal disposable income and such?
Ms Croft: What we've seen in terms of the data we have so far is that Ontario consumers are not spending yet. What they are doing is raising their savings. They've had to draw down their savings in the past couple of years. They've had to draw down their savings just to be able to survive.
Initially, what the tax cut has done, and this is what the numbers are telling us, is that people are using it to repair their balance sheet, but ultimately I still believe that leaves the consumer in a stronger position to spend. We're seeing more current data on houses and cars showing that indeed they are spending. So the tax cut initially may have been used not to spend and boost the economy but to improve balance sheets. But either they spend it now or they spend it in 1997. I still say it puts the consumer in a stronger position to spend this year.
The Chair: We move to the opposition.
Mr John Gerretsen (Kingston and The Islands): I enjoyed your presentation. Let me first of all say to the members opposite that this may come as a surprise to you, but we really, truly believe in a strong economy as well for Ontario as long as everybody benefits from that --
Interjections.
The Chair: Order. Mr Gerretsen has the floor.
Mr Gerretsen: -- as long as everyone benefits from that stronger economy. That's precisely the issue I'd like to address to you. You indicated that about 90,000 new jobs were created in Ontario. In the Common Sense Revolution and in documentation filed by the Minister of Finance following that, he promised 145,000 jobs on an annual basis. Would you agree that's well below the estimation they set for themselves?
Ms Croft: Perhaps that goes back to my old theory about a paradigm shift where those numbers that the government was using to forecast employment growth were probably based on the past paradigm. In the past, with low interest rates and a pretty good economic environment, we did create jobs. But it's not only happening in Ontario; it's happening all across this country. We're in this new paradigm for businesses across our country: To be competitive, you have to be lean and mean; to be lean and mean, you have to cut costs. Two thirds of business costs are labour. In Ontario, for example, businesses are buying computers. That's great. It increases the productivity of the companies in Ontario; that creates corporate tax revenue. But what are they doing? Perhaps they are replacing people with technology.
Mr Gerretsen: Which really leads me to my second question, and then I'll turn it over to Mr Cordiano. Do economists look at all at other issues as to what happens to a society, the gap expanse between the haves and the have-nots? What I'm particularly interested in and I've always been interested in, in this whole notion, is that it's great to have the technology, but what do we do with all the people five, 10 years from now? Do we all go to a 20-hour workweek? Do we go on a part-time job basis etc?
It really is not a very healthy society to have so many people who are talented, many of them with university or college degrees etc, young people -- I know in my own children's peer situation there are many, many of these young people who simply cannot get a job. How does the economist react to that kind of situation and what do you feel that we, as a government, as a society, can do about that?
Ms Croft: Big question. In terms of the economist's point of view, there are some economists who are just financial market economists, so those social issues don't even enter into the equation. But I can tell you that I travel across Canada and I give economic presentations to clients of Canada Trust, which are the average Canadians, and this viewpoint is continually expressed. I agree with you that what's happening in this country is that we are creating a gap between the knows and the know-nots, is the way I would put it.
If you know your way around a computer keyboard, your job prospects are far greater, far more positive, than someone who does not know their way around a computer keyboard and perhaps doesn't have access to the training in order to improve their skills to bring them up to that level. So, yes, as I travel across the country, I'm reflecting back to you the view of Canadians that this gap is growing between the knows and the know-nots, which are the haves and the have-nots. The youth unemployment rate is 17%. When I talk to businesses, they tell me they are not able to fully integrate the people who are graduating from our colleges and universities into the workforce because they're not receiving the proper education. It's a mismatch of education and skills, according to corporate requirements.
So training is a huge issue for Canada. How do we get at that pool of structurally unemployed and provide them with productive lives in terms of the job cycle? It's something we think about, but I must say it gets kind of pushed aside. The more critical issue is: "How many jobs did we create this year? What are the deficit targets? What's the outlook for interest rates?" But I share your concerns on the longer-term social implications of what we're creating.
Mr Cordiano: I want to touch on your comment about the Cinderella story. The world view of Canada is improving and that's great for all of us, and obviously we on this side hope that continues. I think, however, we should examine just how that Cinderella story came about with respect to what the federal government has done. There's a divergence, obviously, in terms of policy. This Conservative government in Ontario is using tax cuts. The federal government is not. It's taking its course of action and undertaking deficit control through expenditure cuts, a very different approach.
I think you would also agree that the decline in interest rates has had a huge impact in 1996, third quarter and fourth quarter, because that's when we saw interest rates really take hold. In fact, this quarter is benefiting from that as well. You're beginning to see the real results of that interest rate decline show up in consumer spending, which it did not do.
If you took last year's income tax cut that this government provided -- and by the way, we should track just what impact that had on consumer real disposable incomes, actually. I would also like to ask if you've done a comparison between the rate of reduction in the deficit federally and the rate of reduction in the deficit in Ontario, comparing the two; where the federal government started from, the percentage decrease over the same period of time, and compare that to Ontario's record, because there is a difference there. So you would factor in the income tax cut and see how the two compare. Has anybody ever done that?
Ms Croft: No, and I'm not so sure that you can, really, because the way the federal government achieved its deficit reduction, as you pointed out, was through unprecedented cuts in government spending, ie, four consecutive years of decline in real government spending, never seen before in this country, and it was helped tremendously by the decline in interest rates. But it's a very different situation for Ontario because of the structure of the debt. It was a big win for the government as interest rates declined because so much of its debt was short-term in nature.
Mr Cordiano: For Ontario?
Ms Croft: No, for the federal government.
Mr Cordiano: So what's happened to Ontario's deficit?
Ms Croft: Ontario has a very different debt structure. Far less of their debt is short-term in nature, so what was a huge windfall for the federal government is benefiting Ontario, but nowhere near to the same extent. So I'm not so sure you can do that --
Mr Cordiano: But it's showing up in real --
The Chair: Our time is up, if we could move to the third party.
Mr Cordiano: I had a very important question I was going to ask.
The Chair: We'll come back to you.
1140
Mr Martin: I find your presentation interesting, not significantly different from the presenter before in the good feeling you have about the economy and what's going on in Ontario. I think it's important that people like yourself travel outside of Ontario and hear from people, what they're saying about us and how they're feeling. I think it's important as well that you travel across Ontario and Canada.
I would suggest, though, that the clients of Canada Trust aren't necessarily the ordinary Canadian. There are a lot of Canadians who aren't the clients of Canada Trust who are busy trying to keep body and soul together, if they have a job, working very hard at it, trying to figure out where they're going to get education for their children and health care for themselves if they get sick, or their aging parents, and all of those kinds of things. There is actually a much bigger picture that you may not be charged with having a look at but certainly we as government have a responsibility to be aware of.
The presenter before talked about Britain and the British economy doing well. Britain's about to turf out its government and put in a new Labour government. We're presented with the example of New Zealand and we've all seen that. Certainly we as a government before this bought into that.
I guess it surprises me that we don't ever seem to be interested in countries like Norway, which has chosen to stay out of the European economic community for reasons they themselves have determined are in their better interests. They're not doing the kind of thing we're doing, yet all of their indicators are very positive, from what I can read. Their inflation rate, their interest rates, their employment rate is much better than what we have here. They have a social safety net in place that provides the kind of security of person that I think is absolutely essential to any long-term economic stability and gain. Could you comment on that a little bit?
Ms Croft: I must say I'm not that familiar with the situation in Norway. Most of the work we do in our investment work unfortunately reflects the reality of where we invest the moneys for Canada Trust, which is primarily in the major economies of the world, so I really am not that familiar with the situation in Norway. The only thing I would look at from a financial market perspective is, what are the markets telling you about Norway? Norway's interest rates are much higher on a relative basis, for example vis-à-vis Germany, which would be your benchmark for Europe, so Norway's bonds would trade considerably above German bonds because there is a cost of maintaining that large social safety net. It presents a very different society, but it is a cost in terms of the fiscal side of the government as well. But I must say I'm not that familiar with Norway's numbers to be able to say, "Yes, Norway is a good example of what Ontario was and how it's changed," and to be able to draw any comparisons for you. I can't add a lot there. Sorry.
Mr Martin: I would agree with you as well that there has been a shift that could be described as a paradigm shift in Ontario. Anybody who spends any time at home on their own streets and in their communities listening to people will tell you that the anxiety level is up. People who lose jobs, whereas before they thought, "I'll just look around and in a month or two I will have another job" -- it's not the case. People who were rather confident they would have a job in the long term aren't any more. For me, that's a significant factor in terms of the long-term viability of an economy.
You're saying that consumer spending is up. It may be, among those who are still fairly secure, but it's not among those who aren't. The tax break only benefits those who have a job and are able to take advantage of it and those kinds of things. In my community, as I go around and talk to people, their biggest concern is, number one, a job for themselves and a job for their children and, number two, education for their children. Actually, number two and number three are education for their children and the declining state of health care. What, in your mind, will be the long-term impact of that kind of instability and lack of confidence in our communities on the economy?
Ms Croft: In terms of the paradigm shift, I agree with you. There are a lot of walking wounded out there. There are a lot of people out there who thought they were secure and would have a job for life who find themselves unemployed, and they never thought they would be.
What's happening is, if you look at the job numbers, most of the jobs that are being created -- actually, all of them since last September -- have been through self-employment. People are now saying: "I can't rely on government to provide me with lifetime employment; I can't rely on large corporations to do that. I have to take care of myself." But there are some people as well for whom that's not even an option. What's interesting is that a lot of people are turning to themselves and saying, "Self-employment is the only way to go in terms of creating a job because I can't rely any longer on corporate Canada or on government to provide that level of security."
What are the longer-term issues for Canada? Last December there was a poll done for CBC and Maclean's. I was struck by one of the findings of that poll, and it reflects what you've highlighted here. Canadians were asked whether they would have a full-time job, and I think the number was astounding. I believe it was around 60% or 70% of young people who did not feel they would have a full-time job in their lifetime. Again, it goes back to my story about a paradigm shift, and yes, it creates tremendous insecurity. I think it will settle out ultimately, but what we're in right now is a transition period. It's extremely uncomfortable and it's insecure for many Canadians, and that was reflected in that poll.
Can government do anything about that? I don't know whether we can do a lot in terms of initiatives to help improve that. As I said before, I think training is critical -- I hear that all across the country -- training and providing for those have-nots, trying to get them back into the workforce in some way, shape or form.
The Chair: Can we move to the government side?
Mr Jim Brown: I agree with you when you say we have the lowest interest rates in 30 years. We've put more money, after the tax cut, in people's jeans, even though the feds have scooped some of it lately, and there are 90,000 new jobs, but still consumers are not spending because they're worried about a job.
Then you went on to say about small business and I agree with you 150%. What else can we do to help small business? I have a theory that the supply of capital for small business in Canada is a very tight supply. It's not a competitive supply, it's controlled by a few suppliers. I'm wondering about your opinion. If that were broadened, if there were more competition, if the supply was increased, would that help small business? And any other ideas you might have to get the job generator -- small business -- going.
Ms Croft: You probably need to have Catherine Swift here to ask that question as opposed to me. My understanding is if you ask small business, "What is your biggest impediment to further growth?" number one is payroll taxes and number two is usually government regulation, cutting red tape.
I'm not so sure where capital availability falls into the equation. I know the federal government has done a lot to raise awareness among the major financial institutions that this is something they should be focused on because of the job-creating potential of that area of the Canadian economy. One of the banks -- I think it was the Bank of Commerce -- introduced this program of cut-rate loans for small business as long as they do create jobs. That's an innovate way of looking at this issue, providing lower-rate financing in return for job creation. Maybe that's the first step in some initiatives that are not so much government-generated but private-sector-generated.
I think government can do something on regulation, and they have. I think they could do a lot more on payroll taxes. But the private sector needs to do its part as well, and perhaps programs such as this are a sign of things to come.
The Chair: Could we move to the opposition?
Mr Kwinter: I'd like to just follow up on the tax question on small business. At the present time Ontario has the highest small business tax in Canada at 9.5%. That's compared to, say, Nova Scotia at 5%. We're totally the highest. The manufacturing tax is the second-highest in all of Canada.
I think one of the problems we have is that there are things happening in Canada that are happening because of systemic change, structural change that's benefiting everybody. This particular government has had the good fortune to be in power at that particular time, and everything that happens, they seem to think, "This is because of what we did." Yet if you take a look at the other provinces, in many cases they're doing better on a proportion basis. There's no question that Ontario, being the largest component in the Confederation, is going to get this benefit.
1150
You're talking about the spreads. At the present time the spread of mid-term Alberta bonds is double that of Ontario. You can explain that very easily: They have a cash flow. The don't have to do anything, just collect the money. It does indicate there are things that are happening that are beyond the control of Ontario, but they're getting that benefit.
Give me an example. You put a great deal of store in this tax cut. I did a survey just after January 1 of people who are salaried, and I said to them, "Have you noticed any difference in your paycheque? They said, "No, none."
Mr Rollins: The feds took it all.
Mr Kwinter: This is the point. I'm just saying that I went around and I said to them, "When you got your paycheque, was there a change?" They said no. They said it was gone. I'm not condemning anybody, I'm just saying it's a fact of life.
Suddenly, everything seems to be a tribute. Things are great and the reason they're great is because there's a tax cut. People have got more money in their jeans, as I've heard someone talk about. When you ask them, they say: "I didn't get a tax cut. My provincial income tax portion went down, but the other things went up. I may have got a tax cut in theory, but in practice, the money that I've got is the same."
Mr Ron Johnson (Brantford): Nobody's saying it's just a tax cut. It's a package under this government.
Mr Kwinter: There is no question that had the tax cut not come in, their situation would have been a lot worse, no question about that, but what I'm saying is that there doesn't seem to be a real benefit to date. As you say, there is empirical proof that whatever benefits some people get, they're paying down debt or they're topping up savings, and that's not coming into the economy either. I just want to raise these concerns and get your comments on them.
Ms Croft: First of all, in terms of Ontario benefitting from things that are happening outside its borders, I would argue that while Alberta has benefited from $25 oil, Alberta embarked on this program of cutting spending and getting their fiscal house in order well before Ontario did and in a much more dramatic fashion. Alberta perhaps is Ontario two or three years down the road. We may find ourselves in the same situation, with an embarrassment of riches that we don't know what to do with, hopefully.
I don't think we can entirely say that what's happening in Ontario is not due to what's happening in this province, and then looking at Alberta. I think we just have to be clear about the timing of these things. Alberta and the western provinces adapted this deficit-cutting program well ahead of Ontario. I think perhaps the fact that our economy has lagged the western provinces may have something to do with the fact that we only got serious about deficit cutting several years after they did.
I do think what's happening in the province is positive. I hope you didn't get the impression that I think it's all due to a tax cut.
Mr Gerretsen: They certainly think so.
Ms Croft: Well, in terms of the impact to people's bottom line, it isn't significant right now because of what happened at the federal government. That's a whole other issue for Canada. We can't have one hand taking away and the other hand giving. Perhaps what it does argue for is implementing the remainder of the tax cut sooner rather than later.
Mr Martin: I wanted to follow up on the small business discussion as well, being as you referenced it in your answer to my last question, the fact that more people are looking at self-employment and small business as a way to grab a piece of the action that's out there.
Bankruptcies are at a record high. I suggest it's probably because more people are taking more risk and actually wanting to do that, which indicates that people do want to work, people do want to be part of the action, but the situation is such that it's very difficult.
On the one hand, it's really complicated to get into business. As a person who just lost their job, with a little bit of savings, expecting to get into a business and make it successful, there are a lot of people out there who can tell you some pretty sad stories about that.
On the other hand, we hear a lot about government regulation and red tape. What I've run into in trying to help some of the small business people in my community is not so much government regulation and tape as corporate regulation and tape. I just went through some very difficult times with a number of franchisees in my community who just could not make ends meet because of what was being imposed on them re the whole question of kickbacks and paying for shelf space and all that kind of thing. I know right now we're focussing on government regulation and red tape. Is there anybody looking at the question of corporate regulation and red tape and the impact that has on the ability of people to actually get into small business and make a profit in Ontario and Canada?
Ms Croft: It's an interesting question, but again I would have to say it's one for Catherine Swift as opposed to myself. I'm not that familiar with some of the hurdles on that side that small business is facing and whether, as you indicated, that's perhaps more considerable than government regulations. That's an interesting question, but again, I'm sorry I don't have the expertise to answer that one.
Mr Martin: I believe it's something we really do need to look at, particularly if we're holding that out as a panacea or a major opportunity for people when in fact it's --
Ms Croft: Right. Let's hear it from them: What are the obstacles?
The Chair: Thank you, Ms Croft, for appearing before the committee again this year. We appreciate your taking the time out of your obviously busy schedule to share with us your thoughts.
If I could have the committee's attention for just one moment, one small piece of housekeeping is standing order 127. If there are any votes in the House during the committee hearings, I will continue with the witnesses until there are about three to five minutes to go before the vote takes place in the chamber, at which time we will recess. I believe that will give us time to get to the chamber for votes if that in fact becomes the case; just so you know what our procedure will be.
If there are no comments on that, we will recess until 3:30 this afternoon. I would ask you to be prompt. We have a full schedule this afternoon.
The committee recessed from 1156 to 1537.
CANADIAN FEDERATION OF STUDENTS -- ONTARIO
The Chair: I call the meeting to order, seeing a quorum. We welcome the Canadian Federation of Students, Ontario division. Mr Hashemi and Ms Smallman, welcome to the committee. We have half an hour to spend together. The committee will operate from this time on. If you would like to take the first part of your time with a presentation, perhaps the committee could ask you questions in rotation. Your rotation will begin with the official opposition, the Liberal Party. Please proceed. Would you identify yourself for Hansard as well as you begin to speak.
Ms Vicky Smallman: Certainly. Thanks for the opportunity to present to the committee. My name is Vicky Smallman. I'm the chairperson of the Ontario component of the Canadian Federation of Students. With me is Ashkan Hashemi, our researcher.
The Canadian Federation of Students represents over 110,000 college and university students in the province. We represent both graduate and undergraduate students at about 20 universities and colleges from Thunder Bay to Ottawa and down to Windsor. We've been in existence as a student organization for 20 years in the province. Our mandate essentially is to advocate for the preservation and enhancement of accessible quality public post-secondary education in the province and it's in that spirit that we come to speak to you today.
I think we all recognize the importance of post-secondary education to the economic, social and cultural health of our province. It's especially important in this climate, as we approach the millennium, as we enter the information age, that we know that knowledge indeed is power and that our economic wellbeing relies on having a strong, accessible public post-secondary education system which will allow for the production of citizens who can think critically, who can communicate effectively, who have a variety of skills and knowledge and abilities and can adapt in an ever-changing situation both in the workplace and outside of it.
Our presentation and the recommendations we're making to the committee are essentially based upon two things: our brief to the advisory panel on post-secondary education, which we presented in October, and the recommendations of the Ontario Coalition for Postsecondary Education, a group that we helped cofound. We've given you a copy of our paper, Future Goals for Ontario Colleges and Universities: An Alternative Vision, which we presented to the Minister of Education on December 16, at the same time the Smith panel reported. We're taking most of our recommendations from that.
I'll touch on a few areas: (1) funding, (2) research, (3) tuition fees, and (4) student aid.
In terms of funding for post-secondary education, if we can all agree that post-secondary education is extremely important to the economic health of our province, then the pattern of increasing divestment of government responsibility for funding post-secondary education over the last several years is somewhat contradictory. We feel that it really puts our system and our province at considerable risk and we worry about our ability to compete and work effectively as a province.
Some stats: Last year's cut of $400 million was the largest cut ever to the post-secondary system. It was a 15% cut. This year we have seen some movement towards more stable funding. We've seen a freeze, so that is no further cuts for the next year, but we feel this is not adequate in addressing the funding problems and the funding crisis in the post-secondary sector. There have been several years of underfunding and the cumulative effect of this on the quality of education has been devastating. Right now Ontario ranks last of all of the provinces in providing public funding for post-secondary education and it also does not meet standards if you compare it to the funding of public post-secondary education in the States.
Earlier this week Premier Harris made some comments about the quality of our college system and said that we had the best college system in North America. Unfortunately it certainly would be difficult to maintain that at the level of funding we have now. In fact, because we rank last in funding for PSE in Canada, I beg to differ with his comments.
The net result of this crisis in underfunding is a drop in the quality of education and a potential for the loss of economic competitiveness. Our recommendation to the committee is to restore the $400 million in cuts and work towards building us up to the national average in terms of funding. We also need to recognize that we have already met the mandate in the Common Sense Revolution in terms of the proportion tuition fees should play in the total funding. I'll get to that in just a moment.
In terms of research, I'm not going to talk very long about this because you will hear at length about research from our coalition partners in the Ontario Confederation of University Faculty Associations, and we certainly would urge you to pay very close attention to what they have to say about it. They are the researchers, after all, and we support their point of view on the need for increasing research funding. But we need to take a look at how we are providing research funding for post-secondary education.
We need to recognize that research is inherently connected with teaching. You cannot separate the two by having a separate research envelope. If you want quality research, you need to be able to provide for research through operating grants. If the government seriously wants to make a commitment to enhancing research and development in the province, it needs to do so through an investment in the operating budgets of our post-secondary institutions.
Regarding tuition fees, one of the results of declining government funding has been massive increases in tuition beyond any inflationary or other reasonable guidelines. There is no real reason for the increases in tuition except for declining government funding.
A few statistics: If we include the 10% discretionary increase that was just announced last week, tuition fees will have increased over 200% since 1982-83 and over 140% in the last 10 years alone. This is a staggering statistic. Last year's increase of 20% for universities and 15% for college students was the largest single-year increase in the history of Ontario. As far back as 1986, increases in tuition have exceeded increases in the cost of living. Since 1986 the CPI has stayed at or well below 2% while tuition has increased anywhere from 7% to 10%.
These massive increases in tuition have been happening at the same time as savings and incomes for families have been declining. It doesn't really make any sense, and students as a group are at the end of their rope in terms of being able to accommodate these increases. Many people are being forced to question the logic of post-secondary education in terms of their life. I don't think that in the long run this will help the economic or social health of the province.
We have an erosion of accessibility. We have massive debt loads. The average debt load of students right now is sitting at $24,000. So there's both a human cost and an economic cost to increases in tuition in that it doesn't make a lot of economic sense to saddle people with massive debts early on in their careers, to take out a mortgage on their future, essentially. It doesn't make any sense to us, common or otherwise.
Our recommendation then is an immediate tuition freeze, and I realize this contradicts last week's announcement, but we still hold out hope that this can be accomplished, as it has been in other provinces. We'd also like to see an increased reduction of economic barriers to post-secondary education. That includes perhaps looking at job creation for summer jobs, looking again at vacancy decontrol, which is posing some risks in terms of ability to find affordable housing, increases in the availability of child care and other economic barriers.
We also will remind you of the platform of the Progressive Conservative Party in the Common Sense Revolution, which said that 25% of operating revenues for post-secondary institutions should come from tuition. We are now sitting at 34%. We have exceeded it quite considerably and this is even before next year's tuition increase.
In terms of student assistance, we recognize that the government has announced a number of student assistance ventures, including the Ontario student opportunity trust fund and the Ontario merit scholarships, but we don't see this as a substitute or justification for imposing higher fees. Because these types of scholarship plans only benefit a small percentage of the student population, we still have the problem of increasing debt loads, which are higher in Ontario than anywhere else in North America, including private universities in the States. Students at Ontario universities are borrowing more than students who attend private universities in the US.
The options that have been put forward by the government, including income-contingent loan repayment plans, unfortunately will only serve to increase the amount of debt that students take out. We'd like to see the government to set up a working group to look at constructive ways of reforming student aid which will not end up saddling students with even more debt, because we do not think this will be healthy in the long run for our province.
You may ask, how are we going to afford all these things, Vicky? We have to say that we feel it is the time to re-evaluate the logic of the tax cut. We have a mandate from our membership to say this. We had some discussion about the tax cut at our general meeting in Hamilton in January and a resolution directing me to come to you and say: "It's time to look at the tax cut and see whether it's really worth the sacrifices in some of our social programs, including post-secondary education," and it passed unanimously.
We feel that there needs to be a shift in government priorities. The cuts to post-secondary education are a political decision. If the government is serious about maintaining the economic health of the province, post-secondary education must be a priority and we feel that this shift in priorities is necessary. Thanks.
1550
Mr Kwinter: This morning we had a presentation by an economist, and one of her comments was that industry and business were complaining that there was a mismatch in the skills that graduates have and their needs. Last week there was an announcement by the high-tech sector in Ottawa that there were 2,000 jobs going begging. They're moving them to Halifax. Do you feel that this is a direct result of reduced funding, or does the whole curriculum and what we teach have to be changed? From a student's perspective, are the students happy with what they're being taught? Is it a funding issue or is it a curriculum issue?
Ms Smallman: I think the erosion of the quality of education, the inability of our institutions to really keep up with the times, is a direct result of the crisis in funding. It's very difficult for institutions to get the right resources, to be able to hire qualified instructors who are up in the skills, to be able to get the right kind of equipment and that type of thing. It's very difficult for institutions to manage in this climate of decreased funding.
We also have to recognize that universities in particular do more than just produce people with marketable skills, and I think industry also has to recognize that it has a certain role to play in training people. We need to recognize that quality education, particularly quality undergraduate education, will produce people who are flexible, who are adaptable.
The skills that are needed and the equipment that we need people trained on change all the time and it's very difficult to expect post-secondary institutions to be able to do this. I think industry has a certain role to play in making sure its employees are trained as well.
What we need to do is sit down and look at the logic of the whole system, but because of the crisis in underfunding and because of the crisis in employment people are becoming a little bit more narrow-minded in what they expect from post-secondary education. I don't think there's one panacea to the problem, but we have to recognize that we need general education as much as we need people with specific skills. Yes, funding is definitely an issue.
Mr Martin: Certainly I heard loud and clear your call for the government to reconsider the tax break. This morning we had a couple of economists here who work for some fairly reputable financial institutions in the country who are saying the exact opposite, that the economy is strong and it will continue to be strong as long as certain things happen: they continue to cut the funding of government-funded programs, ie, education and contributing money to students who want to access that, and they continue to cut taxes.
Certainly that's not the position of our party in this. I think it will lead, down the road, to a diminishing of the foundation upon which this good economy is built.
Interjections.
Ms Smallman: Sorry, guys, I can't actually hear his questions.
Mr Martin: In my opinion, if you take away from the education system, you don't have more people in it, you don't have more people participating and learning the new skills, the good economy, the foundation upon which it is built, will be diminished and we'll end up eventually with a two-tiered system of education. To what extent is that happening now?
Ms Smallman: I think it is already happening in the call from the universities for deregulated tuition, differential fees. They want to be able to charge different fees for different programs. This is creating a two-tiered system within our public institutions because some programs are out of reach financially for certain types of people. Also, a lot of the incentives in terms of the matched funds program, the Ontario student opportunity trust fund and other types of proposed initiatives for fund-raising ultimately will privilege more élite institutions like the University of Toronto and Queen's, which already have substantial endowments and are quickly moving towards, I think, a more privatized state. What really worries me is that they're doing so on the backs of taxpayers -- you know, contributions to post-secondary education over the last several decades -- and I think this is really irresponsible.
In terms of what the economists say, there are plenty of differing opinions in the world of economics. I just draw the committee's attention to a study conducted by Atif Kubursi, a reputable economist teaching at McMaster University, who says that for every dollar of government money that is spent on universities, $4 is put back into the economy. I think that takes us a long way.
We also have to look at the contribution of our institutions to local economies in terms of supporting small businesses and this type of thing. If students are financially strapped, they cannot contribute effectively to a local economy, and graduates who are saddled with large debts even before they start working will never be able to do things like purchase houses or that type of thing. So ultimately, in the long run, I wonder whether this will be healthy for us.
Mr Martin: What is the general psychological health of the student population today? Are they hopeful? Are they excited? Are they participating fully?
Ms Smallman: No. Students are not able to get as much out of their education as they used to be, because many of them are working, either full-time or part-time, while they're in school taking a full course load. This doesn't allow them to really participate in campus life, to do the traditional student things that we used to be able to do.
Many of them are supporting families. The faces of students are changing. We have students who are parents, struggling to support their families as well as maintain a full course load. They're also facing a really dismal employment market. There may be certain types of jobs in Halifax, but there is also an 18% unemployment rate for youth. Right? Students are looking ahead at what's coming and they're not seeing very good things, which is why many of them are deciding not to pursue a post-secondary education. They just can't take the risk. The sticker shock that's associated with high tuition and high debt loads is incredible and that's something we need to pay attention to.
Ms Bassett: Thank you so much for your presentation. It's always fascinating to be brought in touch with some of the problems you're facing on a day-to-day level. I wanted to just make perfectly clear, though, that as members of the Mike Harris government, we feel very strongly that university education is of vital importance to our youth today, and we also feel that we should make the opportunity to everyone to at least get that education.
That said, the question is, how are we going to fund it? Before I get to my question, I just want to make it clear that I've been working with the federal government to make sure the income-loan contingency program is brought in. We are working on it, and in a letter the Minister of Education sent to the federal government he said: "Loan repayments should be geared to an individual's post-graduation income. Consequently, no student should be asked to repay more than he or she can afford."
I heard what you said but what I want to ask is, do you feel that government spending has to be brought under control at this time in order to ensure that funding continues to be available in the future for your universities?
1600
Ms Smallman: I don't subscribe to the belief that our economic problems are caused by spending on social programs. I would refer to the Statistics Canada study that said that only 6% of the deficit is caused by spending on social programs. I think we all recognize that we do need to be responsible in our financial management, but I think we also need to make sure we don't do that at the expense of institutions that Canadians fundamentally believe in.
Ms Bassett: You're saying that universities should have a bigger slice of the pie, or we should consider doing that.
Ms Smallman: I don't think it's just universities. I would make the same argument for health care and social assistance. I do not see that as being the reason, and there are studies that supplement this. I'm not just saying this for purely ideological reasons. I believe there is evidence to support this. I do not accept that spending on education, health care and social assistance is responsible for our problems that we are incurring today. We need to look at other avenues for dealing with the revenue problems of the government.
That's why I can't accept the logic of the tax cut, because it doesn't privilege me as a student. I think my tax cut will work out to maybe about 30 bucks. It does not even compare to the amount of extra tuition I've had to pay, as well as user fees, books and that type of thing.
Ms Bassett: That may be so, but Patti Croft of Canada Trust pointed out today that the tax cut had a direct impact on stimulating the -- all I'm saying is that there are different points of view.
Ms Smallman: But it will only really benefit one segment of the population is what I'm saying. I don't feel that it should be done at the expense of all these other things.
Ms Bassett: Okay.
Ms Smallman: It doesn't make sense. There are all kinds of things that have happened in the last year that have really hurt accessibility. I have a really hard time accepting the government's claim that it values access to post-secondary education when child care bursaries have been eliminated for students who have fewer than three children. That doesn't cost a lot of money for the government, but it means a lot to a woman who is a single mother, who has a child and wants to get out of the welfare trap and get an education.
Ms Bassett: Of course.
Ms Smallman: That's one thing that doesn't cost a lot of money that the government could do.
Ms Bassett: Just on the tax cut, I must say 91% of all taxpayers will see an Ontario tax cut of 30% or greater. So the tax cut you refer to doesn't just refer to the so-called rich. Some 9% of people are the only ones you would be referring to; 91% of people are going to get a benefit.
Ms Smallman: At the same time, we're paying 30% more in tuition, which costs a lot more than our tax cut. We're also seeing single mothers who are students cut off from social assistance and family benefits. So at what price? It's not worth it for us. It's not worth it for the vast majority, I think, of Ontarians who are under 35. It's not going to help. I would reiterate it will hurt us, I think, economically in the long run.
Ms Bassett: Thanks for pointing it out.
The Chair: That concludes our time. Ms Smallman and Mr Hashemi, thank you very much for coming in and presenting to the committee. We appreciate your views.
ONTARIO ROAD BUILDERS' ASSOCIATION
The Chair: We now have the Ontario Road Builders' Association, Rob Bradford. Welcome to the committee, Mr Bradford. I understand you had very short notice because of a cancellation. We appreciate your flexibility.
Interjections.
The Chair: I ask the committee to be aware that this room is very difficult. The noise carries greatly in this room and I would ask you out of respect for our witnesses to keep your personal conversations to a minimum.
Mr Bradford, we have 30 minutes together. If you would like to use part of that time for a presentation, we will use the rest of your time with questions. The rotation will begin with the third party.
Mr Rob Bradford: Thanks very much, Mr Chairman and members of the committee. As you mentioned, we are here on rather short notice and we appreciate the opportunity of being here. For that reason, I may be reading a little more than I should, but you have our presentation in front of you.
A brief background: Our association was formed in 1927 and we represent virtually all of the major contracting firms across the province that maintain and build our highways and municipal roads. We're an industry of a few larger companies with many employees and many smaller companies providing employment in the very communities across Ontario where jobs are most desperately needed.
I'm going to offer you our perspective today on some of the very difficult choices that the government has ahead of it in preparing the 1997 budget. This perspective obviously will reflect the interests of our member companies, but I hope to be able to show you that context is compatible with and in fact complementary to the overall objectives of the government and taxpayers. I would suggest at the outset that our association and I believe the majority of our industry strongly supports the direction that the government has taken and we certainly commend the determination it has to proceed on the course it has set. I don't think some of the things I'm going to be saying today contradict any of those objectives. We do, however, believe that a commitment to investment in the province's roads infrastructure should be a priority consideration in the upcoming budget deliberations.
In the next few minutes I'll very briefly review the importance of a strong commitment to infrastructure investment, I will discuss some of our views on the level of commitment that's required and, finally, I'd just like to touch on some concerns that have recently come to light for our industry regarding the transfer of financial responsibility for thousands of kilometres of roads to municipalities in Ontario.
Investment in Ontario's roads infrastructure is a prerequisite to private sector competitiveness, growth and expansion. It creates good jobs and supports international and domestic trade. Sixty-one per cent of Ontario's goods and services as a percentage of GDP are exported and over 75% of the goods exported are moved on our road systems. It's interesting to note that the Detroit-Windsor corridor is the single largest corridor for international trade in the world.
In the growing global economy environment, successful companies are those which will be able to produce and deliver goods cost-effectively and efficiently, and for the foreseeable future I would suggest that they will require superior roads systems to do that. Other of our major trading partners, such as Mexico and the United States, are investing heavily in their highway systems to enhance competitive advantage. A bill before the US Congress, just as an example, would set aside $6.5 billion for national highway system improvements.
In the globally competitive environment, Ontario businesses must be able to move goods and materials to factories to meet just-in-time inventory requirements. They must be able to move finished goods to market quickly and cost-effectively. Economic growth in Ontario is dependent upon private sector productivity and competitive capability, and one of the fundamental criteria for that competitive ability is a superior roads infrastructure. Companies assessing locations for potential capital investment rate the capacity and condition of local roads and highways at or near the top of their list of requirements.
I'll digress for just a second, because there's an interesting little anecdote that goes along with that one. I had the opportunity this summer to briefly meet Mr Ivan Grose, the member of Parliament from Oshawa, and he told me about a company from Japan -- and this just happened this summer -- that was considering setting up an auto parts support plant in the Whitby area. The people who were looking to make that deal came to Toronto one Thursday afternoon. They tried to get to Whitby from the airport in rush hour, and they never bothered finishing the trip. Mr Grose swears this is a true story, and I would assume it is. We lost a new auto parts plant because they couldn't get across the 401.
1610
Investment in Ontario's roads infrastructure also contributes significantly to the province's economic progress by creating jobs which pay well above the national average industrial wage and by providing varied and rewarding professional career opportunities. Employment created in building and maintaining roads is not short-term or temporary jobs as critics of infrastructure investment might suggest, and they often do suggest that. While a single project has a defined and relatively short lifespan, an ongoing program of infrastructure investment develops a pool of professional and skilled jobs across the province. Road building is a labour-intensive industry and a relatively high percentage of the dollars spent on roads infrastructure is applied to paying wages and salaries.
Apart from the important economic reasons for commitment to infrastructure investment, there are also other significant benefits, and I won't dwell on them too much today because this is the standing committee on economic affairs, but you've also got to consider the benefits such as enhanced public safety, reduced cost to the road user and reduction of hazardous emissions from vehicles that are locked in traffic gridlock.
Turning to the current status of Ontario's roads infrastructure, there are two aspects to investing in that infrastructure: one is the investment in maintenance of the existing system and the other is capital investment in the expansion of the system. With respect to maintaining the existing system, for over 20 years our investment has steadily declined and the condition of Ontario's roads has deteriorated to, in many cases, unacceptable standards. We've all read the Ontario Auditor General's report from 1995, and I'm going to quote a few things again from it today because nothing has changed. The Auditor General noted that almost 60% of the system was in "poor" or "substandard" condition. That hasn't changed.
The Ontario roads system is a valuable public asset. Inadequate investment in maintaining the system not only erodes the value of the asset but also creates a new and disproportionately large public liability in a very short period of time when preventive maintenance options are no longer available.
The Auditor General identified both the fact and the consequences of underfunding for highway maintenance. We echo his warning that unless action is taken to reverse many years of underfunding, "the condition of the infrastructure will continue to deteriorate to the point where a massive and costly reconstruction effort will become necessary." They've just run up against that in the city of Los Angeles where they've had to quadruple their annual budget, and they suspect, if they're lucky, in 30 years they might get their roads back to an acceptable condition. Understanding that, then, continued underfunding is an irresponsible course of action.
The cost of basic preventive maintenance of an asphalt highway is between $500 and $1,000 per lane kilometre. If you don't do that maintenance when it becomes necessary, the cost rises to $80,000 per lane kilometre because you're now in the rehabilitation stage. If you don't do that rehabilitation when it's necessary, and if you did do it you could add another 10 to 12 years to the life of the pavement, but if you let it go a couple more years you're into a quarter of a million dollars per lane kilometre for reconstruction, and that's what I'm referring to when I'm talking about this new public liability that we're building for ourselves.
Ontario has adopted a very minimalist preventive maintenance strategy to maintain the average life of the current road system at 12 years. I understand that this is occurring in light of the current fiscal environment and, in that light, for a very short period of time, it may not be a bad strategy; at least there's attention being paid to maintaining our roads at a certain level. The most cost-effective target is eight years, but even to meet the Ministry of Transportation's strategy, spending of about $580 million per year is required. We have not been meeting this minimum target. Last year the government did show an increased commitment to roads maintenance but moneys allocated to maintenance didn't come anywhere close to $580 million.
The other half of the infrastructure investment picture is capital investment in expansion of the roads system. Here again, we have been falling behind for over two decades and we face, literally, a capacity crisis today. Today, in 1997, plans for new roads and highways are virtually non-existent and we face serious erosion of our competitive position. There are all kinds of statistics on that. I won't throw too many out here but maybe we should note that in the last 20 years the total kilometres of Ontario roads increased by 4.3% while the number of registered vehicles rose by 97%.
A 1988 study showed that in the Metro Toronto area of the 2.3 million vehicle trips per day over 340,000 were truck trips. I believe that's about 13%. In the greater Toronto area, the number of truck trips per day was almost 700,000. So fully 30% of the annual truck shipping costs in the GTA -- over $2 billion per year -- is directly attributable to the undercapacity of the roads system. A similar study showed costs due to congestion in the national capital region were about $500 million per year.
A final point we'd like to raise with the committee with respect to ensuring that Ontario's roads infrastructure is able to serve the province's public interests is that of the transfer of large portions of the provincial road system to municipalities. Some 1,700 kilometres have been transferred or identified for transfer and estimates of stated intentions to transfer more in the future range from 4,000 to 9,000 kilometres. We could conceivably see almost one third of the roads which were formerly considered provincial responsibility being managed and financed by local levels of government.
This process of transferring responsibility for roads is going to lead to a fragmented approach and the resulting huge challenge in maintaining uniform standards for roads going through more than one municipality. This in itself is a concern, but the issue to be raised with this committee and to be addressed in the budget is a financial one. How will the municipalities pay for bringing the transferred roads up to acceptable standards? Do the municipalities have the financial resources with which to maintain them to acceptable standards?
Faced with new costs for local roads infrastructure and competing demands for shrinking dollars from other municipal service areas, some municipalities will find it politically expedient to delay or even ignore the basic investment requirements of the system. This has already occurred in Ontario and we haven't even reached the point yet where these road transfers have taken place. We have one municipality about an hour's drive north of Toronto that last year just said: "We don't have a roads program this year. There's no money." You're getting yourself right into that situation I discussed earlier: Pay me a dollar now or pay me $80 a couple of years from now when there's no choice.
Regardless of who pays for individual roads, they are still components of an integrated roads system. If the components are allowed to collapse at the local level through lack of investment, the entire system will suffer.
To summarize then, if one accepts the strategic importance of Ontario's roads infrastructure to the economic success of the province and that the existing roads system has fallen into a pattern of chronic deterioration from underfunding, then the government must recognize the need to allocate adequate funds to move the system to acceptable standards.
The Auditor General says even a minimalist preventive maintenance strategy costs $580 million per year and that should be the absolute minimum amount made available to the Ministry of Transportation for road maintenance this year. As well, we can no longer delay investing in capital construction of new roads and highways and funding also has to be made available for this purpose.
We would also urge the government to begin planning the financing of infrastructure investment on a multi-year basis. Under the current practice, each year our industry must wait until the spring budget is handed down before any decisions are made about the current year roads program. For an industry that has a window of about eight months in which to complete work every year, it's extremely counterproductive to wait until May or June before the year's intentions become known. A multi-year commitment would allow the industry to begin putting together the required workforce, materials and equipment early in the year and the public would benefit from the resulting efficiencies.
On the matter of transferring responsibilities for roads, we also urge the government to either upgrade the roads in question to acceptable standards prior to transferring them or to provide separate specific funding so that municipalities may at least start out without the additional burden of transferred liabilities. To ensure that the provincial roads system is maintained to appropriate standards, the government must also ensure that municipalities have the financial resources required to meet their new responsibilities.
As I noted at the beginning, we do support fully the government's economic objectives and I trust that the government will recognize the very integral role which investment in our roads infrastructure can and does play in the fulfilment of those goals.
1620
Mr Martin: You certainly make a good case for investing in our roads. I don't think there's anybody who has looked at the economy of this province who won't agree that a good road infrastructure is one of the things that attracts investment to Ontario. I would certainly support that contention. However, your statement twice in the paper about investment in good roads and maintaining good roads and the negative impact that the downloading of the cost of maintaining a whole whack of roads to municipalities will have is actually not in keeping with the economic objectives of the Ontario government.
This morning we heard very clearly from a couple of the economists after the deputy minister spoke that the program of this government is actually very simple and twofold: to cut taxes and to cut the cost of government, which means to cut the amount of money that's spent on things like maintaining roads, and that if the government continues down that track, everything will be better; we're to believe it will be better.
Do you think it will be better if that's the track that we continue on? How does maintaining good roads and a good road infrastructure fit into an agenda which is very simply, "Cut taxes and cut government spending"?
Mr Bradford: One of the reasons I'm here today, Mr Martin, is hopefully to help the government understand that a financial commitment to roads will help it achieve its objectives. This government, as I said, last year showed a renewed commitment to roads infrastructure. Unfortunately, it's not quite at the levels we need. I am hoping the government will understand the importance and will show that they understand that in the coming budget.
Mr Martin: I would just make the point that not only did they not meet the standard that you set, but they didn't even meet the minimum standard, according to your paper here, that you said was required.
Mr Bradford: That is true.
Mr Martin: In the long run, as you say, "Pay me $1 now or $80 later." That in fact is what's going to happen.
Mr Bradford: If it carries on like that, we are in trouble.
Mr Martin: So what we're doing is moving a cost on to the shoulders of future governments or future generations of people to reclaim or rebuild or maintain that road system.
Mr Bradford: That's exactly what we would be doing if we did not show the proper commitment at this time, yes.
Mr Rollins: Thanks for bringing some of these things to our attention. I'd like to point out that the last five years, the dollars that were spent on the rehabilitation of the roads were some $240 million. Last year we raised that number to $375 million. True, it has not got to the numbers that you request, but also the last government in the last five years cut the road budgets and also raised taxes. In fairness to Mr Martin's question over there, I know that's the optimum to get to that level. At $375 million a year, if we can maintain that for the next three or four years, can we still hold our roads close, regardless of what the auditor has to say?
Mr Bradford: I don't believe so, sir, because I believe the auditor was using real numbers. The auditor knows it will cost $580 million a year to keep the roads at a 12-year-average age, and that is a very minimal strategy. If you don't meet that strategy, you're into some of those scenarios that I talked about very close down the road.
Mr Rollins: I want to share my time with one of the others.
Mr Jim Brown: Each year Ontario motorists contribute about $2 billion in gas tax to the federal government and we don't get anything back. The municipalities don't -- we just don't get any of that money back. Have you made a pitch to the federal government, similar depositions to the federal government?
Mr Bradford: Yes, we certainly have, sir. We were part of the Roads Work for Canada campaign during the summertime that called for two cents a litre of the federal gas tax to be put directly to a national highway system, and we're working very closely with our counterparts, the Coalition to Renew Canada's Infrastructure in Ottawa, to press that point. It's a priority for our association.
Mr Jim Brown: Do things look hopeful from your point of view?
Mr Bradford: No, they don't.
Mr Hudak: Is there time, Chair?
The Chair: Yes, you've got about two minutes.
Mr Hudak: Great. I'm sorry to hear that too, because I brought forward a private member's resolution on just that in the Legislature, as you probably remember.
Mr Bradford: Yes, I'm quite aware of that. You've been a big help in that battle. Thank you.
Mr Hudak: It's been a pleasure. I think it's an excellent idea.
I had a quick question for you too, your thoughts on this. I don't know the minister's stance, but I know some of the members have talked about when we're building new infrastructure, and you mention the need for more infrastructure in addition to keeping what we currently have in good condition. What's the position of the roads association on toll roads when you increase the number of highways across the province?
Mr Bradford: Our position as of February 12, 1997, is that toll roads used under the conditions that were used for Highway 407, with the caveats that there is a public alternative and that it is a new road being built -- our association supports tolling for situations such as that.
Mr Cordiano: I just want to go back to your concern with respect to this government's dumping on to municipalities additional costs, particularly for the transfer of provincial highways. We have estimated that the total cost to municipalities will be somewhere in the neighbourhood of $1 billion. Of that, there will be an additional $100-million burden to municipalities for roads that are transferred to municipalities. That's $100 million which this government has not accounted for in terms of transferring costs, so that's an additional burden to municipalities that they now do not have the funding for. That's an additional $100 million that they will have to provide for in their own budgets. I see that you are concerned about that.
I would also like to point out that this government's capital budgeting has been reduced from where it was in 1995-96, from about $3.5 billion in all capital expenditures down to $2.7 billion for this current fiscal year, 1996-97, and will be further reduced in fiscal years 1997-98 and 1998-99 to $2.2 billion. You're getting a reduction of almost half of what used to be spent in capital by this provincial government. Inevitably roads will be affected by that reduction in expenditure for capital expenses that the government used to provide and now no longer will provide for. How does your association feel about that reduction in capital spending on the part of the Ontario government? It puts a crimp in terms of the government's plans to build any real infrastructure. It's almost half of what it used to be.
Mr Bradford: Our interests, sir, are directly related to the part of the capital spending that the government allocates to roads, and certainly if we see a decline or an erosion in those types of capital spending, yes, we will have concern and we will make our concerns known.
The Chair: I would ask the government caucus to watch their conversations. The noise just bounces around in here and it's very distracting for the witness. Thank you very much.
Mr Cordiano: The government's own forecasts -- they savagely cut with respect to the transportation budget. In 1995-96 there was an operating account of $867 million, and in this current fiscal year, 1996-97, it's down to $684 million. That's the operating expense account for the Ministry of Transportation. I don't have the breakdown in terms of the capital account but I gave you the overall numbers in terms of its reductions. The plan that was announced last fall, with reductions in capital expenditures, affected the Ministry of Transportation. So, yes, you've got a reduction in spending in transportation in the capital expenses by $800 million overall, and about $105 million in transportation.
1630
Mr Bradford: We certainly saw last year a greater commitment to capital spending on roads than we've seen in a long time. I think you have to look at the operating costs in the Ministry of Transportation in light of the very major restructuring that's going on with the Ministry of Transportation, where a lot of those operating costs are being transferred to the private sector.
Mr Cordiano: Or to municipalities. Go ahead.
Mr Kwinter: Can you tell me, to your knowledge, what is the total kilometres of roads in Ontario?
Mr Bradford: I can tell you that the total number of kilometres of provincial roads is roughly 30,000. I don't have a figure for the total kilometres.
Mr Kwinter: In your presentation, when you say that some 4,000 to 9,000 kilometres is going to be transferred to the municipalities, is that coming out of the 30,000?
Mr Bradford: Yes. The 30,000 is now down to about 26,000 or 27,000 with previous downloading. That would come out of the 27,000-odd. That's why I say we could end up with a system two thirds the size it used to be.
Mr Kwinter: Exactly: two thirds. There's about a $200-million shortfall per year just to keep your 12-year maintenance standards. Is that correct?
Mr Bradford: That's correct at the present time, yes.
Mr Kwinter: My point is that when these roads, which is a third of the provincial roads serviced, are transferred to municipalities, they're going to have their work cut out for them just maintaining those roads they've got, let alone investing that $200-million shortfall that's going to be apportioned to them, so the chances of that happening are practically zero. Would you agree with that?
Mr Bradford: I wouldn't use figures attached to it, but we said very clearly in my presentation that we have concerns about how municipalities are going to fund their roads in the future. Yes, we have concerns about that. I'm not going to presume at this point to try to say who's telling the truth about whether or not the municipalities are being left without enough money. The government says it's a straight-up deal. I know that other parties would suggest there's a great lacking and that the municipalities are coming out on the raw end of the stick. I don't know enough about the situation to have an opinion on that at the moment.
The Chair: Thank you very much and --
Ms Bassett: Can I just correct the record?
The Chair: No, I'm sorry, you can't. You can correct your own record, but you can't correct someone else's record.
Thank you very much, Mr Bradford, for appearing before the committee today. We appreciate your taking the time out of your schedule, especially on very short notice.
ALLIANCE OF MANUFACTURERS AND EXPORTERS CANADA, ONTARIO DIVISION
The Chair: Our next witness is the Alliance of Manufacturers and Exporters of Canada. I believe it is Mr Collinson and Mr Allinotte, if you would come forward, please. We have half an hour, and if you would like to make a presentation, we will use up any remaining time you have with questions, beginning with the government caucus. When you begin to speak, would you identify yourself, please, for the Hansard records.
Mr John Allinotte: Thank you, Mr Chairman. My name is John Allinotte. I am a director of corporate taxes with Dofasco Inc and the chairman of the Ontario tax committee of the alliance. With me is Mr Collinson, our director of public affairs. We've handed out a written submission that I've taken some excerpts from, which I would like to address to you verbally.
The Alliance of Manufacturers and Exporters of Canada, Ontario division, appreciates the opportunity to provide the committee with its comments and suggestions with respect to the 1997 Ontario budget. The Ontario division is the voice in the areas of fiscal and taxation policy matters for our 2,000 member firms. These member firms produce over 75% of Ontario's manufactured output, which accounts for a large portion of the exported goods from Canada each year.
The alliance congratulates the government for its courage and determination to take quick, incisive action on its agenda of making Ontario more efficient and making Ontario a place where businesses will want to invest, leading to greater employment and economic growth. We applaud the government's resolve to move so early in its mandate to address the deficit crisis this province finds itself in.
The alliance believes there is a need for a strategy that will restore health to the domestic economy for the long run. Government restructuring must and will continue in the near term, and the alliance affirms the necessity for both budgetary restraints and also for reshaping and reprioritizing government expenditures to ensure that government programs are truly shaped by the needs of the Ontario economy and Ontario businesses.
Debt and deficit reduction are essential, but it will also be necessary to simultaneously take steps to foster capital investment to create the jobs and growth that will spark the domestic economy. In this context, the alliance offers the following specific recommendations to be considered by the government in its deliberations on the 1997 budget.
The government should stay the course on deficit and debt reduction and continue the streamlining of government departments. The program initiatives introduced by the current government to accomplish deficit and debt reduction have provided the Ontario business community with certain confidence in the long-term future of the Ontario economy. It is recommended these initiatives be continued to maintain and even heighten business confidence, which will allow for the desired growth in the provincial economy.
The Ontario government must restore health to the domestic economy for the long-term good of the economy as a whole. Steps must be taken to generate capital investment that will spark the domestic economy by creating jobs and growth.
The Ontario economy has a split personality. The export economy has experienced rapid growth in output, employment and investment during the past six years. The domestic economy, on the other hand, which depends on consumer and government spending, is barely growing at present and is likely to remain weak for several years unless initiatives are introduced to spark capital investment in the province.
Ontario must fill the leadership vacuum and rally and lead the national harmonization of the GST-PST tax system. Sales tax harmonization by Ontario is a matter of great importance to the manufacturers and exporters and the business community of the province of Ontario in general. The plurality of the sales tax regime in Canada is a competitive disadvantage to the firms with a presence in Ontario, and serves as a brake on the domestic economy.
Ontario must fill the leadership vacuum in the harmonization issue and rally and lead the non-harmonized provinces, pressing home the message to both the other provinces and the federal government that the current sales tax situation defies common sense for an industrialized country such as Canada. A unified sales tax system should provide for one tax base with full input tax credit for businesses, which will greatly enhance the competitive position of Canadian business and the health of the domestic economy.
The abolition of the corporate minimum tax: The alliance, as do most businesses in Ontario, recommends the repeal of the Ontario CMT. We believe the policy basis for this tax is flawed and completely out of step with the government's initiatives directed at encouraging businesses to invest in Ontario.
The CMT is totally creditable against payment of corporate income taxes and provides for a 10-year carry-forward. It is the alliance's belief that this tax legislation raises little or no revenue for the government, but simply introduces compliance and administrative costs to both the government and the taxpayer. This tax stands out as a highly visible disincentive to potential business investors as an indication of how investment-friendly a given jurisdiction may be. Given the overall packages of benefits, such as tax holidays, cheaper hydro etc offered by many US states, the CMT may cost Ontario a great deal of investment. The abolition of the CMT would do a great deal to convey the message that Ontario is open for business, with little or no affect on the provincial tax revenue.
Ontario capital tax, a disincentive: As with the CMT, the alliance believes there is no adequate basis in policy for the existence of a tax on capital invested in the province of Ontario. In fact, the pre-election stance of the Harris government was that the capital tax should be creditable against corporate income tax in any given year, which would be greatly preferable to the present state of affairs and would recognize that investment in capital represents a cost of earning income.
The capital tax functions as a disincentive to capital investment at a time when Ontario desperately needs more and is in fact de-capitalizing. The alliance urges the abolition of the tax, or at minimum, make it creditable against the corporate income tax.
1640
Reinstatement of the Ontario current cost adjustment: Capital investment in Ontario, and particularly in the manufacturing sector, remains low, to the extent that Ontario may still probably be de-industrializing; expenditures of new capital equipment below annual depreciation charges.
Many jurisdictions have introduced measures to enhance the level of capital investment. Notable in this regard are many of the northern states which offer specific incentives for expansion or relocation of facilities. Germany as well as some of our sister provinces offer rapid depreciation write-offs for manufacturing and production equipment. The alliance believes that capital expenditures by manufacturers in Ontario would be much higher if incentives were provided which would lower the cost of capital or the magnitude of required debt levels. The alliance believes that the reintroduction of the current cost adjustment or a program similar to that would enhance the capital investment in the province. The result of such an initiative would provide for increased employment and ultimately a net gain in tax revenue.
The R&D superallowance: The Ontario R&D superallowance is a key factor in ensuring that research and development, both by large and small corporations, is carried out within the province. As such, it is a vital aspect of the Ontario tax system. The R&D allowance, in its present form, introduces many complexities in both its calculation and administration by taxpayers and government auditors alike. Many of the complexities encountered are the in the area of associated company rules, in the apportionment of expenditures within the wholly R&D companies. These aspects and others of the program impose an administrative burden both on the taxpayer and the government alike.
These problems could be resolved with no loss in revenue to the government by changing the R&D superallowance into a single-rate, non-incremental allowance. The benefit otherwise enjoyed from the incremental allowance could be maintained by simply increasing the rate slightly. This would allow the government and the taxpayer as well to be relieved from the onerous administrative aspects of the super allowance.
Finally, the 5/15.5 add-back on management fees, rents etc: The Ontario Corporations Tax Act requires Ontario taxpayers to include 5/15.5 of management fees, rents, royalties and like payments made to non-arm's-length non-residents to their income for Ontario corporate tax purposes. This effectively increases the after-tax cost of such services for businesses operating in the province of Ontario. I would also add that it's not suffered by companies operating in any other province in Canada.
In the opinion of the alliance, there is little policy justification for any aspect of this additional tax cost. The elimination of the add-back would greatly improve the competitive position of Ontario relative to any other jurisdiction within NAFTA and areas that have no similar tax legislation.
The Vice-Chair (Mr Tim Hudak): Thank you, Mr Allinotte. Mr Collinson, anything further?
Mr Brian Collinson: I think, Mr Chairman, that Mr Allinotte has covered the major points we wanted to make today.
The Vice-Chair: Very good. That leaves the committee about four minutes each for questions.
Mr Wettlaufer: Welcome, gentlemen. Thank you for appearing before the committee. I notice that in the written handout you've given us that you have noted that the reduction of personal income tax has "the positive effect of reducing the `brain drain' of highly skilled technical and managerial personnel from industry." I think, generally speaking, you would agree that the policies of the government have been to increase jobs generally, not just in the highly skilled industry.
The points that you made about the abolition of the CMT and the capital tax, would you have any suggestions on the number of jobs which could be created from that?
Mr Collinson: It's hard to come up with a precise number on the spur of the moment. We believe the number of jobs would be significant. Certainly I think what we should do is make a commitment to the committee, if we might, to have our economist, Jayson Myers, provide you with his estimate of the exact number of those jobs.
Mr Wettlaufer: We'd appreciate that.
Mr Ford: Gentlemen, if the government didn't try to reduce the deficit, how would this affect business and communities? So much of Ontario's business community is dependent on exports. What would be the impact of increasing deficits?
Mr Allinotte: One of the main factors it affects is the cost of capital to us to refurbish our manufacturing and processing plants. To get that capital at the high cost of interest rates when we're competing with the government debt out there is very significant.
Mr Ford: There's a lot of investment going on right now in Ontario in new machinery and different things of that nature.
Mr Allinotte: A lot relative to what?
Mr Ford: The past.
Mr Allinotte: I would agree in the last five to eight years, but Ontario has enjoyed capital investment in the last 25 years that was not enjoyed by any other jurisdiction, I would hazard a guess, in the world.
Mr Kwinter: The government over the last little while has really been making a big point about how the economy is booming. We had economists in here today who were saying that this is a Cinderella story. Yet in your presentation you say, "It is barely growing at present, and is likely to remain weak for several years." Coupled with that -- I just want to refer to the question that was made about employment -- in the last quarter there was virtually no increase in manufacturing employment; the quarter before that there was a decrease of 42,000 jobs. So we have a situation where business is pretty good, employment is not increasing -- as a matter of fact it's either stagnant or decreasing.
What is going to change that? What is it the government is going to do that's going to improve that situation when arguably business is supposed to be booming and particularly exporters have never had it so good? How do you deal with that?
Mr Collinson: One thing we'd like to point out just in that regard is that we do anticipate the manufacturing sector will add jobs in the coming year. We anticipate there will be somewhere in the vicinity of 25,000 to 30,000 new jobs.
The situation is very much one where we anticipate the export economy will continue to grow at a rate through the next year of very nearly 10%. The difficulty we see has to do with what we view as being a short-term situation regarding restructuring in the corporate sector and also restructuring in government, which has had a deep effect on consumer demand and consumer confidence.
We believe the way to address the present difficulties with regard to consumer confidence and consumer demand is to ensure that the government has programs in place which encourage capital investment in the Ontario economy. It may seem that those two things are disconnected, but we believe that in the long run if there is capital investment it will result in jobs and growth and will ultimately impact on the confidence of the consumer.
I don't think we're anticipating that there's a silver bullet or an absolutely quick fix with regard to this, but we do believe the ultimate future of the consumer side, the domestic side of the economy is one that revolves around investment in the economy as a whole.
Mr Kwinter: Your estimate of 25,000 to 30,000 jobs created next year, is that for Ontario or all of Canada?
Mr Collinson: That estimate would be for all of Canada. We anticipate the majority of those jobs would be created within Ontario.
Mr Kwinter: That's my concern. In the quarter before this one that we just finished, you lost 42,000 jobs just in that quarter. There was no growth in manufacturing jobs in the quarter we just passed, and you're saying that next year for all of Canada you hope to create 25,000 or 30,000 jobs, which means -- and I don't have the figures for the first two quarters prior to the 42,000 job losses -- no matter what you do, you're going to be employing fewer people next year than you were this year. That is a concern and I'm just trying to understand how that is going to change. It's obviously not going to change, because you're saying 25,000 to 30,000 jobs Canada-wide next year.
1650
Mr Collinson: Certainly we're saying we anticipate growths over the current level in employment, but I would say the situation you're pointing to highlights the dichotomy between the domestic and the export economy and the need to bring in measures that will really begin to move the domestic economy forward. As we say, we believe that some of the problems the domestic economy is encountering have to do with restructuring which is occurring to some extent as a part of government restructuring. We believe that government restructuring is necessary and essential but we believe it will work its way through the economy and that ultimately you'll be looking at a position of more strength in the domestic economy.
Mr Martin: Thank you for coming today. You certainly represent an important element of the Ontario economy and are important to most of the communities that we in this place come from and represent. I'm from Sault Ste Marie and we're still very much dependent on Algoma Steel and St Marys Paper and Agawa Lumber and all that. We appreciate the contribution that your industry makes.
There are economists out there who will say, and actually one of the last points you made was, that we've enjoyed in this province five years of pretty healthy investment. There are economists out there who would suggest the reason people invest in Ontario are many, but primarily because of our health care system, our education system, which provides a highly skilled and motivated workforce and an infrastructure. The fellow who spoke to you before, roads, the ability to get your stuff to market, I know from northern Ontario, if we can't get our stuff to the Midwest US or down here, we're behind the eight ball before we even start, so all that is really important.
The problem, though, is that somebody has to pay for it. There are some out there who will suggest that over the last 10 or 15 years the burden of the cost of those programs that support us all, individuals and industry in the province, has been shifted dramatically to the employee, the ordinary citizen out there, by way of his income tax and not on the corporate sector.
You've come today asking us to even reduce more the contribution by the corporate sector to the maintaining of those services and those things you depend on very much to both attract new opportunity and maintain and grow what's already there. How do you rationalize that?
Mr Allinotte: First of all the items we've asked for reductions on would account for very little or no reduction in tax revenue. We support the government's move to reduce the deficit and balance the budget. The items we've included and asked for changes on to the tax system will lessen the administrative burden but more so the appearance of how friendly Ontario is as a place for business to operate. We don't have to go very far into the United States to find states offering incentives to Canadian companies to set up operations, to take capital out of this province that would have been here if it hadn't been for these incentives.
For us to have a tax system that raises no revenue, in the case of the corporate minimum tax -- I'm just a tax person, I don't know the political side of it, but it made no sense at all to introduce a tax that raised no revenue and required the government to go out and hire 300 or 400 more auditors and required me to go out and hire two or three extra people to administer a tax. It doesn't pay for the education; it doesn't pay for the schools we need. In the case of the superallowance, it has done an awful lot to bring research and development work to Ontario by a lot of companies, large companies and small companies.
We are suggesting here again, at no cost to tax revenues, an administrative change that will lessen the burden on the taxpayer and help the government in its initiative to downsize government. Unfortunately, today we get all the government we pay for and then some and we don't need it.
The Vice-Chair: Thanks to the Alliance of Manufacturers and Exporters Canada for your presentation today.
INTERFAITH SOCIAL ASSISTANCE REFORM COALITION
The Vice-Chair: The next group is the Interfaith Social Assistance Reform Association. I have Michael Maher, Gabrielle Mandell and Sister Doryne Kirby. Is it ISARC for short?
Ms Gabrielle Mandell: That's right.
The Vice-Chair: I thought I saw ISARC here last year too. Folks, you have about 30 minutes for your presentation. I see you've brought a copy of your written proposals. If you wouldn't mind just introducing yourselves for Hansard to make sure I had that correct, and then proceed when you're ready.
Brother Michael Maher: Thank you, Mr Chairman. My name is Michael Maher. I'm the briefings coordinator for the ISARC group. With me are Ms Gabrielle Mandell of the Canadian Council for Reform Judaism; and Sister Doryne Kirby, who is the social action director for the Canadian Religious Conference, Ontario region.
We first offer a word of thanks for your willingness to hear in this room perhaps a different kind of tune from all those wonderful economic concerns that have been put, as I've been listening up to this point. Our perspective and our brief are more to do with a perspective from the faith communities of Ontario.
The Interfaith Social Assistance Reform Coalition is a coalition of religious communities that has sought to address the continuing reality of hunger, poverty and homelessness. Founded in 1986 as part of the Thomson report and the SARC hearings, ISARC has participated in numerous efforts to reform social programs in Ontario and Canada, including one distinctive effort involving the Ontario government in its efforts to acquire funding from federal government for refugees some two years ago. It has also been active in educational efforts to raise awareness among members of religious communities about the challenges facing our communities and ways to respond to our neighbours in need.
The Interfaith Social Assistance Reform Coalition includes representatives from the Ontario Conference of Catholic Bishops, of whom I am one; the United Church of Canada; the Jewish community, including the Canadian Council for Reform Judaism; the Evangelical Lutheran Church in Canada; the Anglican Church of Canada; the Disciples of Christ; Citizens for Public Justice; the Buddhist community; the Canadian Religious Conference, of which Sister Doryne Kirby is a representative; and the Presbyterian Church in Canada. In addition, we omitted from our list the Mennonite Central Committee, the Quakers or Friends and the Unitarian Church.
During the past year ISARC has been monitoring the impact of the changes in public programs that have been affecting low-income people in our communities. Our efforts include not only work with religious leaders but with groups that are on the front end of delivering community services. We have canvassed members of religious communities across the province, and in these conversations one conclusion has become tragically obvious: The poor are struggling now more than ever.
People are going hungry. Poor people, including many who are working at low-paying, insecure jobs, are increasingly relying on food banks. We are deeply troubled by the sense of desperation facing many low-income people. We are equally troubled by the seeming abandonment by both the federal government and the provincial government of our mutual responsibilities to these, our neighbours.
1700
ISARC has consistently advocated for the recognition of six moral principles and we refuse to accept that political decisions are outside morality. These principles derive from the basic tenets of our faiths and we believe they are reflected in the values of the Canadian community at large. We believe that these principles should guide us as individuals and form the basis for public policy and the foundations for implementing programs.
We have outlined these principles before to this particular committee. They are human dignity, mutual responsibility, economic equity, social justice, ecological sustainability and fiscal fairness. There is an appendix that explains those principles somewhat at the back, as there is a listing of the ISARC steering committee members.
Sister Doryne Kirby: Public policy decisions have moral dimensions. We believe that public policy cannot be divorced from the morality embodied in these basic principles. The current provincial government in Ontario has dedicated itself to reducing the provincial deficit. We do not disagree with the view that we need good management of provincial finances, but we vehemently disagree with the singleminded pursuit of this fiscal object that excludes our collective responsibility to those in need.
In September 1995 we were concerned that there was a growing level of desperation facing low-income people. There is an escalating level of panic and anxiety in communities across the province. This fear results from cuts to the income of welfare recipients, particularly an estimated 600,000 women and children who are forced to depend on social assistance. The increasing levels of desperation are affecting communities right across the province. It is unfair and unjust to expect low-income people, particularly women and children, to be forced to bear a greater burden. They have already been paying a heavy price in cutbacks, in the lack of opportunities for decent jobs and in the elimination of programs that would help them re-enter the workforce. Very serious.
We still maintain that fiscal concerns must undoubtedly be addressed. They should not, however, be permitted to displace the principles of justice and the need for building stronger communities. If we concentrate so exclusively on the fiscal deficit and debt, we ignore and will exacerbate the human and moral deficit facing us now and in the future.
ISARC therefore recommends that this committee call upon the government to make the elimination of hunger, homelessness and poverty as well as the furthering of social wellbeing the priority of the budget of Ontario.
Blaming the poor undermines the community. Such injustice occurs when this happens. ISARC is concerned that we are witnessing a frightening trend toward vilifying or blaming the disadvantaged members of our society. The poor are portrayed as people who abuse a generous system and take money out of the pockets of other hardworking Ontarians. The net effect has been to further entrench societal divisions, undermining the very values of social justice and mutual responsibility which have led Canada to develop a social safety net that is the envy of the world.
Governments have been able to capitalize on middle-class fears and uncertainties about reductions in job security, health care and education by painting a picture of the "undeserving poor." This is the picture of people living in poverty as lazy, enjoying a comfortable lifestyle at public expense, and criminals who commit fraud or abuse the system.
ISARC is very concerned with the corrosive impact that fostering these attitudes has on our communities. We believe it is misleading to encourage these public sector attitudes while governments do not assess the impact of their own policies in abandoning the poor. Citizens in Ontario need to be able to evaluate these assertions based upon accurate information and studies that verify the truth of these claims. Therefore, ISARC believes that governments should be able to table estimates of the social costs of policies in the Legislature and be held accountable, just as with fiscal projections, by the wider community.
So it is that ISARC recommends that this committee call for the establishment of a social forecast concurrent with their fiscal forecasts to be tabled in the Legislature and a social audit undertaken regularly to evaluate the performance of public policies.
Ms Mandell: I'd like to speak to the question of standards, both national and provincial. ISARC believes it is very important to point out that Canada has participated in the development of various international agreements to establish minimum standards for a wide range of human rights. These have included basic civil and political rights as well as social, economic and cultural rights. Many of these international obligations are honoured through programs implemented by the provinces.
Ontario must ensure that the Legislature acknowledges that our international obligations under such instruments as the Universal Declaration on Human Rights, the Convention on the Rights of the Child and other international conventions are in fact honoured. It is through fiscal agreements between various levels of government that these collective social obligations are ensured.
Dramatic changes are being made to social programs in Canada and in Ontario, and this is being done in the absence of any firm standards that safeguard the responsibilities of governments to their citizens. ISARC is even more concerned than it was last year, specifically with the plans unveiled by the government of Ontario in January of this year for the restructuring of the provincial-municipal responsibilities. The speed and the scope of the so-called mega-week announcements is very troubling.
The federal government has in effect eliminated national standards for social assistance programs in Canada and the current provincial government has not identified its own standards, nor proposed any for federal-provincial programs to safeguard vulnerable citizens in this province. ISARC is particularly concerned with the effect of further offloading welfare programs to municipalities. Without federal and provincial standards, we're concerned that we will see even more regional disparities within the province. Will we see municipalities, for example, actively encouraging citizens to move to other communities so that those municipalities don't have to pay the benefits to them?
ISARC is very concerned that these current proposals are being developed not only without adequate information and public debate, but also in the absence of any means by which to hold the government responsible. The wellbeing of a large number of people who, through no fault of their own, require our support is going to be put at risk. Therefore ISARC asks again, what are the national standards being proposed to the federal government, and will these standards honour the international agreements which we have agreed to as a country voluntarily?
ISARC therefore recommends that this committee recommend that the provincial government in its negotiations with the federal government ensure that there are national standards, at a minimum those within the Canada assistance plan, and that these standards apply to Canada's social programs and ensure a fair share of the necessary financial resources for the people of Ontario.
In terms of standards, I'd like to comment on specific policies. Those are the recent, over the past year or so, cuts to taxes and to social services. It is our belief that fundamental to the role of any government is the fostering of the safety and the wellbeing of the members of society, particularly of the most vulnerable members of the community. We believe that the moral stature of a society is judged not by how the society rewards its most privileged members but by how it treats its most vulnerable. Today it is precisely the most vulnerable who are suffering the most and bearing the greatest burden of government policies.
ISARC is concerned about the degree to which governments are abandoning the poor and undermining one important means of fulfilling our responsibility to each other. That means is public financial support. There are various ways in which we exercise our responsibility for each other. Taxes are one essential way that governments, through the support of publicly funded programs, can ensure the wellbeing of citizens.
1710
Last year at these hearings, we outlined our concerns that the proposed 30% tax cut would not necessarily stimulate economic growth, nor that the economic growth would necessarily bring greater prosperity for all people. We will not reiterate those arguments today. However, since we have not yet seen the detailed economic studies, we still believe that further tax cuts will have dubious outcomes for many average- and low-income people.
Therefore, ISARC recommends again that this committee call for a moratorium on provincial income tax cuts and that this committee call for adequate benefit rates based on a market-based approach to assessing income needs or, at a minimum, the reinstatement of the 21.6% cut to recipients on social assistance.
One of our great concerns in this area stems from the fact that while taxes are going down, the demand at food banks and at shelters is going up. At the same time as these tax cuts are being implemented, we are witnessing an increased reliance on food banks and shelters for the homeless. In canvassing our communities and social partners across the province, ISARC remains troubled by the increasing expectation that charity is an adequate response to the social problems that we are facing. The demands on our religious communities and social organizations are increasing beyond our capacity.
There are some statistics from the social safety net report on food bank use which make it clear that Ontario is facing a hunger epidemic. They say food bank use has skyrocketed. Some examples are a 102% increase at a Belleville food bank from June 1995 to June 1996; a 150% increase at the Rainy River food bank; and a nearly 400% increase in emergency food calls at a London agency.
Food banks cannot meet the increased demand. More people, including children, now go hungry regularly in Ontario. In fact the Metro Toronto Campaign 2000 1996 report card, which looks at child poverty in the Metro area, shows that from 1995 to 1996 monthly food bank use by children in Metro Toronto has grown by 64%. In the materials there's also a table provided from the Daily Bread Food Bank which shows a tremendous increase from 43,000 to over 70,000 children being fed monthly now through the food bank.
Similarly, there are increased demands for shelter by people who can no longer find affordable housing. The cuts to welfare have exacerbated housing problems. Families are finding that in order to cover rent costs, they must divert or reallocate greater and greater amounts of the welfare allowances that they receive, which are intended for basic needs. One of our own steering committee members relates that in the shelter where he works, the House of Friendship in Waterloo region, there has been a 20% increase in men using the emergency hostel in 1996. At a time when the need for community support is mounting, many of these agencies which have traditionally helped people are finding that their public support is reduced drastically or completely eliminated.
Governments have suggested that it is charitable agencies and faith communities that more appropriately should fill these needs. Charities and religious communities have been responding, but the very magnitude of these changes and the drastic abandonment of the historic partnership between government and the voluntary sector has been disastrous. How can these agencies absorb significant financial cuts, on the one hand, and then be expected to pick up the slack, on the other hand, for programs which have been defunded or no longer exist?
Even if it were possible for charities, would it even be desirable to depend solely on charity? For ISARC, charity is no substitute for justice. ISARC believes that governments have responsibilities to ensure public wellbeing, and the historic partnership with social organizations and the religious community has contributed to the high quality of life our communities enjoy.
Therefore, ISARC recommends that this committee call for continued support for social and community organizations developing new approaches to addressing these issues.
Brother Maher: Canada has been ranked by the United Nations Human Development Index as a country with the highest quality of life for its citizens. Members of the religious community were not surprised at such a rating, because we have known for some time that this quality of life is the result of a sense of national community in which we have invested for the past 30 years at least.
To continue to exclude low-income people, to erode the foundations of our social programs which have served as a bond for our nation and to continue to cut taxes, thereby further encouraging individualism and consumerism, will have serious consequences for our sense of being a national community. We fail to understand the economic logic that the poor must do with less to make them work, while the rich must have more to make them invest. The moral consequence of this reasoning does not make sense to us and it is contrary to the moral core that lies at the heart of our faith traditions.
We call upon your committee to recognize the intrinsic link between our economic policy choices and our collective social responsibilities. We ask you to include in your recommendations to the government a warning call that we cannot blindly continue down this path that will exacerbate the divisions between haves and have-nots and that will erode our communities. After all, without our community, who are we and what will become of us?
Please be assured that in our various faith traditions, we pray that God will guide and direct you in your decisions. We welcome your questions.
Mr Kwinter: I was quite taken with your presentation. We hear, and we've heard it as recently as today, the Minister of Community and Social Services stand up in the House and state that the welfare load is going down and that's an indication that the economy is growing, that things are better and that this is an indication that this government's programs are working. Yet when I read your presentation and I see figures where 43,000 kids per month were using the food bank in 1995, and this year just past, 1996, 70,380 kids per month were using it, it seems to me we're not getting a true picture of what's happening out there. There's an artificial sort of level that the government has mandated: If you go above that level, I'll help you; if you don't, too bad. They're trying to portray that things are getting better, that less and less people are on welfare and that they're getting jobs and everything is great. This doesn't seem to be what you're finding. Could you elaborate on that for me?
Brother Maher: One of the things you have to keep in mind is that one of the myths associated with welfare and social assistance is that people are continuously on it. That's not true. People move in and out of welfare and social assistance on a regular basis. The second thing you have to keep in mind is that with the front-line organizations, it is almost impossible to spend time and money on researching and keeping accurate tracks of what's happening.
I think a third point needs to be kept in mind in examining the statistics. We have asked governments repeatedly, both this government and previous governments, for the basis on which their projections of the social assistance impacts are going to be made: "What studies have been done? What have you looked at? What can you tell us about how you arrived at this policy or this conclusion?" We've never got any of those. As a matter of fact, some of you may be aware that the faith community leadership has been trying in vain to set some kind of dialogue or exchange with government.
In our experience as front-line agencies and as church personnel responding, you have stretched us to the limits, no doubt about it, and where the statistics come from that say that the numbers are improving or those on welfare are decreasing, we're at a loss to explain that as well. We really don't know and we have not been able, in spite of consistent and persistent efforts with government -- Mr Rollins, who's missing, was part of one little meeting we had, but we've tried persistently and consistently to exchange and establish dialogue with the government, particularly because of the approach that says that the charities ought to pick up the overflow, and it's clearly beyond our capacity to do so. Even if we had the will to do it and the people in place and so on, it raises other kinds of questions about the role of government.
1720
Mr Martin: Certainly the question by my colleague is a key question: Where are all the people going who are going off the welfare roles? I know in my community the municipality has asked the social planning council to do some research to try and put some detail around that particular question.
I think it's invaluable that your group continue to do what you're doing and to appear before committees such as the one that you're appearing before today, because we're not getting the kind of information and the kind of questioning and the kind of challenge from very many other sources at this point in our history that you're presenting.
This morning we had a couple of very good economists who actually were very honest with us and said that the impact of the downsizing of government, the cutting of taxes, the good stuff that all the financiers out there across the world want to see Ontario doing, the impact that has on communities and people is not something they concern themselves with. That's for somebody else to do. The question is, who is that somebody else, and who brings that kind of information forward to this government so that they might consider it and make decisions that reflect an understanding and a sensitivity in that area?
It seems to me that Ontario is a province of tremendous resource, and the greatest resource that we have is our people. Whenever we leave any of them out, we minimize the potential that we have to be even better. I know myself, even in looking after my own health, if there's a part of my body, my foot or my arm, that's aching or sore, I don't operate at maximum potential.
You've made some excellent recommendations in here and I will be doing all I can to make sure they are included in some form of report that comes from this committee.
My question is the same as my colleague's from the Liberal Party: Where are all the people going? I think that needs to be answered, and it's a question that this government should be very concerned about as it moves forward with its agenda, because in the end, if you don't, it will come back to get you. I want to thank you for coming today.
Sister Kirby: Can I just make a remark about the taxes? A very significant person who is a tax expert, a consultant in the Toronto area, one time said, "Taxes are the way that we, as a civilized people, pay for what we have as a civilized country." So it's appropriate to pay taxes. When we talk about downsizing, when the government talks about cutting 30% from people who really can pay taxes, it seems to me there's a very strange attitude that responsible citizens have to the collective good to building up our country. Taxes are a very essential way that we do it, and to cut the taxes of people who can afford to do it seems to me a kind of idiocy.
The other thing that this tax lawyer said was that after people have so much money, what is it that we do with it? There are so many corporations that we're aware of, and you people are aware of them too and the statistics are there to find them -- the delayed taxes, the taxes that are deferred, that are not paid. When we want to build a financial way of proceeding based on cutting taxes, to me it doesn't make sense. It seems to me that responsible people need to take a second look at this, a third look and a fourth look, until they realize the importance of taxes to running a government.
Ms Bassett: Thank you for your presentation. It seems awful to have one question to sort of put it all in perspective. I want to make it clear, though, that many of us, certainly our government, feel and put tremendous importance on the problems facing us as a society. We are going about it in a way that's different, I suppose, than you would advocate, but we feel that what we're doing will improve the economy and will help the people most in need.
Sister Kirby: It's not going to.
Ms Bassett: That said, it's a democracy, and different people have different ways of going about things.
Sister Kirby: It hasn't worked other places. What makes you think it's going to work in Ontario?
Ms Bassett: But let me go on --
Sister Kirby: It doesn't work in other places in the world. Look at what it's doing in the United States. Look at the number of people who are poor in the United States. Look at the people who are suffering in Central and South America. It hasn't worked in Africa. It's not going to work here.
Ms Bassett: If I could just --
Sister Kirby: How many examples do we need to have?
The Chair: Excuse me. You're being asked a question. At the end of that question, you can make a response.
Sister Kirby: Thank you. I'm sorry.
Ms Bassett: One of the questions I want to explore since you raised the United States, I'm thinking of an article that Senator Daniel Moynihan wrote in the New York Review of Books. You might have seen it this fall. He, as you know, is a major liberal, a big advocate for all the social programs in the States, and he said perhaps we should begin to re-examine how we are delivering welfare and help to those who are less fortunate, because of the way that, over 30 years, he felt he was still handing out the cheques and people were on this cycle.
Rosie DiManno, a journalist for the Star, wrote that in 1989 there was a 100% increase since 1986 in food bank use. So in a way it's a problem that's been there a long time. I'm not trying to pass the buck to anyone, because it's something we care deeply about.
Everybody here does care and we want to stop it. Do you, who are so closely connected in helping people, think there's a role for government to re-examine how we're going about helping people who are less fortunate to get back on their feet and that perhaps we should change the emphasis, as we're trying to do, so that people have the tools to get back on their feet themselves and regain the self-respect they claim they want so much and they're entitled to?
Brother Maher: I think what Doryne is saying about what has happened in the US bears a very careful look. For example, the United States now spends more money on prisons than it does on education. When we talk in terms of what a country is and what the responsibility of a government is to its citizenry, I think we need to start thinking in terms of the role of government in the care of its citizenry. What it comes down to is, if a citizen needs care, what's the alternative to not offering it?
Ms Bassett: My question to you is, do you just hand out or do you try and --
The Chair: I think our time is well over. I appreciate the conversation. I thank you very much for coming in and presenting your views to us today. It's very valuable, I can assure you.
Sister Kirby: Can I just say one thing? I do believe that the government does care.
Ms Bassett: We do care.
Sister Kirby: Yes, I think you do. What I would be objecting to is the way you go about it, but I do want to say I do believe that you care. I don't want to take that away from the government.
MIDDLESEX FEDERATION OF AGRICULTURE
The Chair: We now welcome the Middlesex Federation of Agriculture. Ms Smith, welcome to the standing committee on finance and economic affairs.
Mrs Loretta Smith: My name is Loretta Smith. I'm a farmer from Middlesex county. My husband and I have cash crop and hog operations. I also wear several hats other than just being a director for the Middlesex federation; I'm a director with the Ontario Federation of Agriculture as well as the Canadian Federation of Agriculture. Basically, agriculture kind of thrives in our home.
Middlesex county, which is the county I'm representing today, is the geographic area that surrounds the city of London. Our Middlesex Federation of Agriculture has 2,400 members. Our members have together, collectively, invested $1.8 billion into the industry and we produce $417 million in sales at the farm gate each year. We're an integral part of Ontario's $40-billion agriculture and agrifood industry. There are several areas of concern that I'd like to address today. I've got a written presentation, but I'm going to basically just highlight some notes from that today.
First of all, cuts to OMAFRA: Since fiscal year 1990-91, there has been a 44% decrease in OMAFRA's budget, which is the Ontario Ministry of Agriculture, Food and Rural Affairs. When the Harris government was running for this period in time, Mike Harris himself has been quoted many times as having said, "There will be no cuts to agriculture." We have come a long way from that statement. There have been cuts to agriculture and there is the possibility of future cuts to agriculture. I understand the government is looking at cutting another $3 billion and there is no guarantee that agriculture is not going to be included in that.
1730
Each and every year Ontario farmers put $6 billion with inputs into the ground. Most of that takes place within an eight-week period. We're a very big part of the economic growth and the economic industries in Ontario. We're second only to the auto industry. That $6 billion we purchase in inputs creates $7.6 billion in outputs, and that's just at the farm gates. That's before it gets to any processors. So we're talking big bucks here. We create jobs, we create wealth and we create economic growth.
From November 1995 to 1996, in Ontario alone there were 16,000 jobs created just in the agricultural sector, and that's not talking about the service industries that can be related to agriculture. These are not restaurant jobs; these are primary agricultural jobs: consultants to producers, machinery sales representatives, machinery repairs -- it just goes down the list.
The province of Ontario has an economic goal. We can help you with that economic goal, but we need to be a healthy industry and we need your commitment in order to do that.
Retail sales tax is another area I'd like to talk about. Our recommendation is that you harmonize the retail sales tax with the GST. We'd also like that, in harmonizing it, the same exemptions that apply to farm costs be applied to the retail sales tax. Right now we're paying retail sales tax on inputs that we don't pay GST on. We'd like that harmonized.
Alternatively, because we understand there may be some problems in being able to do this, we would like an at-source exemption. The province has developed the farm business registration numbers which we all get assigned. The Ontario federation actually hands us out cards. We would like to be able to present the card and, instead of paying the retail sales tax at source, we would like that card to be our proof that we are bona fide farmers and there would be the exemption right at source, instead of asking for a rebate in return.
We'd also like a continuation of the retail sales tax rebate which was placed on buildings. That was a one-year initiative that took place. In Middlesex county that's done a tremendous amount of good for us. For example, just five miles away from where I live there's a $1.5-million hog barn that's going up. For every single one of the building inputs that were purchased to put that barn up the retail sales tax will be rebated. That's money that goes back and reinvested into the business.
Wildlife damage is another area I'd like to talk about. Ontario farmers feed wildlife. We're getting a little tired of doing this. There is an ever-increasing population of wild deer. There's an increasing population of Canada geese. There isn't a time when I look out into our cornfield and there isn't a flock of geese out there feeding off what I'm supposed to be producing to make money. In Middlesex county there's a huge population of brush wolves. Coyotes are getting to be larger and larger in number. We even have bobcats. They feed on our animals. It's not just dogs running at large that are costing us money; it's also these wild animals that are costing us.
We would like to see a properly funded compensation program. With the compensation program that is available now I understand that in the 1995-96 fiscal year $793,000 was paid in compensation to farmers for the loss of livestock, and the budgeted item was $350,000. You're going to have to do something to make it so that it's funded properly and budgeted properly. If it's costing us almost $800,000 now, then budget $800,000.
We're very pleased to hear about the new game and fish act that was introduced that will allow us to control some of the ever-increasing deer population. We're pleased about that. The act allows us to hire somebody or to actually do it on our own if we have registered guns, to kill some of the deer population, but we have to prove adequate loss of crop. We are losing tons of crop to these wild deer and the geese. If the Ontario government is going to look at having these Bambis in the fields as a friendly thing, then you're going to have to compensate us for it because we're feeding it.
Skills training: A few years ago, I think it was about two years ago, the Canadian Chamber of Commerce commissioned a study to determine why businesses were going under. They wanted this group that was doing the study to say that it was government interference and they wanted the conclusion to be that it was bank problems, financial problems. The group that actually did the study found out that there were three basic reasons as to why businesses in Canada were going under: First was bad management; second was bad management and third was bad management.
Ontario farmers don't want to be part of that statistic of bad management. We have an ever-increasing amount of knowledge that keeps coming our way. We have to have a system where we can be trained properly to adapt to the new technology, to the new human resources that we're being faced with. Our farms are getting bigger and bigger. We're hiring people to manage our farm. The human resources have to be there for us. We need to be trained in that. We need to be trained to market our product properly. We're an export industry. We need to learn about the export industry and how we can adapt what we do on our farm, our management skills on our farm, to fit into that global economy. So we would like a further commitment and an enhancement to the OMAFRA budget in terms of training. We want to be able to have management skills provided to us, some kind of mechanism that we can learn about this.
Tax reform: That's a huge issue. It's multifaceted. First of all, I'd like to talk in terms of municipal downloading. I didn't tell you at first, but I'm also a municipal councillor, so I do know what you've done to us and I'm not really happy with some of the things.
In Middlesex county there has been a preliminary budget that's already been drawn up as to what the downloading is going to cost us. We used to collect $32 million for education taxes. We don't collect that any more. As of 1998, we won't be collecting that any more, but once we take off the portion of the education that we used to collect and we add on all the people services that have been downloaded on us, there's a $10-million shortfall and that's going to impact on each and every one of us.
We're very grateful that you've finally taken away the land tax rebate program, but you've downloaded some people services on to us that weren't really expected. The Crombie commission actually advised not to take away the land tax rebate program because there was no mechanism to deal with all these people services. With land tax reform, what mechanism has been put into place?
For example, right now I rent farm land from other people who do not farm. They're not classified as farmers. They get the land tax rebate back on that land because I signed as a registered farmer that we're renting the land and we produce over $7,000 worth of product. How are you going to do those mechanisms for people who own land but we rent the land from them? Also, how is the farm residence going to be taxed? The land that sits underneath that house is not a residential lot; it's farm property. Some of those things have to be sorted out in order to make the smooth transition for us.
There are other things in the brief like child care that I haven't talked about, but it's outlined for you. There are a couple of other things that just right now aren't coming to mind.
Just to conclude and then hopefully some of these things will come out in the questions, we need a commitment from the Ontario government that you are committed to Ontario agriculture. If you're committed to Ontario agriculture, we can help you with a lot of the export initiatives that you've taken and the economic growth that you believe this province can do. Thank you.
The Chair: Thank you very much, Mrs Smith. I think it's six minutes that we would have for questions. Mr Martin, would you commence, please?
Mr Martin: Sure. That's six minutes all told?
The Chair: No, six minutes each.
Mr Martin: You present a very well prepared and detailed brief and point very clearly in my mind, and maybe you can correct me if I'm wrong, to an argument for government involvement in the life of farmers in Ontario. It's my contention, and you've been sitting here for quite a while listening to some of the presentations, that underlying any business venture, and farming is business, in Ontario is the need for a good infrastructure. That's, as you mention, your health care.
I find it interesting that you mention day care, child care, something we don't always relate to farming people. We get a sense somehow that that just happens and it's not a problem. We often think of child care as an urban problem more than a rural problem or an urban challenge more than a rural challenge.
1740
You talk about the need for funding for skills training in agriculture. You were here when the students presented and they made their arguments for more funding so that they can go to school and learn how and hopefully some of them will come back home and run some farms. If we take away from that, we diminish our ability as a community of people to support the various industrial initiatives that are out there.
You've listed a whole grouping of things that you think are important. You also mention in that, which complicates it even further, the downloading that's now going to happen to municipalities, whether they're rural or urban, and the cost of skills there. Which, in your mind, would be the most important if we were to focus on one in particular to your community out of all of the things that you've presented here?
Mrs Smith: It's difficult to pinpoint one. Can I do this as two parts because I can't actually come up with one? Number one is our future, and our future is our children. Most people like you think that child care is an urban issue. We take our kids to the barn, we take our kids out on a tractor, and there is no other industry anywhere that brings their children into a place where it's not safe. Someone working in the automotive industry does not take their child to Oakville's line with them, but we do because there isn't anything for us.
People think that we can just pass it off to our mothers or our mothers-in-law. My mother-in-law is dead and my mother isn't interested in that, thank you very much. She raised hers and it's my turn to raise mine, but there isn't anybody else. I'm not interested in taking my child to a day care. I'm well past that. I mean my youngest is 17 years old, so I'm past that, but I've gone through all this.
The idea of taking my child to a day care for the whole day, that's not what I need because I go to the barn at 7 o'clock in the morning and I go to the barn at about 4 o'clock in the afternoon for about an hour, but when it's time to go in the fields, I'm in the fields from 7 o'clock in the morning till sometimes 2 and 3 o'clock the next morning. Who's going to provide the day care for me there? And we're putting our children at risk. That's one very important issue.
The other issue is, there are so many things in technology that are coming at us right now. I mean, global positioning where we can determine what kind of pesticides and herbicides or what kind of yields we're getting to an actual pinpoint on our farm, those are things I have to learn about. It isn't just this infusion of knowledge that I absorb. I have to learn about this and I have to be able to go someplace where I'm trained properly on it. Marketing is something that just keeps going for ever and ever and ever and ever. I mean the global weather patterns, just what happens -- how much grain the United States is producing right now, how many soybeans are being produced in Brazil. I have to know all that -- I have to keep abreast of all that.
Basically we're dealing with the big boys. These are the big boys, the people down at the Chicago Board of Trade. We're supposed to know almost as much as they do. Well, they went to school to learn that information. I need to go to school to learn that information. We need to go to school -- we, collectively, the farmers -- for skills training and management training. We know how to feed pigs and we know how to grow corn, but it's the ever-increasing technology that comes with it and looking after our next generation. Those are the two basic things. We need your help with that.
Mr Martin: What you're saying here today is that government cannot disengage, that government in fact has to be more involved in that.
Mrs Smith: We're big business and it's to your benefit to get involved in agriculture. We are an economic growth industry. The world isn't getting smaller, and they're not eating less. The world is increasing. The population is increasing and technology hasn't kept up with the increasing population. You have to get involved with us.
Mr Martin: You're obviously a private sector group in that you've invested probably your life savings in this. What happens to you if government continues to disengage? I believe the thinking -- and I'm waiting to see how it all unfolds -- is that the private sector will come in and take over and pick up and do a lot of the things that you have indicated here that you need and will do it more cost-effectively and more efficiently than government ever will.
Mrs Smith: But they'll do it at what detriment? If I look at South Carolina, for example, they have a huge hog farm in South Carolina called Murphy Farm, and Murphy likes to say it's Murphy Family Farm, but it's a corporate farm. They have 200,000 sows. What they've done is they've got it to the point where people who live in South Carolina don't want to live there any more either, because they've damaged the environment. They've polluted the air. Maybe they can produce cheaper, but at what cost, and is it the product you want?
The family farm has always been able to provide you with high-quality products at the most efficient cost in Ontario, and we do minimal damage, if any damage at all, to the environment. It's in our best interests; we've invested in this land. We continue to invest in the land by looking after the future of it environmentally. For the government not to maintain an involvement with us -- huge corporate farms are going to produce food at a higher cost. You're going to see it in the grocery store.
We heard people here talking about the poor. If they can't afford it now, are they going to be able to afford it when big business takes it over? Big business isn't going to do it for 1% profit or half a per cent profit; they're going to want a lot more than that.
Mr Wettlaufer: Thank you, Mrs Smith, for coming here. I'm a city boy, but I married a farm girl, and I spent many, many hours in the hay loft on 90-degree days.
Mr Kwinter: This is not a place for confession.
Mr Wettlaufer: We're talking about putting hay up into the mow. There were many warm days when I had perspiration dripping down my face, down my back. It was tough work, as I understand.
I'm really drawn to this wildlife damage. My uncle has an orchard in the Beaver Valley. When he started growing his apples, he had problems with rabbits, and then as the trees grew larger, he had problems with porcupines, and as the trees grew larger, he had problems with wild deer. I don't think I need to tell you what he does.
Mrs Smith: It's the three Ss?
Mr Wettlaufer: You got it.
The crop insurance plan, you say compensation for spot loss is extremely difficult to collect. Why is that?
Mrs Smith: It's just a mechanism that has been placed into the compensation act. You can't prove it was deer, and you can't prove it was just poor soil conditions or lack of chemicals. Deer may go in, and raccoons as well, they go in and just take a small portion, so how are you going to say out of a 100-acre farm that they've taken a 10-square-foot piece? It may not just be one 10-foot-square piece; it may be 30 in, let's say, a two-acre piece. It's very difficult to prove.
When you do crop insurance, it's on the overall basis of all the land you've grown. I guess the best example to use here is, we grow coloured beans, which are edible beans. We grow them on three different farms; one is seven miles away from our home farm, and the other one is 10 miles away from our home farm. When crop loss is determined, they do the average of all three farms. So if I have a crop loss on one farm and the other two farms are producing well above my normal yields, I'm not collecting a thing. But I may have had substantial crop loss on one farm that has a bush on it, where the deer like to hide or the raccoons are in, because they like to go up into the trees.
Let me backtrack here. There's no mechanism to be able to collect on that, because it's the overall yield. I've got three farms; one has a bush, two don't. On the two that don't have a bush, there's very minimal deer damage done, very minimal raccoon damage done. But the one that does have a bush, they come out and they can go very far into the field. That's why it's difficult to collect: the mechanism just isn't there.
1750
Mr Wettlaufer: So this is not a true insurance plan, then.
Mrs Smith: Not really.
Mr Wettlaufer: Do you pay premiums into it?
Mrs Smith: Yes, we do.
Mr Wettlaufer: How much?
Mrs Smith: We pay 50%. The provincial and federal governments pick up the other 50%.
Mr Wettlaufer: What would the rate be that you would pay for something like that?
Mrs Smith: It depends on what crop you're doing. Coloured beans are a lot higher than they are for corn or grain. Coloured beans are at $38 an acre, so that's $76 an acre, actually, when you consider the federal and provincial costs that are going into it. We're paying money out to this. We grew 150 acres last year of coloured beans, and we paid over $4,000 in crop insurance. Nobody compensated us or any other farmer for the loss of crops by wildlife damage.
Mr Wettlaufer: The livestock plan is not insurance either.
Mrs Smith: For the livestock, you have to have a field representative come out, and it's administered municipally, where they would go out and they'd say that it was a coyote kill or a wolf kill or something like that, and then you are compensated. But if that animal is bred, you're not getting compensated for the loss of income. For example, if you have a cow that's out there -- I mean, pigs are housed indoors -- and that cow is a dairy cow, let's say, and that cow was supposed to drop her calf and the calf turns out to be a heifer, and a heifer produces milk down the road, you've lost the income from that heifer; you haven't just lost the one cow that was carrying the animal, you've lost all the income that goes along from it. We get paid market value for the animal, and that's it. There's no further downloading of costs. It's just the one animal you get paid for.
Mr Wettlaufer: Unlike business insurance, you cannot collect for future loss of income. Do you pay a premium for that?
Mrs Smith: I believe it's all administered municipally. I'm sure that somewhere in our municipal taxes it's all there.
Mr Kwinter: Thank you for your presentation. I have to admit there are no farms in Wilson Heights, but notwithstanding that --
Mrs Smith: But you eat.
Mr Kwinter: -- I have a very strong and continuing involvement in the agricultural industry. One of my concerns is that, and I've noticed it not necessarily with just this government but virtually every government, there isn't a realization -- and I am almost prepared to bet that if I were to raise the question in the House, of our 130 members, very few of them would know that Ontario was the largest agricultural province in Canada. It's an issue where people just don't think of Ontario as an agricultural province. You see it in the government.
I was frantically looking through the Ministry of Finance's documents that they provided us with, Ontario Economic Accounts. They show the various sectors of the economy: community, business and personal services; manufacturing; miscellaneous; primary; utilities; construction; government; transportation, storage and communications; trade; finance, insurance and real estate. No indication of agriculture. It's just lumped in somewhere in there. It may overlap a couple of different sectors, but there isn't an agricultural sector.
I noticed that in the projections for capital investment by the government, it had budgeted in 1995 $5 million; this year, zero -- written it off. If you take a look at what has happened in the agricultural sector, you'll notice that there's a steady decrease in government support for it, yet as you rightly point out, it is a huge growth industry and will continue to be because people have to eat. That's just in the way of background.
What I would like to get from you, and maybe we can get some -- oh, we no longer have a reaction from that side. Sorry.
We had a presentation this afternoon by the Alliance of Manufacturers and Exporters Canada. You say in your brief that the agricultural sector is the second largest next to the automotive. The automotive is included in the manufacturing section, so they're all-encompassing. I don't have the figure because I can't get it from the government documents, but I would assume that manufacturing, including automotive and agriculture, is a sizeable chunk of the total economy. We have representatives -- and I assume you speak not just for Middlesex but for the agricultural sector -- saying that the GST and the PST should be harmonized; that it will be an advantage. So you ask the question, if the major drivers of our economy are asking for it, why isn't it happening?
Mrs Smith: Well, that's what you're all here for. You're the engine that's supposed to make this happen. We're asking you to harmonize them. From the agricultural point of view itself, harmonizing the GST and the PST, our retail sales tax, would put $40 million back in the pockets of Ontario farmers. Farmers don't just take the money and run; we reinvest and we reinvest and we reinvest. It's our business, it's our livelihood, it's our way of life. Most farmers are in it not for this generation but for the next generation and the generation after. We're building and we're spending money. Every time we spend a dime, you prosper, Ontario prospers; and we spend lots of dimes.
Mr Kwinter: I'd like to also refer to your observations, your concerns about when they download and what it's going to do to farm residential property that is going to possibly attract a residential assessment, notwithstanding that it's categorized as agricultural land. It would seem to me there's a real inequity there. I know from my experience that it is very difficult to sever that property. If you could at least sever it and be able to do something with it where you would get the actual value for it, the market value or whatever you want to call whatever happens to be the flavour of the month of how the assessment is going to take place, then there would be some equity. But it would seem to me there's an inequity because you're stuck. They're going to apportion some of these downloading costs to you and you have no way of recouping that. In the odd case they'll let you do it, but very, very rarely. I'm sure you know that.
Mrs Smith: It's often been said even in the real estate industry that the cheapest way to buy a house is to buy a farm. If that's true, then why should we be paying the same assessment rate on our house and one acre that the rest of the land is going to be paying? We have some concerns about that. The land that sits underneath our house or that surrounds our house is not a residential lot. We can't sever it. Municipal bylaws and county bylaws have prohibited severances of farm lots. If we can't sever it -- and it's considered to be part of the farm. We're not asking for the same 25% rate that the rest of the land has. We're concerned about the possibility of having to pay full residential assessment rates on that one acre that sits underneath the house or surrounds the house.
The Chair: Thank you very much, Mrs Smith, for coming in and presenting to us today. We appreciate the agricultural input and the farm view.
There being no further business, this committee stands adjourned until 9 o'clock tomorrow morning. I would ask you to be prompt.
The committee adjourned at 1800.