Mr Ted Arnott (Waterloo-Wellington PC)
Mr Marcel Beaubien (Lambton-Kent-Middlesex PC)
Mr David Christopherson (Hamilton West / -Ouest ND)
Mr Doug Galt (Northumberland PC)
Mr Monte Kwinter (York Centre / -Centre L)
Mrs Tina R. Molinari (Thornhill PC)
Mr Gerry Phillips (Scarborough-Agincourt L)
Mr Toni Skarica (Wentworth-Burlington PC)
Substitutions / Membres remplaçants
Mr John O'Toole (Durham PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Clerk / Greffier
Mr Tom Prins
Staff / Personnel
Mr David Rampersad, researcher, Research and Information
Services
Ms Elaine Campbell, researcher, Research and Information
Services
The committee met at 1003 in room 151.
PRE-BUDGET CONSULTATIONS
CANADIAN FEDERATION OF INDEPENDENT BUSINESS
The Chair (Mr Marcel
Beaubien): If I can get your attention, please, I would
like to bring the committee to order. It's a little after 10
o'clock, and if we want to get done on time, we might as well get
started.
Our first presenter this
morning is our representative from the Canadian Federation of
Independent Business. For the record, could you please state your
name and position.
Ms Catherine
Swift: My name is Catherine Swift. I'm president and CEO
of the Canadian Federation of Independent Business. I'd also like
to introduce my colleague, who is probably known to most, if not
all, of you, Judith Andrew, who is CFIB's vice-president for
Ontario and appears here a lot more frequently than I do. In
fact, Judith will be back here in a couple of weeks representing
the CFIB-specific perspective on some particular policy
issues.
I've been invited today as a
so-called expert witness. My background is also as an economist,
which is probably one of the reasons I was invited as well, so I
want to speak to some of the more macro-economic issues for the
province and even some national issues as well, as they affect
the province.
We have provided everybody
with a kit with a few items in it. We have a PowerPoint
presentation today, not too extensive, but a black and white
version of it is contained in the kit. Also in the kit, on the
left-hand side, is a letter I recently wrote to the Prime
Minister which addresses some broader policy issues that I
believe are relevant to this province as well. Also, I've
included our latest pre-budget presentation, which was made last
fall to the federal finance committee, and, again, a number of
the recommendations there are germane to Ontario.
Another inclusion in the kit
is a study called Small is Big. This was actually a study that we
conducted jointly with Scotiabank last year. We were the co-hosts
of an international small business congress in Canada, and this
was actually a public opinion poll on Canadians' views towards
small business owners.
Finally, the last item is our
national economic outlook for 2000, and a little later in my
presentation I'm going to be speaking to some elements of that as
they pertain to Ontario.
A couple of years ago I was
also asked to appear in this role as an expert witness, and in
preparation for coming and speaking to you today, I looked back
at what I said a couple of years ago, something that economists
maybe should never do. I was at least pleased to find that most
of the prognostications in that presentation turned out to be
pretty true.
We poll our small business
members regularly. We have about 40,000 in Ontario and about
97,000 nationally, so we have a good, solid chunk to get feedback
from. I have found, of all the data sources that we use, our
small business members' views of what they believe is going to
happen in the economy and their business are pretty accurate. We
often call small businesses the ca-naries of the economy because
they tend to feel downturns fastest. They're not as insulated as
our large firms. They also experience positive developments in
the economy quickly as well. So we find they're really quite good
predictors over time, and that was indeed the case.
It was interesting, too, to
look back a couple of years ago and look at what some of the
other expert witnesses were saying. John McCallum, the chief
economist at the Royal Bank, was one of them. I understand he's
going to be here this afternoon. He was waxing eloquent about
bank mergers at that time, as you may recall, and obsessing about
Y2K and all the problems that was going to cause for the economy.
So it was interesting to look at that retrospectively and how
changed things are today.
In terms of the outline of my
presentation today, I'd like to briefly touch on what we believe
the impact of some recent past policies in Ontario has been on
the small business sector. I'd like to give you a perspective
based on our survey data of the current views of Ontario small
businesses as to what they believe is going to be happening with
the economy and their businesses, look at some future concerns in
a number of areas and, finally, address some medium- to
longer-term issues that we see.
In terms of past policies,
certainly we very strongly advocated, and have for the duration
of our existence as an organization, which is almost 30 years
now, lowering income taxes and notably the employer health tax in
Ontario. Payroll taxes generally, as we have said endlessly
before, are very much the bane of small businesses for a number
of reasons. Small business is more labour-intensive than larger
firms, therefore payroll taxes hit them harder proportionately. They are also
profit-insen-sitive. Naturally, in rougher times when firms
aren't making money, these taxes really bite. They don't bite as
much in good times, because firms are profitable, but
nevertheless, they still are a disincentive to increasing
employment. As a result, we've focused a lot of our efforts on
payroll taxes generally, and here in Ontario the EHT is a notable
payroll tax. The elimination of this tax for businesses with
payrolls of less than $400,000, which again was something we
recommended for years and years and which was implemented a few
years ago by the current government, was definitely a winner. The
feedback we had from our members was that this was very much an
inducement to hire and a positive development in terms of income
tax reduction. As it hits the consumer positively, that naturally
also affects the business sector via consumer spending.
However, as we know, we did
see overall federal income taxes increase, largely because of
phenomena such as bracket creep. The fact that tax brackets and
the basic personal exemption are not indexed to inflation has
added billions and billions to federal tax coffers over the last
few years and certainly, to some extent, offset the benefit of
income tax reductions in Ontario.
1010
Given that these policy
changes coincided with a pretty strong and enduring period of
economic growth, it was a happy coincidence because we did see
extremely robust job creation in Ontario over the last few years,
and we see it continuing. Naturally a lot of events contributed
to that, but we believe the policy mix was very timely when we
saw the economic growth. Of course governments typically don't
cause recoveries or recessions, but they can make a recession
worse or they can make a period of economic growth better by
their policies.
Outside the tax area, we also
saw a number of other legislative and regulatory changes-I'm not
by any means trying to be exhaustive here, but some of the key
ones. Changes to the Labour Relations Act were positive. We still
see quite a bit more that needs to be done there, and we believe
there is the intention to do that. We still have an imbalanced
environment in Ontario with respect to issues such as successor
rights. We still see employers very much hobbled in certain
respects. Again, that is another disincentive to expanding or
growing their business, as has been cited many times by our
members.
Red tape is again another
bane of small business, and the ongoing red tape review has been
very positively received as well, although much remains to be
done. General fiscal restraint is also a positive development,
and some tax relief on the capital tax and corporate tax front
has also been welcome.
The key tax area that remains
a huge, looming problem is property tax. I know Judith is going
to talk about that exhaustively in a couple of weeks. You might
have seen that we released a report yesterday in Ontario that was
aimed at municipalities. We compared key municipalities across
the province and how our members believed they were or were not
welcoming to businesses. The average rating was quite dismal,
although naturally some were better than others. We still see
immense inequities in the residential property tax burden versus
the business tax burden, for which there is no justification on
any business or economic basis, but there is on a political
basis, which of course is why it's there in the first place.
In terms of the current views
of our members, we conduct a survey of our members every fall,
usually around November, to ask them their views in terms of
their expansion or contraction intentions, their hiring
intentions and investment intentions for the coming year. In our
last survey, done late last year, we were pleased to see that our
members were the most optimistic they have been since the peak of
the previous business cycle, which was 1989.
Getting into some of the more
specific results-and this is an index of business expectations of
our members. Since 1988-it was based at 188 and, as you can see,
it has surpassed its pre-recession peak fairly recently. So our
members generally are quite upbeat about their expectations.
These are Ontario-specific data, by the way. For the sake of
reference, the national data are contained in the other report
that is in the folder.
We ask firms what they expect
for the economy and what they expect for their own business.
Here, as you can see, almost 60% cumulatively believe that their
own business will be much stronger or stronger in 2000 than in
1999. Of course, 1999 was a pretty good year, and so it's worth
keeping these things in mind relatively. Almost 40% feel it will
be roughly the same. Very few see weaker fortunes for their own
business in 2000. So, obviously, there are extremely positive
findings here that should bode well generally for the Ontario
economy.
Just aggregating this by
industry sector, we see the manufacturing sector especially
strong and business services next. This has been the trend for a
few years, so this isn't different from anything we've seen for a
number of years. As you can see, going down, the weakest sectors
are construction and agriculture. But generally speaking, overall
there's a pretty positive forecast in all sectors, with some
relative differences, as you can see.
We also broke this out for
some Ontario regions. Again, the Toronto-central Ontario part of
the province was most optimistic, with the north the least
optimistic-not shocking, I guess, seeing what's happening.
Nevertheless, we're still seeing more than half of the northern
Ontario economy believing that they will see a stronger business
performance in 2000 and roughly another 40% saying the same. So
it's just relative differences, not that any one part of the
province believes that things are going to be worse by any
stretch in the year 2000.
We also ask what our members
think they are going to be doing in job creation. Here we have
all the provinces across the country. As you can see, Ontario is
in second place, behind Alberta, in terms of its expectations for
job creation. Again, we found these predictions on the part of
our members have been pretty accurate over the years, so we
believe we will be seeing another year of strong job creation.
This is in full-time equivalents, by the way. We already have seen, over the past
couple of years, a strong trend towards the conversion of
part-time jobs into full-time jobs, which is typical in any
economic growth period. In the first couple of years of a
recovery, firms have a higher tendency to hire part-time, not
surprisingly. Once they see the recovery establish itself and
they have confidence that they won't have to lay people off or
downsize, then they convert those into full-time jobs. So again,
we're seeing that trend continue very strongly.
Something else we always ask
the members is what factors they believe would encourage them to
boost their own job creation plans above what they are currently
thinking. Again, these are consistent results in terms of their
ranking. Number one, increase in customer demand, is simply a
proxy for a growing economy. Naturally, a growing economy is
always a precursor to expanding employment in your business.
Payroll taxes come in as a strong number two. Although we have
seen in Ontario some lowering of the EHT, we still see things
like workers' compensation premiums creating huge grief, for some
sectors more than others. Although we see some reductions on an
average basis, some individual sectors are still seeing
significant increases in workers' compensation premiums. Other
taxes are number three on the hit list, and we go down from there
in terms of reduction in the firm's debts, access to credit
issues and so on.
Overall, these numbers
provide us with quite a good picture. However, I think we
shouldn't feel all is great and that we can all rest on our
laurels.
What's very interesting about
this period of economic growth, which has been strong and quite
lasting relative to other periods, is that there seems to be,
certainly in our membership and even in the general public in
terms of public opinion polls we've seen, this underlying malaise
that things are pretty good now but there's a lot of concern over
the future. I think this is caused by things like prevailing high
public debt levels. Provincially we're still carrying a whacking
big debt here in Ontario. Federally we have an immense debt.
We've seen very little movement in any of these factors over
time.
I think the pace of change in
our environment is definitely a factor affecting business and
affecting everybody. Technology is just barrelling ahead,
everyone seemingly grasping to keep up. I think, to varying
degrees in different jurisdictions, there is still a sense of
governments not getting it with respect to small business.
Although positive changes have been made, in some places more
than others, there still is an overwhelming feeling that it's an
uphill battle to have a successful small business.
We hear more and more from
business members-and this is anecdotal, so it's not scientific
and it's hard to measure this kind of thing because it is
subjective. But we have never before in our time heard this level
of underlying malaise in a period of the kind of strong economic
growth we're seeing now. We hear more and more the sentiment from
our members: "Yes, I'm doing well right now, but I'm not really
making a lot of money. I'm getting by, I'm expanding, but not a
lot is going to the bottom line. I worry about my future
personally. Our policies in our country do not really permit me
to save enough for my own retirement, to make me feel a comfort
level." There's worry about everything from the Canada pension
plan and so on. I just cite that as something that we're trying
to get a handle on.
1020
There was a public opinion
poll that came out late last year, you might recall, that stated
the same thing, that people felt that yes, they're employed right
now so they're generally OK, but they had an overwhelming concern
about the future. I don't think this is something any of us
should ignore in our respective capacities.
In terms of some future
concerns-tax issues, which are always the key preoccupation of
our members, from a business standpoint anyway. GST-PST
harmonization: We've certainly been accused of beating this drum
many a time, and we're continuing to beat it. It hasn't gone away
but continues to crop up unsolicited on surveys we do with our
members. As you know, we sought harmonization of the GST-PST in
three Atlantic provinces a couple of years back now. We were
waiting for the fallout to be negative; it hasn't been. Granted,
how you do it is hugely important. I know many Ontario officials,
including the finance minister, have said they don't want to
increase taxes on Ontario consumers or any part of the Ontario
constituency. That doesn't have to happen.
Every jurisdiction has the
freedom to set a blended tax rate where they choose to set it.
The notion that it has to increase taxes isn't true. How it's
done is hugely important. Here in Ontario we have a large tax
base, much more so than those Atlantic provinces that harmonized
successfully. It's an ongoing irritant to our members to have to
administer two different tax systems, so I'll just put that one
back on the table yet again.
In the last budget, a
business tax review was promised. We're wondering where it is,
because we haven't seen any follow-up or mention. We welcome it.
We think a comprehensive review of the whole series of taxation
issues for business is a good idea. The federal government has
been making noises about it as well for a while and they came out
with that Mintz report, as you know, a couple of years ago.
Anyway, we would like to see that move forward and would of
course be delighted to provide as much help and information as we
can to that from the small business side.
I mentioned property tax
earlier. It's a looming problem because, when the caps come off
relatively imminently, we're back at square one. This is a very
challen-ging issue. Successive governments have backed off taking
it on because of the huge politics and complications involved.
Nevertheless, although some of the property tax issues have been
dealt with from the small business side, a lot of the serious
ones are yet to be dealt with.
Payroll taxes, as I mentioned
earlier, continue to be an irritant here in Ontario. If we just
look Ontario-specific, yes, the EHT was very welcome. Workers'
comp is still a problem for many business sectors. At the federal
level we've seen some
reductions in EI, but still nowhere near as much as we need to
see. We're still seeing accumulated surpluses around $5 billion
to $6 billion in the EI fund on an annual basis, and the
cumulative surplus must be around $26 billion right about now, so
obviously way more than is ever necessary to counteract an
economic turndown. Naturally, it's just being grabbed for
whatever purposes seem to be appropriate at the time by the
federal government.
The other federal payroll
tax, CPP, naturally is going up on an annual basis, as we know,
for the next couple of years and has been for the past couple of
years. Even though this is viewed as a federal tax, all of the
provinces agreed to these increases. We don't let the provinces
off the hook when it comes to what has happened with the Canada
pension plan over the years. These kinds of large increases, it
must be said, were necessitated by the fact that this plan was
grossly mismanaged for so long by successive provincial and
federal governments which never bothered setting up a proper
pension plan.
So-called "pay as you go" was
laughable because it basically meant governments spent any monies
that should have been invested in a fund for future claims. For
governments to pretend now that they're surprised that this big
bunch of baby boomers is going to be retiring sometime in the
next 10 to 20 to 30 years is laughable. Everybody has known that.
Demographers were saying that back in the 1960s. Obviously we
need to fix that.
The worrisome part as well is
not just that we're imposing this higher payroll tax burden year
after year from the federal standpoint, but also that recently
there have been concerns coming up from the actuarial community
that even with those significant increases, which amounted to a
doubling of CPP premiums over about a five-year period, the plan
could be in big trouble. So there's something where provinces and
the feds are both very integrally involved and need to focus on
that, obviously, in the next little while.
The issue of effectively
decoupling provincial personal income tax systems from the
federal system-Quebec has done this for years, as they've done in
so many areas, and now it's being not only discussed but planned
by a number of provincial governments, Alberta and Ontario being
two notable examples-the way this current system works, as
everybody knows, is that fed-eral taxes increase via bracket
creep or whatever we want to call it and provincial taxes
naturally go up as well, as they're based on the federal
portion.
Decoupling this system is not
a bad idea, the caveat being, with a government that has the
right responsible tax policies, that it's sensible to decouple
the system so that they can have more control. If we had a
government that wanted to see maybe more tax brackets or
increases overall in the tax system etc, then I guess we'd be
considerably more concerned. When we make these policy changes,
we make them in a certain environment, and right now we know the
intention of this government is to decouple the income tax system
so that they can pursue a lower income tax strategy in Ontario.
We might not be quite as sanguine if we had governments with the
opposite intentions in power. So although, like I said, we don't
have a problem with the theory, in practice it could manifest
itself in a very different way-something to keep an eye on.
Finally, the whole issue of
fees levied on businesses, and individuals, for that matter, is
proceeding apace. The fact of governments being strapped for cash
generally over the last number of years has meant that a lot of
emphasis has been placed on levying fees, as we've said before.
True fee for service we've never minded, but we've noticed that
when fees go up, nothing else seems to go down. So it's
definitely not an offset; it's an incremental level of revenue
collection. Fee reviews are very difficult to do because they're
a lot of work, it's a micro type of analysis that has to be done,
and governments can get discouraged because they're not those big
headline-grabbing issues that some other things may be.
Nevertheless we feel, from a fairness standpoint, transparency
and also from a good business standpoint, that increasing that
level of fees is really just increasing taxes by another name and
should not be pursued and will have negative effects on the
economy overall.
The whole financing area is
an ongoing challenge after we saw a few years of improvement in
the availability of financing. That's something we track over
time with our members, so we have a very good time series over
20-odd years now. Just from 1991, we see this problem increasing
notably. It peaked back in probably the worst of some of the
recessionary periods there in the early 1990s. We tend to see
availability-of-financing problems sort of lag a business cycle
right at the beginning of a recession. They won't click in for a
little while and then they tend to creep up as the recession
continues. That's what we see with these data. They went down
again, as you can see, for a few years when our economic growth
was a little stronger in 1995, 1996 and 1997.
In the last couple of years
we've seen an increase again, and this is pretty worrisome,
because we've had a pretty good economy over the last couple of
years. Why is this happening? We believe there are a number of
reasons for this: The trend in the financial sector generally
towards consolidation is happening in a number of ways.
Technology is driving some of it; it's not necessarily a policy
choice. We see much more automation in lending processes, much
more decision-making being taken away from the local branch
manager, from the local presence.
This might be good for some
sectors. I think it's not a bad thing for mortgage lending, for
example, which is very formulaic. You can plug three numbers into
an equation and spew out, "Yes, that's a good loan; no, this is
not." It's much harder to do with small business, with, as the
bankers themselves say, the three Cs, so called: credit,
collateral, character. Character is very tough to measure-the
character of the business owner, in other words, the likelihood
that they will pay their bills-when you're in Toronto and the
borrower is in Timmins or somewhere else.
1030
We have found this
centralization of the whole financing sector to be very negative
for small businesses. Of course, we saw just this week yet
another merger, the final trust company bite the dust: the Canada
Trust takeover by TD. This is a big issue for Ontario. Canada
Trust has a much larger presence in this province than it does
anywhere else in the country and often was the only other player
in some communities, so we see this being a notable issue for
Ontario. We also wonder how it will predict the possibility of
future bank mergers. We're hearing rumours that not necessarily
in the next month or two but probably a year or two down the road
we're going to see further big-bank-to-big-bank mergers proposed.
We've heard the receptiveness in Ottawa has changed for this. It
hasn't changed in the small business sector. We still think that
without viable competition, which we still do not have-not just
in Ontario but elsewhere in the country, but notably here in
Ontario-there's a big problem with pursuing further consolidation
in the big banks.
I guess, too, if we see
concerns increasing now, when the economy is still very good,
what are we going to see when the economy slows? In the last
recession, bankers have admitted to us-and again this was
particular to Ontario-that there was a very knee-jerk, negative
response, where a lot of businesses that were, granted, having
some rough times but were not in danger of going out of business
were nevertheless cut off credit and forced out of business, as a
result, by bankers who overreacted to negative economic
circumstances. So I think we really should be worried about this
issue, unfortunately, once again, and the solution, to our mind,
is to try to promote alternatives. That's not easy-I'm not trying
to pretend this is something that can happen quickly or
easily-but right now we have a legislative environment that does
not encourage that in many respects.
The whole question of equity,
not simply debt, has to be focused on. Our tax system, which
continues to take a lot of earnings away from small businesses,
and others for that matter, deters the building up of equity in
the small business sector. Many of our members feel that they
still haven't recovered their equity levels that they had before
the 1990s recession, and that's very worrisome, again down the
road, for a period of economic slowdown. Of course bankers will
look at that and say, "Your equity isn't strong enough; I can't
grant you any debt," and that exacerbates the problem.
We've been focusing very much
on the need for tax incentives which will free up some equity at
low levels. Venture capitalists do nothing for our members, or
for a very small segment of our members. We see huge tax benefits
being given to these labour-sponsored venture capital funds,
which can't seem to even spend the money that they're given, and
we have oppose those for the duration. We find them outrageous
and a misuse of taxpayers' money. We feel some loosening up-and
this is more of a federal issue when we look at things like
RRSPs, but things could be done at the provincial level as well
to promote people to invest the smaller amounts of
money-typically $30,000, $40,000, $50,000, not big bucks involved
here-that are needed in an equity position in small
businesses.
Some other future concerns:
The general direction of government policy deserves a couple of
comments. We've seen a lot of events at the federal level lately:
misuse of employment insurance monies, notably in this
transitional jobs fund, which was predictable years ago and I
guess finally made public recently; something we term
"second-term syndrome"-the current Ontario government is also in
its second term. Governments over time get more distant from
their constituents. They tend to have much more affinity for big
spending policies, more interventionist policies, whatever their
partisan affiliation. We don't find there's an absence of
so-called second-term syndrome in any one party, say, versus
another.
We bring these issues to
light for the Ontario government, for example, to start getting
back into a highly interventionist approach. We look at things
like the SuperBuild fund. Our members are very supportive of
so-called real infrastructure. We definitely need some
infrastructure investment; nobody would question that for a
second. But let's confine it to real infrastructure and not some
of the strange infrastructure spending we saw prior to the last
election, which went into a lot of questionable recreation
facilities and all manner of things that really could not be
termed infrastructure and was politically oriented spending, not
economically based spending.
I think, too, that we need to
really take this opportunity of continued growth, which happily
we seem to be going to enjoy for at least the next couple of
years or so, to consolidate some of the gains we have
made-whether in government finances, in the economy generally,
getting rid of deficits, starting to work on public debt-because
we will see another slowdown. We all like to think we have
banished the business cycle, but I don't think we have yet.
When we look at things like
corporate profitability right now-and of course there are notable
examples; we see the Nortels, the banks etc in the
headlines-overall profitability in the corporate sector is down
considerably from the last business cycle. It's down for a lot of
different reasons. The competitive climate is way more intense
now than it was even a decade ago, and it's probably going to get
more so.
From the small business
standpoint, we have a tax system in Canada that over the last 15
to 20 years has increasingly relied on the profit-insensitive
taxes-property taxes, as I mentioned earlier, payroll taxes,
capital taxes and so on. The more we lay these taxes on the
corporate community, and notably the small business community,
the more we will decrease profitability, reduce the ability to
add to equity and weaken the corporate sector generally. Small
business profits-some recent data has come out of
StatsCan-nationally are consistently lower than large corporate
profitability, and the tax system and the way it falls more
heavily on small firms is a key reason for this.
We've heard some musings about our productivity
challenges. A lot of this has been focussed at the federal level,
but I don't think the provinces can afford to ignore it either.
Our standard of living, as we know, has at best been flat over
the last decade or so. The tax environment, the lack of
productivity gains, is the main reason for that. Finally, we see
an emerging focus on a large corporate agenda. We don't
necessarily have a problem with this, but all we would say is: Do
not focus on the large corporate agenda to the exclusion of the
small business agenda. There are elements in common and then
there are elements that are different.
I have talked more than
enough. I welcome any comments you have at this time.
The Chair:
On behalf of the committee, thank you very much for your
presentation. We have approximately seven minutes for each
caucus, and I'll start with the official opposition. Mr
Kwinter.
Mr Monte Kwinter
(York Centre): Catherine, as I mentioned to you just
before we started, I just got back from the World Economic Forum
in Davos last night, and the theme that dominated that meeting
was the new economy and e-commerce. When you listened to what was
being discussed, there is really going to be a total revolution
in how small and large businesses actually function.
I notice there's no mention
at all of that. From your perspective of small business, should
we as a government be doing something to prepare these people for
this economy? Is something being done? Is there something that
should be done by your organization? How do you see that playing
out over the next couple of years?
Ms Swift: I
agree completely, and I didn't not mention it because it wasn't
important. There were probably a lot of things I didn't mention
that I could have. You just need to make these things three hours
long, that's what you need to do, and really torture
ourselves.
As an organization, we have
been promoting with our members for quite some time. A number of
years ago, it was: "Get hooked into the Internet. Understand what
it means for your business." We have a segment of our Web site,
which we have had operating for a couple of years, which is
constantly changing and which offers online education courses to
our members. A number of them focus on e-commerce issues: why you
as a business need to think about it, what you need to do, advice
to facilitate, links to help people and so on. So, we as an
organization agree it is an ongoing challenge. I believe
governments also can take a role and promote. It's partly an
education process and it's partly a facilitation process.
Right now there are a lot of
questions about how the e-commerce environment is going to
evolve. A small firm, unless it's hooked up-and many are now, of
course, as suppliers or somehow linked in-with a larger firm, is
not likely to make the investment to put an e-commerce platform
unique to them on their Web site, for example.
1040
It seems that we're probably
going to be moving towards a utility type of environment that
smaller firms can access, not unlike the telecommunications
system or whatever. Nobody is going to set up with their own
phone system; they're going to pay to hook into an existing phone
system or e-commerce system, or whatever. Of course, that's all
evolving right now, and there's a lot of pushing and pulling as
to who is going to be the standard and who is going to provide
these types of infrastructure, I guess you could say, for
e-commerce. That being said, I do see a role for government. I
see a role for organizations like ours and so on in the education
and facilitation side and encouraging firms.
There was a recent report
that came out of a federal task force on e-commerce and related
issues. Governments seem to be happy to focus on the trendy,
interesting developments in these areas, but what is holding back
our productivity is that we're taxing the pants off these
businesses so that they don't have some of the resources they
need to devote to some of these new areas.
The US, as we know, is moving
ahead in leaps and bounds. A lot of business people have
expressed concerns in Canada that we're falling behind, and that
we might be falling behind to the extent that it will be
hard-some say impossible-to catch up if we don't watch it. I
don't like to be that pessimistic. I don't think it's true. I
think we have to keep in perspective that Canada is also ahead of
a lot of the rest of the world. However, that big neighbour to
the south does tend to direct a lot of what we do in Canada so we
do have to keep up to date.
In addition to government's
role in education, promoting and encouraging the development of
e-commerce, I would also like to see them focus on the policy
infrastructure. Let's get the tax mix right. Why are capital
gains in Canada taxed at twice the US rate, and the US is talking
about lowering theirs yet further? Again, that's not a provincial
issue exclusively, but provinces could levy some strong support
with the federal government for reductions in some of these tax
areas. That would definitely be a more favourable business
climate and would free up businesses and resources to be able to
devote more to some of these areas that you're talking about.
Mr Gerry Phillips
(Scarborough-Agincourt): I appreciate, as always, your
presentation. The concern that many of us have is, will we be
able to sustain the essential services in the environment
of-without question, tax cuts are the in thing. It's very
difficult, as a politician, to even raise a cautionary note.
Do your members give you any
indication of concerns on the delivery of health care, of
education, of municipal services? What advice would they give us?
Should we be looking at further cuts? Or are you getting any
concern by your members that maybe the things that distinguish
Canada are at risk?
Ms Swift:
There certainly is. Our members are very reflective of your
average Canadian, we've noted in a lot of our polls. We compare
them to a public opinion poll and on many issues they're
virtually interchangeable. In the most recent survey we've done,
which is included in that federal pre-budget that I put in the
package, on priority areas for cutbacks versus spending and so
on, the only area in which
our members see any justification for spending increases is
health care.
We're not experts in health
care and don't purport to be for a minute, but we've certainly
been looking at it a lot more lately than we've ever looked at it
in the past, because it is such a huge area of expenditure, and
we know it's going to be more and more important in the future to
everybody, no matter what venue they're coming from.
We spend a lot already in
this province and in this country, relative to other systems
around the world, and we certainly don't seem to be getting
value, and there are a lot of reasons for that. I do think some
of the policy initiatives-the federal government is at least
trying to get some good and consistent data on a national basis.
That's something we need. We've never had that.
While our members have
expressed their view that they believe the only area that
warrants more spending is health care, they also know a lot is
already being spent there and a lot of it isn't being spent
terribly well, so throwing money at it is not the only route to
follow. But yes, they are concerned.
In the education area, that
has become so politicized it's almost difficult to have any kind
of sensible position on the whole spending area. We've seen, as
you know, study after study showing that resources are not going
to the classroom per se in anywhere near the same proportion as
they were 25 to 30 years ago. The whole unionized environment has
radically polarized that environ-ment. My kids come home with
union propaganda. I get pretty ticked off, I have to tell you.
That's what happened through that whole period of strife
there.
That being said, I think
there's a lot of constructive work. Despite all that turmoil,
which was very unfortunate for everyone, I think there was a lot
of constructive questioning being done by a lot of the education
community, as well as others. We're certainly, as an
organization, quite active in encouraging businesses-the
provin-cial partnership council is one area we are very active
on-to participate even more in co-op programs, for example. Our
members are acutely interested in the education system. They are
usually parents, so they have that interest anybody would, but
also they're interested naturally from a business standpoint.
They do notice, and small firms, as you know, are the biggest
employer of young people in their first jobs. Anything that can
assist the business, and of course, the prospective employee, is
something that they are pretty willing to put some time and
resources into.
So the answer is yes, there
are obviously some serious questions in both of those areas as to
how we go about it. The money solution is only part of it. I
think they see some things starting to improve in the education
system, generally, but we're still a long way from seeing the
kind of co-operation we need among all the different
stakeholders, business included.
The Chair:
With that, I have to go to Mr Christopherson.
Mr
Christopherson: Thank you, Catherine. Good to see you
again. Obviously, I want to talk a bit about the issue of taxes
and explore the other side of what happens when there are tax
cuts. I agree with Gerry that it's not always the most popular
ground, but there are two very clear ideologies on how to
approach this.
When it comes to small
business, I know one of the first things that I heard-I represent
the inner city of Hamilton-from a lot of small business,
neighbourhood stores, neighbourhood service companies, was that,
for instance, the cut that was made to people on social
assistance affected corner stores in many neighbourhoods in a
dramatic way, because that was a good chunk of whatever
disposable income a family in poverty had. The stores were
feeling it, big time, and didn't see that the macro-politics that
the current Premier was talking about was a good trade-off for
them.
In addition, you mentioned
user fees. I spent five years on Hamilton city council before
coming here. I would think that a lot of the user fee issue would
be what happens when small business goes to city hall. They would
interact there more than the average citizen as a rule. I can
assure you that the transfer cuts that were made to
municipalities have resulted in a lot of user fee increases,
introduction of user fees that didn't exist before, and when I
was on council it was still the philosophy that you generated
enough money to provide an administration that provided efficient
service to all the citizens, so that one business that was maybe
more profitable at a given time than another didn't have an edge
in terms of dealing with their own government because they had
the means to pay for these costs.
That world is gone and you
can lay that problem right at the feet of the provincial
government in cutting transfer payments, in cutting social
service costs and other things in the interest of giving a tax
cut-the infamous 30% tax cut. How do you square that in terms of
your concerns-quite legitimate; I understand them and I can
assure you that any councillor I know is concerned about them
too-what those user fees mean and the fact that whole problem is
exacerbated by the notion of having to cut provincial income tax
and therefore provincial transfer payments in the interest of
making the provincial bottom line look good, which this
government has been very successful at. But if you take a look at
municipal government, for instance, and what's happening there
and the amount of problems, pressure, increased costs, cuts in
services that they've had to make, through no decision of their
own, it really does provide a different point of view as to what
all this means. I don't personally see where the small business
in my community has benefited from this trade-off. Can you give
me your thoughts on that please?
1050
Ms Swift:
Sure. Certainly any change, whatever it may be, has its
detractors. As you know, all of our policy positions are based on
feedback from our members in Hamilton as well as elsewhere. I'm
sure there is a minority and, like you say, if there's a
convenience store in an area that happens to have a certain average
income level or whatever, I am sure they would notice the
difference. I don't doubt that for a moment. Nevertheless, the
overwhelming majority of our members in Hamilton and elsewhere
are supportive of these tax cut policies.
I guess, to look at the
converse, we saw welfare increased by numerous governments. No
particular group was more gung-ho than others. That orientation
on the part of a number of governments over the years seemed to,
in good times and in bad, just produce more people on welfare. In
terms of that being an enduring strategy, I can't see that it
is.
I think we have a lot of
problems. Our members are crying for people to work for them
right now. There's a huge shortage of labour right now with an
unemployment rate, nationally, of 6.7% or something or other? In
Ontario, it is somewhat lower. I don't think anybody would like
to think we can't bring that unemployment rate down further.
I would like to believe we
could do a lot more in bringing people into the workforce, maybe
into the workforce on a more permanent basis. I'd like to see the
focus there. There will always be a need for social assistance-we
all know that-and that is something we should be concerned
about.
I think right now there's a
lot happening on the homeless issue. As we know, it's very
complicated. It's not as simple as welfare, or whatever. It's got
a huge number of factors, as the Anne Golden task force and
whatnot showed. I'm not questioning what you're saying, because I
think that's true, but we do some pretty comprehensive surveying.
We can disaggregate it by postal code if we really want to and we
still find overwhelming support overall for these policies
because we believe, in the long run, they will be the ones that
will keep people most prosperous on an ongoing basis and not in a
dependence cycle that we've seen so starkly demonstrated in some
parts of the country, Atlantic Canada being a notable example,
where they have not much of a real economy there any more because
that dependency cycle is so terribly well established.
The second part of your
question was-
Mr
Christopherson: Municipal user fees.
Ms Swift:
More the municipal side. I guess the problem with municipalities
was they couldn't pass the buck anywhere. The feds passed the
buck off to the provinces, the provinces passed the buck off to
the municipal level and they don't have anybody to pass the buck
to and it has to stop there, which is unfortunate.
Our members do feel it at
the municipal level, but by the way, user fees have been
happening everywhere. There's no level of government that has
been without sin on the user fee front. It hasn't been
exclusively municipal by any stretch of the imagination.
If we had to name one area
where the most botches happened over the last few years, it was
that whole muni-cipal restructuring area in Ontario. Everybody
played a role and nobody should be particularly proud of what
happened, including municipalities. We saw some of the
upload-download scenarios where some municipalities-it was
different for different municipalities-actually ended up with
more money. I don't even know if they knew it sometimes because
it was such a complicated mess and there was a lot of
misinformation flying around, as you probably know. Again, I
don't think we would necessarily put the blame-we'd put the blame
on everybody, not any one level of government. We've seen some
pretty reprehensible behaviour from a spending side and fiscal
responsibility side on the part of municipalities too.
We still see municipal
employees, for example, paid on average-I think some of the worst
discrepancies are at the municipal level relative to the private
sector, just to give you an example. Aren't they, Judith? You're
probably closer to this than I am. We still feel that shouldn't
be terribly out of whack. That should be roughly in sync. A
comparable job in the private sector versus the public sector
should be roughly in sync. That's just one example of many. I
don't know if you want to say anything, Judith?
Ms Judith
Andrew: I just happen to have it here. I'm taking
Hamilton by example. The public-private sector gap for municipal
employees in Hamilton as of last census date-and updates suggest
that things wouldn't have changed that much-is 16%, so the public
sector workers have a 16% advantage before you add in other
benefits such as pensions and so forth.
As Catherine was saying, I
think some of what went on with the upload and download and the
calls on both sides is still very unclear, but we've been told,
and muni-cipalities will deny this, that really no municipality
is out money in that exchange of services and costs. Then we hear
rumours that some municipalities have been squirreling away money
in certain other accounts and so forth.
There is so much lack of
clarity in this area it almost calls for some forensic
accounting. But what Catherine was saying about our members
expecting their governments to work together on these kinds of
things rather than engaging in finger pointing-there's been far
too much finger pointing on both sides of the fence. We really
need to get to the bottom of the financial arrangements between
the two levels of government and then have that play out in a
fair and even-handed property tax system and a fee regime.
The Chair:
With that I have to go to the government side because we've
exhausted the time.
Mr Doug Galt
(Northumberland): Thanks for an excellent presentation.
I just wish you had another hour because I have a pile of
questions I'd like to ask.
Interjection.
Mr Galt:
You may get a turn.
Just a couple of comments,
one on user fees. I hear so much emotionalism about user fees.
I've yet to have an increase in user fees that I've paid, and
anybody that I've asked, including Mr Arnott here this morning,
has not had an increase in user fees to pay. I'm not sure where
all that emotionalism is coming from. Just a clarification on
small business "crying for people to work." I think that's
what I heard you say. I
hear it regularly in the riding. I'm sure the opposition would
appreciate knowing that out there because those people are crying
for people to come forward and give an honest day's work.
The question I really have
for you relates to the federal government and what you're doing
with the federal government to get them onside. We have proven
that tax cuts create jobs, tax cuts increase the revenue. The
opposition said our tax cuts would cost $5 million when in fact
we've increased it by $10 billion a year. That was a $15-billion
mistake, which is factual. It's in Hansard.
My question really is about
the federal government. If they'd just go onside with tax cuts,
imagine what it would do to the economy of this country. We'd
just become a whirlwind. What are you people doing to get the
federal government onside to have some tax cuts?
Ms Swift:
We're constantly in the media on this very issue and have been
for a very long time. It's kind of interesting that small
business was called kind of the lunatic fringe, right-wing
loonies, back around 15 years ago when we were saying exactly
what you're saying now. Now we seem to be kind of mainstream. I
don't know whether that means everybody's loony now or whether we
were never loony in the first place.
Interjection.
Ms Swift
The loonies have taken over the asylum; maybe that's it.
We survey our members
incessantly, as you know, and that's how we form our positions on
issues, and tax has been number one forever. The particular tax
may change. At one point it's GST, at another point it's EHT, at
another point it's income tax, capital gains, whatever, but tax
is number one.
In high tax jurisdictions,
which we are-and we're cumulatively increasing our tax level.
There are a lot of examples of lowering taxes. The feds have
substantially increased their tax level since 1993, since this
government came into power, and it's documented all over the
place. It's a fact. They wiped out their deficit. We favoured the
approach your government took, which was a measured tax reduction
and deficit reduction. The feds eliminated the deficit very
quickly by taxing us all in a major way, as you know. Now they're
awash in cash, so much so that they can give it out without
accounting for it, as we know.
Mind you, it must also be
said that if we hadn't had the economic period we did, you
wouldn't be looking at eliminating your deficit next year. That's
something nobody can control. Happily, in hindsight, it's worked
out well. You will eliminate your deficit and we believe the tax
cuts have been one factor that has helped in that.
Mr Galt:
This tremendous boost in the economy of Ontario is probably why
the federal government has been able to balance their budget.
1100
Ms Swift:
No question. When you look at the revenue, there's no doubt that
a lot of it is coming from Ontario. It's 40-odd-percent of the
national economy, so how could it not? We feel, though, just as a
concluding comment, that confidence is hugely important. We know
that consumer confidence and business confidence are
important-creating a climate of confidence and making people feel
that entrepreneurial initiatives are rewarded, not punished. A
lot of our members in Ontario and elsewhere still feel, on
balance, that they have put in a lot of sweat and their own
equity and money, and put up their own house or whatever, and
they still feel they are being hit on the head more often than
not. That's where there's a way to go.
Mr John O'Toole
(Durham): Just to follow up on your most recent comment,
yesterday Minister Eves said that Ontario workers and employers
will pay $560 million more in federal payroll taxes in 2000. That
translates into 22,000 jobs. Whenever we hear Mr Martin talking
about what progressive steps they are taking to reduce the burden
of tax, clearly, whether it's CPP, UI or the personal income side
specifically, they have increased taxes. They still don't get it.
I'm really seriously-
Ms Swift:
They get it. They just have no opposition, and Canadians aren't
giving them a clear enough message.
Mr
O'Toole: They think it's free. Whether it's user
fees-
Ms Swift:
They know exactly what they are doing.
Mr
O'Toole: Quite honestly there is a certain communication
problem with "user fee." Technically, every user is creating a
fee for someone. I think the debate is the lack of transparency.
If you were to make the fees at the municipal level so onerous
that the local business community or the contractors or whoever
will get together and find some way of providing some competition
for that consulting fee, that licensing fee-that's where it
should be. Don't hide it in some bureaucracy so you can't find
out who is really charging, because nothing is free.
The idea that we had a
society of entitlement is the whole over-arching philosophical
problem of making it more clear to the user that it does cost for
that visit to the doctor, that consultation with the education
community. Whatever the service, it isn't free. We should get it,
and we should figure out the priorities of who pays for what.
That disentanglement has been going on for two decades. And what
it's really about is driving it down to the area where the
service is provided. That is the area that should pay for it,
whether it's the library or the research centre.
Ms Swift:
We have no problem with that principle. It's just that the
experience has been that user fees have just been layered on top
of everything else. There's no transparency.
Mr
O'Toole: I really want to follow up perhaps with Judith.
I have met with her a number of times during the transitional
period of property tax reform. I agree it's still, if you will,
unresolved. I'd like some feedback with respect to: We harmonized
the business tax and realty tax, which was an outstanding issue
for many years. But we ended up with the short-term solution, the
capping of 10, five and five. I'm not sure how we'll get out of
that outside of assessment growth itself.
But there is another philosophical argument that is
not getting clarity, and that is the shifting or the intended
shift from the non-residential side of the assessment base to the
residential side. Your ultimate goal is to switch the burden of
municipal tax from the commercial residential side more
progressively. You know how they do the percentage, the ratio
between the commercial side and the residential side? You want to
shrink that gap, because they really don't consume the services.
If people in business use the library, they pay for that at home,
wherever they live. Are you saying to us that you want to reduce
the assessment tax burden further on the business side and load
more of it on to the residential side? That's the issue in
Toronto.
Ms Andrew:
No question. Our view is that the business-residential gap is too
wide. That fact has allowed a situation where there is no
accountability for spending at the local level. That is why
Ontario is the property tax capital of the OECD world. We extract
more in property-
Mr
O'Toole: Do you think any provincial government has the
courage to do that, though, to set those ratios?
Ms Andrew:
We're looking for a courageous person to step forward and do
that, because the way it's playing out in the municipalities,
they never will. It's a political accounting of who has the
votes, and it's just not going to happen.
The Chair:
With that, we would like to thank you, on behalf of the
committee, for your presentation.
Ms Swift:
Thank you.
1110
UNITED STEELWORKERS OF AMERICA
ONTARIO ALTERNATIVE BUDGETWORKING GROUP
The Chair:
First of all, sorry for the slight delay, but this is the year
2000 and we do have modern technology, so we have to accommodate
it.
The next presenter is the
research director for the United Steelworkers. Could you please
state your name for the record.
Mr Hugh
Mackenzie: My name is Hugh Mackenzie. I'm the research
director for the Steelworkers. I'm also co-chair of the Ontario
Alternative Budget Working Group.
The Chair:
Welcome. You have an hour for your presentation.
Mr
Mackenzie: I'm going to try, to the best of my ability,
to move through the presentation relatively quickly, because I
recognize that much of the value of this comes in the question
and answer session. But there are a few things I would like to
try and put in front of you as a starting point. I'm going to
highlight the issues I'm going to address this morning.
The first is to address the
question that has become a constant refrain of people in the
government, namely, that the personal income tax cuts that the
Harris government has brought in have been responsible for
Ontario's economic performance. I note in the record from
yesterday that there was further discussion of that question
then.
Secondly, I want to review
some information that it's been possible to generate just
recently because the federal government has released the 1996
personal income tax data, which allows us to draw some
conclusions in more detail about who has benefited from the
income tax cuts that have taken effect to date.
Thirdly, I want to talk
about the fiscal impact of the income tax cuts.
Finally, I want to address
the impact of the reduction in Ontario's fiscal capacity that has
been imposed by the income tax cuts on services, and I want to
focus particularly on education funding. One could have picked
any one of a number of areas of funding. It happens that for my
sins I've spent a bit of time thinking about the way the school
system is funded, and so I thought I'd spend a bit of time
talking about that.
I want to put a slide up
that I think really underlines the point as clearly as one
possibly could as to what has been the real engine of growth
since the Harris government has been elected. What this chart
shows is the growth in exports from Ontario as a percentage of
total GDP growth using the quarter in which the Harris government
was elected in 1995 as the base. What it shows, for example, is
that in the third quarter of 1997-I'll pick that as a low point,
because it crosses one of the lines-growth in exports since that
base year amounted to 60% of all the growth in GDP. This is
international exports, not exports in total.
The reason I picked
international exports is because that's a much more solid figure
than the total exports from Ontario. Obviously reliable data on
interprovincial trade aren't calculated from border crossing
points, and so I have focused particularly on that. If you drill
into those numbers even further, you find that that growth is
almost entirely concentrated in exports of goods. In other words,
if you look at the export numbers, what they're telling you is
that the engine of growth in Ontario is sales of goods, primarily
to Americans. I think that's a critically important piece of
information.
I noticed from my reading
of the discussion that took place yesterday that the committee is
being encouraged to ignore the effect of exports on their own and
instead to look at the balance between exports and imports. If
you were looking at this strictly from the perspective of a
balance sheet, that would make sense; if you're looking at it
from the perspective of what drives the economy, it doesn't make
sense at all. I'll use an analogy of a car, partly because the
analogy fits and partly because much of the growth has been in
automobile and parts production. If you want to think about the
economy as a car, exports would be described as the engine. The
growth in imports would really, by analogy, be the rate at which
the wheels are spinning. In other words, exports are what are
driving the economy
forward and imports grow as the economy grows.
When you look to explain
something like the acceleration of growth in the Ontario economy,
you have to look around for things that could be seen to have an
independent impact on the economy. An economist will tell you
that when you're looking around for those independent impacts,
the key areas you look for are drivers of the overall competitive
position of the economy, like the exchange rate, drivers of the
cost of borrowing, drivers of business investment and exports and
the net effect of government on the economy. The net effect of
government on the economy over the past four or five years has
been negative. The net effect of exports has clearly been
substantially positive.
I'll finish off this part
of my remarks by saying that I can't find any evidence anywhere
that would suggest that the decision of somebody in Kansas City
to buy a car, which after all is what is driving Ontario's export
perfor-mance, has anything whatsoever to do with an income tax
cut in this province. That's not to say that income taxes don't
do anything. We'll see as we go through the presentation that
they have substantial effects in a number of areas, but that's
not one of them, in my view.
I want to put this chart up
just briefly to highlight who has actually benefited from the
Ontario tax cuts to date. The red line describes the cumulative
share of taxable returns in Ontario, the bottom scale represents
income ranges and the scale on the left represents the percentage
of returns that's reflected in that number.
I think this is an
important reality check for the debate. We read all too often in
the newspapers claims like the rather ridiculous claim of the
chair of BC Hydro reported in the Globe and Mail or the Star on
Saturday to the effect that it's tough to raise a family in
Canada on an income of $100,000 a year. Let's take a look at what
that really means in terms of distribution. At $100,000 a year,
98.5% of taxpayers have incomes below that number. We're talking
about a very rarefied percentage, a very rarefied group in the
economy.
So when people talk glibly
about an individual making an income of $70,000 a year as kind of
a normal income-and maybe it's a normal income for a member of
Parliament; it may even be a normal income for somebody who works
as the research director of a trade union-the data tell us that
it's not a normal income for 95% of the population; 95% of the
population earns less than that. I think it's important to keep
that reality check in mind as we're talking about the
distributive fairness of these kinds of tax measures.
1120
The dotted line represents
the cumulative share of the savings from the Harris tax cut. I'll
just give you a little bit of a guide to this by looking at one
particular spot. If you look at the bar that's opposite $45,000,
which represents an income range between $45,000 and $50,000, if
you look to the red line, you can see that 80% of Ontario
taxpayers had incomes below that number but people with incomes
below that number receive less than 50% of the benefit from the
tax cut. So you can see how the benefits of the tax cut are
heavily tilted towards the upper end of the income
distribution.
One of the things that I
draw some attention to is the paradox that because Ontario
introduced its income tax cuts at a time when the budget was in
deficit, in effect, to this point every cent that we've provided
in income tax cuts in Ontario has been borrowed. That gives rise
to something I've talked about in previous appearances before
this committee, but I think it's important just to keep reminding
people of it. That gives rise to a rather odd phenomenon that I
would describe as the tax cut debt. That's the amount of debt
this province is incurring or is failing to pay off as a result
of having given away a huge amount of fiscal capacity.
You can see that by the end
of this term, the debt attri-butable to the tax cuts that either
have taken effect or have been announced to take effect this term
will accumulate to about $70 billion. Even when you factor in the
government's promise in its Blueprint to start paying off the
debt at the rate of half a billion dollars a year by allocating a
contingency fund to paying off the debt, you still end up with a
net debt attributable to the tax cuts by the end of this term of
office just shy of $60 billion and a carrying cost for that
additional debt of something on the order of $3.5 billion a year.
In other words, we're going to be paying a carrying cost by the
end of this government's current term of in excess of $3 billion
a year just to pay the interest on the debt that has been
incurred to finance the tax cut.
I want to spend a few
minutes bringing this down to the level of fiscal planning and
trying to focus the discussion on what this may imply for
Ontario's fiscal balances in the next few years, because,
obviously, one of the primary roles of this committee is to give
the Minister of Finance some advice about his overall fiscal
strategy.
I want to note two
potential risk factors that face Ontario; one is various
proposals for substantial cuts in income taxes at the federal
level. Because of the way the income tax system works in Canada
at the moment, Ontario's taxes are driven by the federal basic
tax base. If you reduce the federal basic tax base and leave
Ontario's rates the same, Ontario's tax revenue will go down.
Just to put this in perspective, the 20% cut that Premier Harris
advocated that the federal government undertake as part of his
lobbying effort leading into the next federal budget, due in
about three weeks, the implication of that would be a cut in
Ontario's revenue of $3.4 billion, unless Ontario raised its
rates to offset the revenue loss driven by the reduction in basic
federal tax.
I just note in passing that
the flat tax proposal that is favoured by the Premier's friend
Tom Long would, if fully implemented, reduce Ontario's revenue
base by approximately $6.1 billion, again unless Ontario were to
respond by increasing its own tax rates to offset that revenue
loss.
The other risk factor that
I think is of particular concern is the potential for a US
economic slowdown. We have been riding on the back of what
everybody says is an
unprecedented economic boom in the United States. When I say
riding on the back of it, I mean that literally and I'll hark
back to the comments that I made about exports. It's the US
economy that has been driving the growth in the goods export
sector in Ontario-period.
We have been operating in
Ontario-when I say "we" I mean the provincial government-as if
this is going to go on forever. Every time the Minister of
Finance looks at projections two and three years in
advance-which, I note from yesterday's transcript, he won't share
with the committee-and sees a little bit of extra money appearing
on the horizon, money that might permit him to accelerate the
rate at which the deficit is being reduced and/or start to repair
some of the damage that has been done in public services, it gets
larded into another tax cut. The result is that we are spending
our fiscal flexibility. Our fiscal flexibility in this province
is being spent out of existence in the form of tax cuts. It's not
quite a Ponzi game but it's close to it. It's like a chain
letter: As long as it keeps working it keeps working, but when it
stops, boy, it really collapses.
I want to just share with
the committee a couple of little simulations that I did to
illustrate the impact of these things. The line that's up on the
screen now is a projection to the end of the next fiscal year of
what would happen if the provincial government were to decide to
suspend its tax cut program; in other words, stick with the one
that has been implemented so far and stop right now until
Ontario's finances are improved, and use the money to repair some
of the damage that has been done in the cuts that have taken
place in the last little while. As you can see, we end up with a
pretty substantial surplus emerging in a couple of years-a great
deal of fiscal flexibility.
The second one is a
projection I've done that takes the current fiscal situation as
it exists, assumes that the government continues to implement the
tax cuts that they announced just before the election, as they've
laid them out, and differs really only from the projections that
the government is currently using by abandoning the 3.7% growth
projection for 1999, which is clearly ridiculous. The government
continues to base its fiscal projections on the basis of 3.7%
growth for the calendar year 1999. We've already had 4.4% growth
in the first three quarters of the year, so clearly that's
ridiculous.
When you incorporate that,
you end up with only a very slight deficit in 1999-2000-and I
want to come back to that in a moment-and then a surplus emerging
in 2000-01 and 2001-02. These are all assuming that the economy
continues to grow at a reasonable rate.
1130
The note I wanted to come
back to is that I'm showing here a slight deficit still in the
year 1999-2000. That deficit gets wiped out entirely even given
some of the financial manipulation that's been done in generating
the most recent version of Ontario finances. That number
disappears if you assume that the government doesn't spend the
remaining contingency fund that's buried in the Management Board
of Cabinet numbers for expenditure. If you take that out, the
budget is actually projected to be in a slight surplus in
1999-2000.
The third line I've got
here is based on the assumption that a US recession happens in
the year 2001, so that a year from now we end up with a recession
in the United States which has its corresponding impact in
Canada. This is based on Mr Eves's current estimates for
1999-2000 and then assumes there's a US recession in the year
2001. As you can see, you end up with a persistent deficit of
about $1 billion. In other words, we don't end up with the budget
balanced next year or the year after as a result of that
recession assumption.
That's not to say that
there's going to be a recession in the United States. What it
does say, though, is that it just illustrates the importance of
the phenomenon of the government spending our fiscal flexibility
in the form of tax cuts rather than using it in a prudent way to
protect public services and to bring the province's finances into
balance.
The last chart I've got
here illustrates in one way the extent to which the numbers are
being manipulated here. If you take the current estimates for
revenue and expenditure for 1999-2000 that were presented to the
committee yesterday and project those forward, you end up with
the budget not balancing in the year 2000-01, primarily because
we're assuming here that the income tax cuts continue to proceed,
and we note here that the $1.6 billion that was in the revenue
base for 1999-2000 for the Highway 407 sale isn't available next
year.
That gives you a range of
the risk factors. As you can see, it's actually quite a
substantial range from a very healthy fiscal balance in 2000-01
if the government were to decide to suspend its implementation of
the tax cuts at one extreme and at the other extreme a persistent
deficit of about $1 billion if the US economy were to go into
recession in the year 2001.
The last thing I want to
turn to is I want to spend a few minutes talking about one
particular aspect of the impact of the expenditure cuts that have
been brought in by the government on the level and quality of
public services in Ontario. I'm going to focus on elementary and
secondary education.
To start off with, I want
to draw attention to a misperception that is being repeated over
and over again about the nature of the introduction of the
education financing formula. The new education financing formula
is being characterized as a revenue-neutral shuffling of
resources from large urban boards to small rural boards and
separate school boards. While it's true that large urban boards
have been hit very hard in terms of forced expenditure reductions
as a result of the introduction of the funding formula, and while
it's true that particularly rural separate boards have benefited
from the introduction of the funding formula, the fact is that
when you look at education funding on a real per-student basis,
the funding formula actually disguises a cut in education funding
overall of about $700 million in 1999-2000. That substantial
funding loss we have seen has, frankly, exacerbated the problems
that the large urban boards have experienced in trying to adjust to the
introduction of the funding formula.
I want to put a picture up
for you that gives you a bit of a sense of what has happened to
per-student funding and how it has been concentrated in various
boards.
The dotted blue line
represents the cumulative share of total enrolment. What I've
done here is that I've taken all the boards in the province and
arranged them from the smallest to the largest and then looked at
the impact of the funding program on them. You can see the
concentration of the impact on the large urban boards.
The blue bars represent the
average funding change per student, and you can see that for the
smaller boards you're seeing increases in funding typically in
the range of $500 to $1,000 per student, but in some cases higher
than that, and for the larger boards, reductions in funding that
vary, again, from relatively small amounts of $300 or $400 per
student up to relatively large amounts in the case of the Toronto
board.
The red line represents
accumulation of the changes in total funding. As you can see
again, you see increases in funding for the smaller boards, and
then as soon as you get to the relatively larger boards, you see
fairly dramatic reductions in total funding allocation. The
question really becomes, is it defensible that you have these
very large reductions in funding for the large urban boards?
I want to focus on a number
of elements of the education funding formula, just to highlight
some of the difficulties that have been created.
First of all-and these are
not in any particular order-the funding formula, because of the
way it's structured, actually does not permit many of the school
boards to pay even the amount of money they're contractually
committed to pay to teachers and other staff that the funding
formula permits them and requires them to have in order to
maintain instruction in the classroom. The reason for that is
because the funding is based on a reference salary grid which is
not the same as the salary grid for any board. It represents what
the ministry calls a representative average grid. The result of
it is that boards that have different grids or different
demographic characteristics of their teachers-more older
teachers, more teachers with higher qualifications-actually find
that even with the teacher compensation adjustment in the funding
formula, they're not able to afford to pay the teachers whom
they're required to have under the funding formula the amounts of
money they're required to pay under their contractual
commitments. I'll note that the Education Improvement Commission
identified that as one of the weaknesses of the funding
formula.
1140
The second issue I want to
focus on is special education. The government claims, as recently
as last week, that the funding formula has resulted in a
substantial increase in the amount of funding that's available
for special education in the province. The fact is, though, that
the expert panel that was created by the government before the
funding formula was introduced to make recommendations to it
about the funding formula did an analysis and discovered that
school boards were spending anywhere from 23% to 85% more than
the government had earmarked for special education under the
previous funding formula. Depending on whether you take the low
number of 23% or the high number of 85% higher, you end up with a
base number for 1997 of between $1.056 billion at the low end and
$1.560 billion at the top end. If you take some sort of median
between those, what I think you'd find when you look at the
numbers is that the current funding allocation, even topped up as
it was last week by the minister, still will probably fall short
of what the boards were actually spending in the last year before
the funding formula took effect in 1997. The EIC indicated in its
report last week that even at this higher level of funding,
higher than the government was officially providing in 1997,
boards are spending money on special education that they have had
to reallocate from other areas because the funding isn't
adequate.
The learning opportunities
grant, for those of you who aren't deeply enmeshed in the
intricacies of education finance, is a component of the funding
formula that is designed to address additional costs incurred by
boards because of demographic and other characteristics of their
students. This grant was also the subject of an expert panel
report. It was chaired by Enid Slack, an economist who is an
expert in this area. The expert panel actually went to the extent
of including in its recommendations a recommendation for a level
of funding, based on 1997 numbers, of $400 million a year. That's
what they considered to be a basic minimum level of funding that
was needed in order to achieve the objectives of the learning
opportunities grant. This is the grant that compensates for the
extra costs associated with having high rates of poverty among
students, high rates of turnover, inadequate housing and various
other things like that.
The actual funding that was
committed under the learning opportunities grant was $185
million. I'd note for comparison that in 1996, the Toronto board
estimated that it alone was spending $175 million on what the
Toronto board called compensatory education, which is captured by
the learning opportunities grant. Not surprisingly, given the
fact that the government's own expert panel highlighted this as a
potential problem even before the funding formula came into
effect, the EIC has identified that as a shortcoming of the
existing funding formula.
The last thing I want to
focus on is the question of English and French as a second
language. The funding formula is extremely restrictive in this
regard. It does provide additional funding for
English-as-a-second-language instruction but it is strictly
limited to children who have been in Canada, having emigrated
within the last three years from a country whose first language
is not English. So it's an extremely restrictive allocation and
it's a funding allocation that diminishes with each year that the
child is in Canada. I haven't encountered anybody expert in the
teaching of young children who come to Canada without any ability
in English who considers this to be adequate. Again, the
Education Improvement
Commission has fingered this as another inadequacy of the funding
formula.
I'm going to pass over the
next two charts and just review what the Education Improvement
Commission has identified as problems with the funding formula.
The Education Improvement Commission, while hardly a vociferous
critic of the government in the work that it's done, has in fact
identified weaknesses in the funding formula in the following
areas: teacher compensation; special education; pupil
accommodation, even with the top-up provisions; and English and
French as a second language.
They've made
recommendations suggesting that the funding formula is inadequate
in the way that it deals with in-school administration in small
schools, remote-area school administration, the funding of
transportation of pupils, the learning opportunities grant, as
I've highlighted, and the last one, which I want to spend just a
couple of seconds talking about, the funding for social services
delivered by school boards. This is one of the interesting
recommendations or concerns that was raised by the EIC in its
most recent report. There's an interesting element to this that I
want to put on the table for the committee.
The implication of the
analysis of the Education Improvement Commission is that one of
the reasons why some of the large, urban boards are in financial
difficulty as they confront the exigencies of the funding formula
is because those school boards have been providing services that
in other areas are provided by municipalities or by another level
of government. They are saying there are immigrant adjustment
services, psychological services, social services of various
kinds that have been delivered traditionally through boards like
the Toronto board and the Windsor board and the Toronto catholic
school board that really don't fit within the four walls created
by the funding formula and that this is an issue that ought to be
addressed.
The point that occurred to
me as I was reading this, finally acknowledging that there were
broader services that were indirectly relevant to education that
weren't covered by the funding formula, is that if it's true that
these are services that really ought to be provided by
municipalities, then presumably the province ought to give the
tax base that funded those services in the first place back to
the municipalities so they can provide them. The province's
takeover of the residential and commercial-industrial tax base to
fund its education takeover included the money that was being
allocated for those social services. If it really is true that
that money was funding things that ought to have been paid for by
municipalities, then logic suggests that the province ought to
give the money back to the municipalities to enable them to
provide those services.
I've gone on a little
longer than I expected to, but I did start a little bit late
because of the technological problems.
The Chair:
Thank you very much for your presentation. We have approximately
seven minutes per caucus.
Mr
Christopherson: Thank you very much for the
presentation. There are so many areas. I just want to go back to
something I raised yesterday to see if there's a different take
on it.
In the statement of
financial transactions in the quarterly report handed out by the
Minister of Finance yesterday, page 11 talked about an
interesting line called "cash timing adjustments." This speaks to
a line item in the budget plan of $3.192 billion, almost $3.2
billion. The current outlook is that they're only going to spend
$961 million, meaning that there is over a $2.2-billion change in
that line item. When I asked the deputy about it, he and his
assistants talked a lot about the fact that much of this was just
a money transfer, a paper transfer of money depending on whether
money had actually flowed out to areas where it was to be spent
or not, maybe money they received back from municipalities, from
transfer partners, if they hadn't spent it.
My focus was whether or not
there was anything real in terms of its impact on our economy,
given the large dollar amount. I said to the deputy that if it
were a few hundred million-not that that's not important-I
wouldn't have raised it as a priority issue. To be fair, they did
agree to get back to me in writing with a further detailed
explanation. They didn't give me a definitive answer, but
certainly the impression, I think it's fair to say, is that this
is not a huge deal. It has to do with accounting practices. I
would like to get your take on that, whether you agree, and, if
not, what you think this says.
1150
Mr
Mackenzie: The cash timing adjustment number is a
balancing number. It balances the way the government keeps its
books for budgetary purposes with the actual cash flows of the
government. So when there is a positive cash timing adjustment it
means there is more money being spent by the government in one
form or another during the year than appears in the budget. When
there's a negative cash timing adjustment, it means there is less
money being spent by the government, actually flowing out, than
appears in the actual budget.
When the cash timing
adjustment number goes down, because it's a balancing number, it
can only be the result of one of two things: Either there is
money that the government has put into the budget for this year
that it turns out will not flow this year, or there is money that
had been previously budgeted and accounted for in a previous
budget year that they thought was going to flow this year that
did not. The bottom line is that something in excess of $2
billion that was originally projected to be spent is not going to
be spent.
To give you a highlight to
this, in the most recent update of Ontario Finances, it shows
additional spending of about $1 billion compared with the
previous iteration of Ontario Finances. My guess would be that
although that's been booked, a lot of that actually won't be
spent; it will be spent in some future year. So some of the
expenditure that's been booked in this year as an adjustment in
this most recent issue of Ontario Finances is actually
phantom money that won't
appear until some time in the future.
That can only account for a
maximum of $1 billion of that difference, though. The rest of it
has to be that expenditures of various kinds, both capital
expenditures and other expenditures, that they were anticipating
they were going to be making in this year, they are not actually
making.
What measures the impact of
the budget on the economy is not what's in the budget, it's what
flows in cash. So in terms of economic impact, the cash timing
adjustments have gone from pushing an extra $3 billion into the
economy to pushing an extra $961 million into the economy.
Mr
Christopherson: Thank you.
On page 2 of your handout,
you point out the personal savings rate. Again, I raised this
yesterday with the deputy. Those are not political discussions;
they're technical presentations and we keep it at the technical
level, or try to. I noted that over the years, their own figures
had shown that we'd gone, at one point, from about 16% or 19% to
about a 10% savings rate when the government took power and that
now we're down to about 3%, less than 4%. I asked what the
significance of that was should the economy burst and, again,
their full answer is in the Hansard; I don't want to misrepresent
them.
To paraphrase, they
answered, as I suspected, that people are looking at the amount
of money they have in mutual funds, in their RRSPs, as they ride
the stock market wave and saying: "Gee, I've got enough money
there. I don't need to worry as much about having cash on hand
because I'm doing quite well. The books are looking good and
we're making money year over year."
I said, "What happens in
the event that the bubble bursts?" The answer I received was that
if that happens, "Then individuals would just reallocate money
back to their savings." My point was that that's not possible for
a lot of people who don't have that many discretionary funds. If
you have a big enough income, you can make that kind of a
dramatic move.
Can I ask your opinion of
what it means to be at this low a personal savings rate if indeed
the bubble bursts and there's a recession, let alone any kind of
a major downturn in the value of the current stock market? Where
does that leave people?
Two things: One is, where
does that leave people in terms of their future, their retirement
plans, middle-class working families that are planning to retire
on this growing nest egg in their mutual fund RRSP portfolio?
Secondly, what are the implications of such a low savings rate on
families and on the overall economy if we get into that
recessionary mode? Even Catherine Swift acknowledged it's not a
question of "if," just "when."
Mr
Mackenzie: I think my explanation or my characterization
of what's going on would be similar to the one that was given to
you yesterday. I noticed when I was looking at the Hansard
response that the officials noted the fact that this is a
phenomenon that's taking place in the United States as well.
The implications of it are
quite serious. In my view, the consumption bubble that is based
on consuming out of unrealized wealth, which is essentially
what's going on-what's going on is that people's perceived wealth
has gone up because their mutual fund holdings have gone up in
value dramatically in the 1990s and they have made expenditures,
borrowed money, whatever.
The other phenomenon of the
1990s is that in the longest continuous expansion in American
history, levels of personal indebtedness have soared. So what's
going on is that we've got the 1990s equivalent of margin buying
from the 1920s. We've got people consuming out of wealth that is
not realized, that is accumulating in a mutual fund account.
It concerns me that we may
have built into our financial and economic structure exactly the
kind of vulnerabilities that many people attribute the rapidity
of the collapse after 1929 to in the context of the 1920s. In the
1920s people accumulated large amounts of wealth on the strength
of money they borrowed to buy stocks. You can't do that any more,
so what people are doing now is borrowing money to consume out of
those assets. If those assets were to diminish in value, we're
going to see a return to-just to back up a second, one of the
things that happened in the 1930s, 1940s, 1950s and 1960s is that
the real economy got insulated from the paper economy. What we're
seeing is people starting to consume out of unrealized wealth
building up in mutual funds. We're seeing a reconnection of those
two in a way that I don't think is going to be terribly helpful
if we do get a rapid turndown in stock values. As to the
implications for people's retirement income, it's potentially an
extremely serious problem.
The Chair:
Thank you very much. On the government side, Ms Molinari.
Mrs Tina R.
Molinari (Thornhill): Thank you for your presentation. I
could talk about and focus on some of the areas you've talked
about with respect to education and some of the inaccuracies that
I've noticed in your presentation. Some of them have to do with
the fact that boards are spending more for the teacher
compensation package, and that's because they have a portion of
the budget where they have flexibility. If boards are choosing to
spend that flexible money on the teachers' compensation package,
then it's the option of the board.
One of the things the
government has done is taken away the ability to increase taxes
to the already overburdened taxpayer, so that boards can no
longer increase taxation to provide for the compensation packages
that they have.
I want to focus on some of
the other points that you've raised. You said that we borrowed to
introduce the tax cuts. The money already belongs to the
taxpayer; it's not money that is borrowed.
We've heard from the
previous presenter that governments don't effect a downturn in
the economy, and they don't do the good economy, but obviously
the policies that the government puts in place can either make
that better or make it worse depending on what the government's policies are. Certainly
some of the benefits the US economy has had on us is a factor,
but it's been stated that if it weren't for the tax cuts the
economy would not have increased to the point that it has.
One question that I have
for you is related to your comments on tax cuts. Do you believe
that governments can spend money better than you as a taxpayer?
In essence that's what you're saying, that the government can
spend the money better than you as a taxpayer. The tax cuts are
putting money back in your pocket, giving you the option and the
opportunity to spend the money the way you see fit. What I'm
understanding is that you believe that governments shouldn't
introduce tax cuts because governments can spend money better
than you as a taxpayer.
1200
Mr
Mackenzie: The short answer to your question is yes. I
think the reason why is that Ontario society, the Ontario
economy, Ontario businesses benefit enormously from the public
services we provide. Canada's medicare system is far and away the
most important competitive advantage that Canadian businesses
have relative to American businesses. Anything that we do that
jeopardizes that jeopardizes a fundamental piece of Ontario's
competitive advantage.
To pick another area,
education at the elementary, secondary and post-secondary levels,
every analyst that stargazes about the future of the economy
underlines how important it is for our entire society and our
entire society's economic future to ensure that we maximize the
effectiveness and the quantum of our investment in the skills and
education of our young people. That is going to be the economic
foundation. When those expenditures are cut back we are
jeopardizing our economic future.
My answer to your question
would be that at the margin where we're sitting here in Ontario
right now, Ontarians are better off if the government were to
take that money and invest it in improving public services. The
fact is, curiously enough-maybe not curiously enough-that when
you look at the public opinion surveys, that's exactly what you
find. What you find is that a significant majority of Canadians
and a significant majority of Ontarians, when they look at the
choices in front of them, would choose to reinvest in public
services, to reinvest in health care, to reinvest in education,
to make investments that will enable our society to deal with
homelessness, to make investments in the quality of life of poor
children. They would make those investments before they would
take a tax cut. So, yes.
Mrs
Molinari: I won't take up much time. I'd like to leave
some time for my colleagues.
We also believe in health
care and education and the quality of those very important areas.
Our plans are for the long term. For the economy to continue to
improve and for us to have the money to fund essential services
such as education and health care, you need to have a growing
economy. We agree on what the end results should be but I guess
we have different ways of approaching that.
Mr
Mackenzie: I would say that my point was a long-term
point. I wouldn't pretend at this point that the cuts that have
taken place in education to date have had a measurable impact on
Ontario's competitive position, on Ontario's ability to generate
the skilled and smart people who are going to be needed to make
this economy thrive in the future, but I think we are introducing
some cancerous elements into the education system in this
province and we're going to be paying for it 10 and 15 years from
now. Likewise, I think we jeopardize the effectiveness of the
medicare system at our economic peril. You're sowing the seeds
now of problems that we're going to be dealing with in the
future.
Mrs
Molinari: There were problems already in place. It's an
evolving thing that over the years will continue to be
improved.
I'll leave time for the
rest of my colleagues.
The Chair:
I think the time has been exhausted and I have to go to the
official opposition.
Mr
Kwinter: Mr Mackenzie, as always I've enjoyed your
presentation and the effort that you put into it. I was quite
interested in your-
Mr
Mackenzie: Just to interrupt, I was hoping that Mr
O'Toole would get to ask a question because I was going to ask
him what he thought the user fee should be for making a
presentation to the committee.
Mr
Kwinter: I wanted to just pick up on your initial graph
which was the international exports being the real driver of the
economy of Ontario. I had occasion to listen to the federal
Minister of International Trade a few weeks ago and it was quite
interesting to me that he was pointing out that Ontario and
Canada are 45% dependent on trade for the GDP as opposed to the
United States, which is 11%, as opposed to Japan, which is 15%.
The thing I found strange is that he was trying to portray that
as a real plus, in that, "Just look at how much more competitive
we are than these other jurisdictions, that we've got 45% of our
activity through international trade."
The question I ask of you
in your studies is, what happens if the exchange rate changes?
During the free trade discussions, I had several leaders of
industry come forward saying that if the dollar ever exceeds 80
cents we're in trouble, big trouble. Secondly, what happens if
there is a downturn in the US economy, which is our major trading
partner, and how is that going to impact on the ability of
Ontario and other jurisdictions in Canada to carry out the
programs they're embarked on now and to deal with their debt?
Mr
Mackenzie: In a nutshell, that's disaster times two. You
don't have to invent anything. All you have to do is look back at
what the factors were that changed in the 1990s to get us out of
the deep recession that developed in 1991-92. What happened was
that the value of the Canadian dollar dropped from the high 80s
down to the high 60s, which was an almost instantaneous, dramatic
improvement in the competitive position of Canadian exporters in
the United States, and an equally dramatic change in the import
price that people were facing.
The gradual increase in integration of Canada
into the US economy means that our economy is far more vulnerable
to fluctuations in the US economy now than it was 10 years ago.
For all the talk and the Team Canada exercises that go to this,
that and the other place in the world, the reality is that our
dependence on trade with the United States has increased
dramatically over the period of the 1990s. Our economy is much
more closely tied into that of the United States and we are much
more vulnerable to fluctuations in the US economy than we
were.
Mr
Phillips: Thank you. I appreciate your being here. I'm
very interested in your revenue forecast.
Mr
Mackenzie: I read the exchange.
Mr
Phillips: Just for the record, I write down my
predictions. I've always predicted that with the tax cut, tax
revenue in Ontario still would continue to rise. I've always said
that, and that's the reality. The issue is, how much has it cost
us in lost revenue? The federal personal income tax revenue has
gone up about 30% over the last five years and Ontario has gone
up about 5%. That's about $5 billion in forgone revenue. The
government itself, when it published its budget, said this will
represent forgone revenue of $4.8 billion, I think they said. So
it's not a number that I or any of us in the opposition have made
up. The government itself has said, "Listen, we think it's a good
idea to forgo $4.8 billion of annual revenue." The personal
income tax revenue shows it: federal revenue up 30%, provincial
revenue up 5%; that's close to a $5-billion difference.
The issue for me is that we
are trying to make some decisions on the budget. The government
has not given us one estimate of revenue, not even for next
fiscal year.
Mr
Mackenzie: You don't even have an accurate forecast of
revenue for this fiscal year, the one we're in.
Mr
Phillips: That is also true. The minister said he's
betting that when the books are closed, the revenue will be $600
million higher, or something like that. We do not have that, so
we have to rely on our own resources to prepare that, and people
like yourself. Can you help us out in terms of how we should be
looking at how we can predict revenue for next fiscal year and
the following at least couple of fiscal years?
Mr
Mackenzie: I guess my starting point would be to look at
the forecast for Canada that the Department of Finance has
released. Keep in mind a couple of things. One is that partly
because Ontario's economy is so much more tightly tied into the
United States than the economy of any other part of the country,
these numbers are exaggerated a little bit. In the last few
years, Ontario's rate of growth has been running about one point
above the national average. I'd take those and I'd increase them
a bit to reflect the fact that Ontario is likely to be growing
more quickly as long as the US economy continues to boom. The
other side of the coin is that Ontario will shrink more quickly
if the US economy starts to slide.
As a rough rule of thumb,
income tax revenue tends to increase about 10% more quickly than
a strictly proportional increase would. You can just go through
the budget items. There are some that you know are not going to
increase because they're one-time-only items; there are other
things that are going to increase basically in proportion to the
total value of goods and services in the economy. Things like
employer health tax revenue, for example, increase basically in
proportion to growth in employment. It's not rocket science. It
would be nice if the minister were prepared to release the
numbers that he's basing his analysis on. That would certainly
help you. But there certainly isn't a shortage of other sources
of information out there. There are various agencies that do
forecasts for the province. The Conference Board, for example,
generates-actually, the legislative library is a subscriber, so
you could send somebody up to the legislative library to take a
look at what the forecast is for economic growth in Ontario for
the next couple of years. That would give you a reasonable
ballpark.
My understanding is that
although the minister is now saying that the rate of growth in
the province is expected for 1999 to be about 5%, the revenue
projections are still based on the original forecast of 3.7%,
hence his statement that when the numbers finally come in it's
going to be $600 million higher. My guess is that if the minister
is prepared to say the number $600 million sitting here at the
beginning of February in a partisan environment, the actual
underlying numbers are going to be even higher than that for this
fiscal year.
So it's kind of a mixed
story here. On one hand you're looking at what I consider to be a
significant underestimate of the revenue base for this year,
which translates to reduced forecasts for next year, but then
over the horizon we're seeing some real risk factors. I think at
the very least it would provide some comfort to people who are
feeling anxious about this if the minister were to indicate that
once the budget is balanced he will not proceed with any of the
future instalments of the tax cut if it appears that the
introduction of the tax cut is going to cause Ontario's fiscal
situation to deteriorate or public services to deteriorate.
The Chair:
With that, we have run out of time. On behalf of the committee,
thank you very much for your presentation.
This committee will stand
adjourned until 1 o'clock this afternoon.
The committee recessed
from 1214 to 1303.
The Chair:
It is slightly after 1 o'clock. I would like to bring the meeting
back to order.
First of all, I have a
brief announcement. One of the members requested some information
yesterday from the research department; that is in front of
you.
ROYAL BANK OF CANADA
The Chair:
Our first guest this afternoon is the chief economist from the
Royal Bank of Canada. I'll give you the opportunity to introduce
yourself for the record. Welcome to the standing committee on
finance and economic affairs.
Dr John McCallum: It's a
pleasure to be here. My name is John McCallum and I'm chief
economist for the Royal Bank. I'd like, if I may, to talk for not
more than 20 minutes or so, and then there will be lots of time
for questions and discussion.
I do think we live in
interesting times. On the one hand, every living, breathing
economist seems to be very optimistic about the outlook, which is
itself perhaps cause for concern.
One personal example: The
Globe and Mail, every year-end, does a debate between an optimist
and a pessimist on the economic outlook. They called me up just
before Christmas and they invited me. I said: "Oh yes, sure. Just
out of curiosity, who is the pessimist?" The answer came back,
"You are." Well, I'm not a pessimist but that gives you a sign. I
was the most pessimistic person they could find.
There's great optimism on
that front. At the same time, I think there's a certain amount of
pessimism or gloom and doom in terms of the longer-term future of
the country, partly because we've had a pretty dismal 1990s,
where the average households faced declining take-home pay.
What I'd like to do is talk
a bit about the outlook, the risk to the outlook, starting with
the US, talk about Canada, come to Ontario, including the budget
outlook, and then say a few words about taxes in general.
The rest of the world,
outside the US, is picking up more than we thought they would.
The US economy is booming, but we, like most, think it has to
slow down. It's growing at an unsustainable pace. We're already
seeing inflation on the rise. It's absolutely certain that the
Fed will raise interest rates in about an hour's time, probably
by a quarter, possibly by a half, and another quarter probably in
the coming months.
We, like most people, think
that the US economy will continue to do well in the coming year,
maybe 3%, which is quite a lot lower than the previous year but
still quite respectable.
Just to offset some of this
huge optimism, let me talk about a couple of things that could go
wrong in the US. This is extremely important for Ontario, because
Ontario far more than any province is highly dependant on the
United States, with over 40% of the province's GDP going in
exports to the US.
The first thing that could
go wrong is what you might call a boom-and-bust case in the
United States where the economy refuses to slow down. The economy
for three years has refused to slow down, refused to obey
economists' forecasts, and so it might happen again. If that did
happen, if the US were to continue growing at 4%, 5% or even 6%
for awhile, you would clearly have rising inflation and you would
clearly have a situation where the Fed would have to go up, not
by half a point but by a full point or even two percentage
points, at which point you would clearly have a slowdown, but
we'd land abruptly rather than softly, because Ontarian, Canadian
and US households have record levels of debt and there's nothing
like a two percentage point hike in interest rates to bring
considerable distress to North American households.
That's the first risk of
boom and bust, where we'd have high growth for two or three more
quarters and then an abrupt landing, and that wouldn't be good
for Ontario, except for two quarters of the boom part followed by
the bust.
The other thing that could
go wrong in the United States is the stock market correction. As
you all know, the US stock market is grossly overvalued according
to most conventional measures. I'm not predicting this, but a
severe stock market correction cannot be ruled out. I would say
if it's just the stock market that corrects, the economy would
slow, but it wouldn't throw us into a recession. I think bubbles
that burst that cause huge damage usually involve real estate as
well as stock market, as in Ontario in the early 1990s and it
isn't much of a real estate bubble in the US. I think the stock
market correction would give us slowdown. We'd have slower growth
than what we're forecasting but not a recession. Our best-case
forecast though is 3% growth to the United States in the coming
year.
Coming to Canada, the fact
that the global economy is doing better is good for commodity
prices, therefore good for our resources sector, good for the
Canadian dollar-"good" meaning higher, which isn't what everybody
regards as good.
I think the Canadian
economy will grow at maybe 3.2% this year, a little bit faster
than the US, as long as those bad things I mentioned don't
happen, because we have a continuing good US economy. We have
higher commodity prices, as I said, which is good for the
resource sector. We have good conditions for investments. We have
most governments in surplus, providing tax cuts or spending
increases rather than the fiscal drag which we had through much
of the 1990s. Put that all together and I think we'll have pretty
robust growth in this country in the coming year.
I think, by the way, the
Bank of Canada will follow the Fed in its hike today and probably
next month, not because it really wants us to slow too much but
because the Canadian economy at this time is growing very fast
and the Bank of Canada will want to impose certain speed
limits.
1310
Let me come now to Ontario.
As you all know, there is no doubt whatsoever that this province
is booming. Just to give you a few statistics for the year to
date: 3.1% employment growth-unemployment rate lower than it's
been in a long, long time; retail sales up 7.4%; housing starts
up 20%; manufacturing shipments up 12%; exports, which are
critical to this province, up 14.2%; manufacturing shipments up
12.3% etc. I don't need to tell you more. You know very well that
this province is booming.
In answer to the question
why, I would put primary emphasis on the booming US economy,
because as I said before, over 40% of this province's GDP is
going to the US. The US is absolutely critical. Also, the weak
Canadian dollar has
given a further boost to Ontario exports to the United States.
Lower taxes have given a bit of help as well, but I would put the
primary emphasis on those first two factors.
The question we're all
interested in is, what's going to happen in the future? We think
as our base case forecast that the Ontario economy will continue
to do well this year, will outperform the Canadian economy. Our
estimate for growth is 3.8%, which is not far off the consensus,
but I would draw your attention one more time to these risks, to
things that could go wrong, especially coming from south of the
border, and that these events potentially coming from south of
the border, because of what you might call structural imbalances
in the US, would have a major impact on this forecast.
Turning now to the budget
of Ontario: A while ago we produced a document called Relative
Fiscal Power: Ottawa versus the Provinces, which made somewhat
mechanical assumptions and projected forward the surpluses of the
provinces. Five years from now, the estimated surpluses or fiscal
dividends were estimated for each province. Ontario had about the
lowest and BC the second lowest, something like $3.5 billion in
2004-05. The reason was the starting point. It's not a criticism
of Ontario or BC. Both of those provinces started with a deficit,
Ontario primarily because of the tax cuts and BC because they
decided to increase spending to offset the impact of the Asian
crisis. In a sense, Ontario had spent a part of its fiscal
dividend in advance, but these estimates, which were done some
time ago, in September I think, now are somewhat too pessimistic
because the economy has become much stronger than we thought it
would.
I did just a
back-of-the-envelope calculation as to what would be the largest
possible surplus, if you like, under somewhat rosy assumptions.
My assumptions are very simple. Assume that Ontario's tax revenue
grows at 6% per year, which is high-2% inflation, 4% real,
something like that-and over three years, in rough terms, that's
a 20% increase. Assume that Ontario expenditures and non-tax
revenues, like transfers from the federal government, grow at 3%
a year-that's like inflation plus population-or roughly 10% over
three years. I think those are pretty rosy assumptions. If you
make those assumptions, then we get a $5.3-billion improvement in
the surplus by 2002-03. Assuming the government is right in the
sense that there's a $1-billion deficit in 1999-2000, that would
mean a $4.3-billion surplus in 2002-03, which would give you some
idea, under what I would call optimistic assumptions and without
any allowance for prudence, as to how much room there would be
for either lower taxes or higher spending.
Finally, let me just say a
few words about taxes in general. I'm not just talking about
Ontario; I'm talking about Canada. I think there's always
something of a balance between our desire as a country to be what
you might call a kinder, gentler society versus the need for
competitiveness to foster economic growth.
There's a balance between
those two things. I think the 1990s have been a pretty rotten
decade. It ended with a boom, but in the decade as a whole, we've
seen declining Canadian living standards as measured by per
capita disposable income, both absolutely and very much relative
to the United States. We've seen productivity growth that's at
best mediocre. So it's very important that Canada not continue
this not only absolute decline but decline relative to the US. If
we keep on at our present rate, the US lead over us will get
bigger and bigger, and this can only be bad news, both in terms
of attracting business and people to work in our country and in
terms of keeping up with the Americans in areas like research,
health, education, that depend on the overall growth of the
economy.
For these reasons it seems
to me, as a general statement, I would favour a little bit of a
tilt in terms of this balance, that we really have to have
policies to foster growth and productivity, more so than we have
had in the past. For this reason, I myself would put more
emphasis on lower taxes than I might have in the past, and I
agree with Jack Mintz, for example, president of the C.D. Howe
Institute, that you got quite a lot of bang for the buck from
lowering business taxes, and I also think that a good share of
the revenues available ought to go to lower personal income tax.
I think that we'll always have higher income tax than the
Americans-unless perhaps we have the 17% flat tax, but that's
another issue-but I don't think we can afford to have a rising
Canada-US tax gap. Don't forget the Americans have surpluses.
Undoubtedly they will be cutting taxes, so if we are just to
preserve the big gap we already have, we also have to work in the
direction of lower income taxes. I'm saying that from the
standpoint of the country as a whole. I certainly am not opposed
to some expenditure increases, certainly in areas of greatest
social need, homelessness etc, but I do think that a considerable
chunk of any impending fiscal surpluses ought to be directed to a
lower tax burden.
Mr Chair, that's about 15
minutes. I'll leave it at that. Thank you very much for
listening, and I'd be happy to answer any questions you might
have.
The Chair:
We have about 15 minutes for each caucus, and this time I'll
start with the government side.
Mr Ted Arnott
(Waterloo-Wellington): Thank you, Dr McCallum, for your
presentation. Thanks for coming again.
Dr
McCallum: Thanks for listening to me.
Mr Arnott:
It's my understanding that you have suggested that with the
expected surplus that we're looking at for the federal
government, they have room to cut personal income taxes by
between 15% and 20% over the next five years. Is that
correct?
Dr
McCallum: I believe what I said is that if they used all
of their fiscal dividends for personal income taxes, they could
cut by 20%, but then I said, "which they won't," so the maximum
personal tax cut, if you used all of it, under my assumptions,
would be a 20% income tax cut. But they'll certainly use some of
it, maybe for EI premium reductions, some of it for business tax
reductions, some of it for investments etc, so-
Mr Arnott: Transfers to the
provinces.
Dr
McCallum: Transfers to provinces. So it won't all go
there. That's more an upper limit than a statement of how much I
think they will cut by.
Mr Arnott:
And they're politically committed to doing something totally
different as well. This 50-50 idea of-
Dr
McCallum: My impression is the Minister of Finance is
not desperately keen on that 50-50, and there are certainly
accounting manipulations one can do to present things as spending
or as taxes, depending on one's preferences. There is also the
case that this 50-50 rule only goes to the end of the mandate,
and if you are thinking of a five-year plan, then you are not
bound by it. But one doesn't know what will replace it, of
course.
Mr Arnott:
Getting back to the provincial jurisdiction, I was interested in
what you said about the pending surplus for the province of
Ontario, presumably $3.5 billion by 2002-03?
Dr
McCallum: My back-of-the-envelope, rosy calcu-lation
would be, if you'd take it as a given that there's a $1-billion
deficit in 1999-2000, it would be roughly $4 billion in 2002-03,
but that's based on pretty rosy assumptions. I would call that
kind of an upper limit.
1320
Mr Arnott:
People in my riding tell me they want debt reduction to be a
higher priority in the provincial government as well as the
federal government. Would you concur that should be an important
priority of the provincial government as we get into these,
hopefully, continued years of surpluses?
Dr
McCallum: Yes. It's a question of how much. Obviously,
the more you put into debt reduction, the less you have for tax
cuts or higher social spending. But Ontario has a relatively high
debt, so that would be an argument in favour of it.
I think the general
argument in favour of debt reduction, whether federally or
provincially, is partly that Canada has one of the highest debts
in the world, but it's also an intergenerational argument because
we have a 10- to 15-year window before all the baby boomers
retire en masse. At that time, the spending needs for health care
and pensions will be higher and the tax base will be weaker
because there will be fewer people working to support more old
people. So the last thing that younger generation needs is to be
saddled with a high debt and interest carrying charges in
addition to the burden of supporting the elderly.
You could argue-I don't
think I argue this, maybe because I am a baby boomer-that all
these calls for tax cuts today, which will favour the baby
boomers who are in their peak earning years, are kind of like
pigs at a trough from a younger generation's point of view. It's
these people who have benefited from the deficits, and they will
be saddling their children with a higher debt when it comes to
their retirement 10 to 15 years from now. That's the argument for
a big focus on debt, and there's a lot of truth in that.
But I do think there are
some very high priority spending needs. I would be highly
selective. I do think that, given our need to be competitive with
the United States, there is also a pressing need for tax
reductions. So it's always going to be a balancing act. I would
put significant money into debt reduction. I certainly wouldn't
put the whole thing, but I would probably have more emphasis than
we've heard so far.
I think at the federal
level their $3-billion contingency reserve, if it's not needed,
is the minimum. Assuming the economy grows nicely, the
debt-to-GDP ratio will come down. But if you agree that we are
living in the best of times, economically speaking, now is the
time to have significant surpluses.
Mr Arnott:
Thank you very much. I have more questions, but I want to allow
my colleague-
Dr
McCallum: Maybe my answers are too long.
Mr Arnott:
No. Thank you.
Mr Galt:
Thank you for the presentation. I want to question around your
giving so much credit to the Ameri-can economy when in fact we
are leading most of the states and leading all the G7 countries.
You're giving an awful lot of credit to them, that we're riding
on their coattails, when in fact we're leading.
There are several things
that run through my mind. First, I understand that you did not
support the tax-cut approach that we were going with, the
government, and later on you came on board. That's all part and
parcel of economics of the Laffer curve and where it goes. We
understand that in the beginning of our term a lot of it was
export-support growth. More recently, 80% of our growth relates
to consumption within the province.
In the first half of the
last decade, across Canada there were 350,000 net new jobs
created, while in Ontario we lost almost 50,000-a total
turnaround. I can't believe those who wrote our platform, the
economists, could be so accurate on deficit reduction and also
with creation of new jobs. We're right on target. Maybe they read
into that what was happening with the American economy. I don't
know.
In viewing all those
things, plus BC going downhill in the last few years, is that
related to the American economy or is that related to the
policies and the tax structure of BC? I have difficulties giving
so much credit, as you are giving, to the American economy for
what's happening in the province of Ontario, particularly
comparing with the left coast, out in BC, and what's happening
there.
Dr
McCallum: First of all, I wasn't aware that I'd ever
commented publicly one way or the other on the tax cut.
Interjection: It's in the
dossier.
Dr
McCallum: I don't believe in the Laffer curve, if that
was your implication. I don't believe that if you cut a dollar of
tax, you'll get more than a dollar back in revenue. That is the
extreme of what an economist would call a free lunch. If that
were the case, why didn't governments have massive tax cuts years
ago if they'd get more money back than they cut? So I don't
believe that; I don't think many economists do. You'll get some of it
back, but nowhere near dollar for dollar.
On the question of British
Columbia, I've put a lot of emphasis on the US for Ontario,
because Ontario is uniquely dependent on the US for its trade and
Ontario trade is huge relative to GDP. British Columbia exports
about a third of its exports to Asia; Ontario exports about 3% of
its exports to Asia, virtually nothing. So when Asia tanks,
obviously BC gets affected by that.
I would also agree with you
that the extreme-what shall I call it?-hostility between business
and government in that province, which is unique to this
country-Glen Clark no longer is the Premier, but he was, and if
you go and talk to business people in British Columbia, and it
doesn't matter what the topic, within three minutes they're into
bashing Glen Clark. I'm not denying he possibly deserves bashing.
I'm just saying the climate there is-you can't quantify the
impact, but certainly it isn't good. That is an unquantifiable
negative, but Asia certainly had a big impact also, given the
exports of Brit-ish Columbia.
On Ontario, I mentioned the
US a lot, yes. A second factor which helps to explain Ontario's
more rapid growth than the US would be the low Canadian dollar.
Ontario is the principal exporter of manufactured goods. We've
certainly benefited immensely from that weak dollar in terms of
export generation.
I did mention as well the
tax cut. I don't think it's as important as those other two
factors, but I do think it played a positive role. If you look at
Ontario personal income tax revenues as a percentage of Ontario
personal disposable income, it was 7.6% in 1995-96, and according
to estimates it will be around 6.9% in 1999-2000. So over four
years it's gone from 7.6% of disposable income to 6.9%. That's
lower by 0.7 percentage points. I don't think it's lower by
enough to have had a huge impact on this province's growth rate,
but I did agree and I did mention it upfront as a helpful
factor.
Mr Galt:
Just as a follow-up supplementary, you commented that disposable
income of Canadians had dropped throughout the decade, with a
little rally at the end, at least as far as your comments. Why
has disposable income gone down so much? Is that related to the
taxes? The federal government continued to increase taxes in the
first half of the decade. In Ontario they increased taxes. In BC
they are increasing taxes now. Is that the reasoning, or are
there other factors than taxes driving jobs away, driving the
economy out of Ontario and out of Canada, because those taxes
have gone up?
Dr
McCallum: That's certainly one of the reasons. You heard
me say, I think, at the end a plea for lower taxes. I'm in favour
of lower taxes. I'm in favour of using a good chunk of future
surpluses for lower taxes because I think that will make our
economy more competitive, that will help to create jobs, and that
will help to attract both people and economic activity to our
jurisdiction. So I'm not arguing for higher taxes; quite the
contrary.
If you ask me why our
relative income position dropped in the 1990s, it's partly taxes:
the direct effect of taxes on take-home pay and the indirect
effect of taxes on growth and economic activity. But the single
most impor-tant factor from a purely statistical point of view
is, if you take disposable income per capita, you can break that
into two components: income per person employed and the
percentage of the population that has a job. So you can have
falling per capita income either because of lower income per
person employed or because a smaller fraction of the people are
employed. The biggest reason for Canada's drop was a drop in the
fraction of the people who were employed, especially in the first
half of the 1990s when our recession was way worse than in the
United States, and especially in Ontario it was way worse than in
the rest of Canada.
So part of the reason is
the very deep and long recession that we had. And why was that?
Well, a number of reasons. We started out with higher inflation.
We had sky-high interest rates to fight inflation. We started out
with big deficits. We had fiscal drag to tame our deficits. So we
had some structural adjustments to do which were painful, and
that helped to deepen the recession; possibly also because of our
higher taxes.
1330
The good news is we've made
those adjustments. We've turned our deficits into surpluses.
We've got our inflation down to a very low level. While those
adjustments have been painful, those adjustments have been made.
I think from that standpoint, the outlook going forward is
positive. A high priority, though, to reduce this living
standards gap between Canada and the US is to lower taxes.
Mr Galt:
Thank you very much. I fully agree with the lower taxes.
The Chair:
I have to go to the opposition for 15 minutes.
Mr
Kwinter: Mr McCallum, I was interested in your
observation about what we do with this fiscal dividend, whether
we reduce taxes, whether we improve services. You went through
all the options, and it wasn't until you got prompted by a member
of the Conservative Party that you talked about debt
reduction.
My concern and the thing I
want to ask you about is this: At the present time, in round
figures, it takes about $9 billion to service the debt of
Ontario, a significant proportion of the budget. If you feel
there is a stimulus in reducing taxes, plus a need to improve
certain services, how can you even deal with the debt in any
significant way that's going to impact on that $9 billion a
year?
Dr
McCallum: It's always a question of the present versus
the future. If you have a big reduction in the debt, let's say
over the next five years, then Ontarians will have to have higher
taxes than they otherwise would have had because of the debt
reduction program and/or less social services than they otherwise
would. So there's a cost during the period when you're bringing
the debt down. The benefit is that once you've brought it down,
that $9 billion of debt servicing will be less, and at that point
you can cut taxes more or raise spending more. It's all a
question of intertemporal or intergenerational distribution. If you want to have a
huge debt reduction in the next five years, then you're
penalizing citizens in the next five years to the gain of
citizens thereafter. That's why I brought up the baby boomers and
so on. But also, if your debt is way too high, then you have the
risk of economic instability in hard times.
There is no agreement with
economists on exactly what debt is optimum. There is agreement
that ours in Canada and Ontario and Ottawa is too high. For
Ottawa, I think a $3-billion debt reduction per year plus growth
to reduce the burden of the debt is okay, but I think that is the
minimum. If they do that, then under fairly conservative economic
assumptions the federal debt would go from 72% of GDP, which was
its peak three or four years ago, down to less than 50% five
years from now. That's quite a significant reduction. It's a
matter of opinion whether that's enough. I think it's the
minimum.
In terms of Ontario, it
would be nice to devote a part of future surpluses to the debt,
but I certainly wouldn't say all of them. If Ottawa is $3 billion
a year, maybe Ontario could do $1 billion a year. I don't know. I
think something on that level would probably be adequate. Others
would be more hawkish on the debt. I think it's a matter of
opinion. There's no economic law or theory which tells us
precisely what one should do in this area.
Mr
Kwinter: From a practical point of view, let's say we
use your figure of $1 billion a year in debt reduction. That $1
billion a year in debt reduction of a debt that's well over $100
billion is going to have very little effect on the interest
charge against it. All it will really do is pander to those who
say you've got to do something about the debt. But from an
effective point of view, or from a political point of view as
well, how do you see any kind of resolution, anyone making any
kind of commitment to tackle the debt when, as you say, a billion
dollars is not going to make a significant difference? How would
you do that?
Dr
McCallum: I think time heals many things, and if we are
correct in assuming that we will not have a major recession but
we will have continuing moderate growth of maybe 3% in real terms
per year, well then, what really matters is not the absolute
dollars of debt but the debt in relation to the size of the
economy. Just like your own personal debt, what matters is your
debt in relation to your income. If you're Bill Gates, you can
sustain a bigger debt than most of us. So it's debt to income
that matters. I think that with modest dollar down payments on
the debt, plus continuing growth, we will steadily but surely
have that burden of the debt coming down.
Mr
Phillips: The government's already announced its plans
for the next three or four years in terms of how it's planning to
deal with the fiscal dividend. I'd just like your comment on the
implications of it. They have said they're going to use $2
billion to pay down the debt, increase health spending by about
$2.5 billion and cut taxes by about $5.3 billion, although
they're partially into that now. Two of those are annual costs.
The $5.3 billion is an annualized cost, the $2.5 billion is
annualized cost on health care and it's probably the equivalent
of $500 million a year on debt reduction.
By the way, as an aside,
I'd be interested in getting both the back-of-the-envelope thing
you did there and the other document, because we're kind of
flying blind here in terms of any idea of what revenue we should
be looking at over the next two to three years. Just on the basis
that, as I say, they've already made some very significant annual
commitments on how they are going to spend that money in the
future, what does that do to your envelope?
Dr
McCallum: Well, let's take my back-of-the-envelope ones,
because those are the most optimistic. I would say that it would
be very imprudent to assume a higher surplus than that. If you
assume over the next three years a 20% increase in tax revenues
and a 10% increase in spending and non-tax revenues, then by
2002-03 you have a $5.3-billion surplus. So if the list of annual
expenditures, including debt reduction and tax cuts, is more than
$5.3 billion by 2002-03, well then my numbers say you can't do
that unless you have spending go up by less than 3% per year - 3%
per year is basically constant real per capita - or unless you
raise other taxes, because my back-of-the-envelope calculation
says under rosy assumptions you have a $5.3-billion surplus in
2002-03. You add up your numbers and if they come to more than
that, then my number says that the government can only do that if
it, as I just said, either raises spending less than 3% per year
or raises other kinds of taxes.
Mr
Phillips: It would be helpful, I think, if you would
provide the committee with that, because frankly we're being
asked to kind of buy into the tax cut without the government
providing any information at all to the committee of what we
should expect in future revenues. By the way, the government's
told us they prepare these things, details, line by line. There's
no magic. You're an economist, you know there's a formula you all
use, but we can't get the government to get us that, so I'm
interested in your providing that. It would be very helpful to
the committee.
Dr
McCallum: I won't comment on what you just said about
the government, but I'd be happy to prepare-should I send the
documents to the Chair?
1340
Mr
Phillips: Yes, I think they go to the Chair. He would
circulate them.
Just a comment on the flat
tax-we've heard about that-whether you have any comment on
the-
Dr
McCallum: I gather the Minister of Finance, Ernie Eves-I
guess there's not a universal opinion of him in this room, but I
don't think anyone would say he's a raving socialist. He said
yesterday, if the paper is right, that it was not progressive
enough for him or too right-wing for him. My own personal view is
that I agree with that. I said that we have to have a balance
between a kinder, gentler society and growth, competition etc,
but that flat tax is more than the Republican Party in the United
States has done. I can do a back-of-the-envelope calculation of
what it would do to my take-home pay, and it would certainly be very nice, but my
income is quite a bit above the Canadian average.
This is a personal point of
view-I'm not sure if the Royal Bank has any view on this-but I
would agree with what the minister said. I think most Canadians
would favour some degree of progressivity in their tax
system.
Mr
Phillips: You have commented a lot on the export
orientation, and I personally agree with that, and I think the
government does agree with it because they always cite it in
their documents as the most important economic factor driving
Ontario. It's gone from the equivalent of 28% of the gross
domestic product to 52%. It's the engine driving it.
Again, maybe to summarize
so we have it clear, what are the implications of that? Let me be
more specific. We've heard today that we must move our taxes. I
think the implication is that we must parallel the taxes in the
US because we're now so competitive with them. What I would like
is somebody like yourself to give us some indication of the
implication of that. If we have the same income tax level as the
US, same corporate tax level, the taxes are exactly the same-the
productivity and the income levels are lower in Canada-it seems
to me that you could conclude that we will therefore, over time,
end up with a lower level of service, coupled with the fact that
everybody has told us that one of the major competitive
advantages that we have here is we fund our health care system in
a different way than the US, which gives an enormous advantage,
particularly to the auto sector. Any advice you can give us on
that? If we follow the direction of mirroring the US to compete
with them on taxes, where might that lead us here on the
services?
Dr
McCallum: I think that's a very good question. Just the
first and obvious point: Ontario in particular and Canada in
general are extremely dependant on the US for trade and are
getting more so, and that's a two-way street. Everything is real
wonderful now because the United States economy is booming and is
wonderful, but at some point we're going to have a recession, at
some point things will go down in the United States. It's a
symmetrical thing. Then we too will go down to a significant
degree.
On your question about
taxes and harmonization, I think there are two ways to go. One is
what I would call Americanization, where we harmonize everything
left, right and centre. In a North American context, harmoni-zing
means we do what they do. It doesn't mean they do what we do. It
just means we do everything the Americans do. We harmonize our
taxes, our tariffs, our external barriers, this and that and the
other, and ultimately our social programs. I think we might end
up that way if we continue to deteriorate relative to them.
I for one, partly for
economic reasons and partly because I value the differences
between the two countries, would not want to see us go that way.
I would like to see us not copy the Americans but in some sense
do better than the Americans. I think in some areas we can turn
our differences into advantages. The health care system, for all
its problems, puts us at a competitive advantage vis-à-vis
the US. I think Jack Mintz is right. Now this is partly a tilt.
He says we could lower our corporate tax to lower than the
Americans at a cost of $2 billion to the federal government if we
broaden the tax base. That might be an activity-that's not very
politically popular, but as part of an overall package it might
be possible-that might have a lot of bang for the buck in terms
of attracting economic activity to this country. That is where
the Laffer curve might work to some extent because it would also
give corporations an incentive to change the jurisdiction in
which they report profit from the US to Canada.
I think in many areas we
should not try to be the same as the Americans but in our own
different way do things better than the Americans.
That having been said, my
last point is I don't think we can afford to have an income tax
gap vis-à-vis the US that gets bigger and bigger and bigger.
I think to some extent the border is coming down. People are
mobile. We can have some gap-I'm not saying we have to be as low
as the Americans-but if the gap gets ever larger, I think we put
ourselves in danger in terms of retaining highly skilled people
in this country and attracting people from outside the country
here. So we don't have a total degree of freedom in these
matters. We have some degree of freedom, which we should use
innovatively and inventively, but we can't let ourselves get
unduly out of line with levels of taxation south of the
border.
The Chair:
With that, you're out of time.
Mr
Christopherson: Thank you very much for your
presentation. I've enjoyed it, probably more than the Tories
have, I have to tell you. They had a United Steelworkers-
Interjections.
Mr
Christopherson: Oh, calm down. Boy, you guys are good at
dishing it out, but you can't take it.
Interjection.
The Chair:
I won't entertain any cross-discussions.
Mr
Christopherson: Fair enough, Chair.
Interjection.
Mr
Christopherson: We're going to get a net for you.
Mr Arnott:
We hope so.
Mr
Christopherson: Yes, his own colleagues say "We hope
so." Everybody knows John O'Toole.
To be serious, though, it
was interesting that before lunch we had an economist with the
United Steelworkers who emphasized again the importance of the US
boom in terms of our exports and the implications for Ontario, in
particular, and all of Canada. Of course you come in this
afternoon. The government would like the world to be that it's
their policies alone that are the reason for the boom that we
have, and there aren't a lot of economists and others who speak
publicly on economics who side with that. That's why they didn't
continue that line of questioning with you.
Most people do recognize
that it is the main driving thing, and I think the government
would be wise to stop trying to defy gravity and just acknowledge
that has happened, rather than trying to convince everybody that
night is day and black
is white. This is not like the naming of one of your bills, where
you can just call it whatever you want regardless of what
happens. We've got the rubber hitting the road here.
I wanted to ask you a
couple of questions. You had mentioned the surplus under this
rosy scenario, and we know how often that usually happens, but
the figure you gave was roughly what, under the rosy
scenario?
Dr
McCallum: Assuming that the current estimate of a
$1-billion deficit this year is right, the number would be $4.3
billion in 2002-03. It's a $5.3-billion improvement, relative to
1999-2000. So if 1999-2000 is in balance, you'd have a
$5.3-billion surplus in 2002-03. If 1999 is a $1-billion deficit,
you'd have a $4.3-billion surplus in 2002-03.
Mr
Christopherson: Mr Mackenzie, the economist who was here
before lunch, just before you, noted in his handout that if the
federal government followed the proposal of Ontario's Premier to
cut taxes by 20%, it would mean a loss of Ontario revenue,
according to Mr Mackenzie's calculations, of $3.4 billion. Even
under a rosy scenario, that doesn't leave a lot of room for a
government. First of all, do you think that's likely to be the
number? I realize you haven't done the calculation, but does it
sound reasonable? Secondly, if so, how do you feel about that
vis-à-vis it being part of an overall Ontario economic
strategy?
Dr
McCallum: I said 20% would be a maximum personal income
tax cut by Ottawa. I think it will be something less than that;
maybe 15%.
Mr
Christopherson: But that does affect Ontario
revenue.
Dr
McCallum: That does affect Ontario if Ontario continues
as it is now, with its own tax revenue being a percentage of
federal tax. But a number of provinces, including, I think,
Ontario, are considering going to the tax on income. If you do
that, then Ontario's tax wouldn't be immediately impacted by the
federal government. So really it's up to the government to decide
whether it wants to continue with the tax on tax or shift to a
tax-on-income system.
Mr
Christopherson: But that would have the effect of
negating the impact, the thing that the provincial government has
accused the federal government of doing: Every time they make
some tax space, the feds fill it up. This would be the reverse of
that, wouldn't it?
1350
Dr McCallum
: It depends on how you look at it. It would be leaving
Ontario tax rates the same. It wouldn't be increasing it to undo
the federal tax cut. You'd still have the federal tax cut. But
from the citizen's point of view, it wouldn't be as big if it was
federal only as it would if it was federal plus provincial. It
would be up to the province to decide if its priority was in that
direction or in some other direction.
Mr
Christopherson: Right. But they would almost need the
two. Ontario would have to decouple in order to mitigate the
impact of the current system if there were an across-the-board
cut by the feds.
Dr
McCallum: Under the status quo, the way the system
works, then a federal tax cut automatically translates into an
Ontario tax cut, but Ontario could decouple, as I said, by moving
from tax on tax to tax on income.
Mr
Christopherson: Right. Another subject, and I've asked
this of a number of people and I'd like your opinion on it. I
draw attention under Ontario's economic accounts, and I realize
you don't have a copy in front of you. You probably know the
issue, the issue of the personal savings rate. In 1992, which is
as far back as the charts that the province provided go, the
personal savings rate was 16.9%.
Dr
McCallum: What page?
Mr
Christopherson: You've got the document in front of you?
Page 24.
Dr
McCallum: I think I do.
Mr
Christopherson: OK, great.
Dr
McCallum: It's a different document, but anyway I'll
listen to you.
Mr
Christopherson: It's their document and I'm quoting from
it. The personal savings rate in 1992 was 16.9%. At the point at
which the current government took power, it was 10% even. You go
to where we are now and we're at 3.2%. I've heard from a number
of speakers that this is not unique to Ontario, that it's
happening elsewhere. That really isn't the focus, because I
wasn't looking to blame anyone for that. I just wanted to
acknowledge that indeed that's where we find ourselves now.
With so much emphasis being
put by individuals and families on the value of their
portfolio-"unrealized wealth" is what Mr Mackenzie called
it-whereas in the 1920s and the ramp up to the Great Depression,
the stock market crash in October 1929, part of the cause was
people buying further stocks on margin. Then when the value of
the stocks dropped and the margins were called, they didn't have
it, ergo personal bankruptcy and all that happened.
Because there are laws that
prevent that now, Mr Mackenzie was pointing out that the record
level of personal indebtedness is sort of the 1990s version, or
could be the 1990s version, of what we saw in the 1920s, whereby
they can't borrow against the paper value of the stock to buy
further stock, but families and individuals can borrow money and
go into debt based on the expectation that money would be
there.
With such a record low
personal savings rate, if we run into the bubble bursting, where
could that leave us and where are some of those individuals, from
two perspectives: one, those boomers who are looking at their
RRSP mutual fund portfolio to provide them with the planned
retirement they're hoping for; and two, with such a low savings
rate? What does that mean or could that mean in terms of a domino
effect on individuals and families right across Ontario and
Canada?
Dr
McCallum: I certainly agree with you that you can't
blame the government for the low savings rate, because it has
happened across the country and the continent.
Mr Christopherson: Right.
Dr
McCallum: I think it has happened partly, especially in
the US, because of the booming stock market. People feel less
need to save because their paper wealth is going up so much. In
Canada there's some of that, but also because of our declining
take-home pay people save less to maintain their standard of
living.
You're asking me really
what's going to happen if there's a stock market crash. The
answer I gave before is the same as I give now. It would slow the
economy but it wouldn't throw us into recession. A study by the
Federal Reserve System-you know, the mighty Alan
Greenspan-suggests that the wealth effect out of stock market
wealth is quite low. If you lose a dollar of stock market wealth,
your consumer spending only goes down three cents out of every
dollar versus 12 cents if it's real estate wealth. The reason for
that is partly because the distribution of stock market wealth is
extraordinarily unequal; 1% of Americans own maybe 40% of the
stock market. The other reason is that it's volatile. People
don't respond as much up or down to changes in their wealth when
it's very volatile.
If you believe that, then
even a very major stock market correction-it will have some
effect in raising the savings rate. You're right. People will
consume less. The question is, how much? These studies suggest it
wouldn't have a major impact. I think the best parallel is 1987.
If you think back to 1987, there was a big stock market
correction. The Federal Reserve lowered interest rates, and the
economy kept chugging along. So it wouldn't be good if the stock
market crashed, but I don't think it would throw us into a
recession. I think it would slow growth somewhat.
Mr
Christopherson: Is it fair to say, though, that it could
be a disaster for tens of thousands of families who are planning
on the value of that portfolio to provide for their
retirement?
Dr
McCallum: Yes, it would certainly hurt some individuals.
It depends how much it corrects itself and how long the downturn
lasts. Some of the high-tech Internet-type stocks, by any
conventional measure, are very, very high. The stock market
correction could be concentrated on those kinds of stocks. If you
are heavily concentrated in terms of your wealth in those kinds
of stocks, it's highly risky. If it drops a lot, you lose a lot
of money, no doubt about it.
Mr
Christopherson: You mentioned the declining incomes. The
next presenter will, I assume, be referring to a report she did,
The Growing Gap, that talks about the discrepancy between the
very wealthiest in our society and the very poorest and the fact
that during the recession of the early 1990s-I'm not asking you
to comment whether you agree on it or not, but during that
recessionary time the policies of the NDP government actually
closed the gap. Here we are in the biggest economic boom we've
ever seen in North America, and the gap is getting wider.
I just wondered about two
things; first, how you feel about that in terms of what it says
about the sustainability of continuing to see an increasing gap
between the very, very wealthy and the very poor. Second, if you
were of a mind to do something about it, what would you do to
close that gap?
Dr
McCallum: One thing I like about Canada is that we have
far less gap between rich and poor than the Americans. In the
last decade, for technological reasons and globalization and all
that, there has been a very big increase in inequality of pre-tax
income. Think of the pay of sports stars, the head of Disney,
Bill Gates etc. Pre-tax income inequality has gone up a lot in
both Canada and the United States. But when you're doing our
tax-and-transfer system, the transfers to lower-income people and
the progressivity of the tax system, up until a few years ago I
don't think there was any significant increase in inequality in
Canada. More recently I think there has been some, but it's been
very little relative to what's gone on south of the border.
The way the world is going,
over which Canada has no control, with changing technology,
internationalization etc, there is this trend towards greater
income inequality. Our tax-and-transfer system offsets some of
that. Again, it's a question of balance. You can't offset all of
it or else you'd have to have punitive taxation of higher-income
people. Canada is not a prison; a lot of them would leave. It's a
question of balance. I think we have offset a fair chunk of this
increased inequality, certainly not all of it but more than has
happened south of the border.
Mr
Christopherson: We would argue that the tax cuts the
government has implemented actually exacerbate that, because it
is the very wealthy who would benefit given the progressivity of
our current tax system. So when you go in reverse, make tax cuts,
those who earn the highest amount receive the biggest dividend.
Arguably, that is exacerbating the inequality between the very
wealthy and the poorest in our country.
Dr
McCallum: Actually, isn't it true that for any income
you have over $80,000 you don't really benefit from the 30% tax
cut because of the fair health levy or whatever it's called?
Mr
Christopherson: There's still enough gain for the very
wealthy.
Dr
McCallum: So the very wealthy, any income over $80,000,
you don't really benefit on the part of your income that's over
$80,000. Is that correct?
1400
Mr
Christopherson: No. They would like you to believe that,
but all the numbers and all the stats show-
Interjections.
Mr
Christopherson: No. Get away. Here you go, writing
titles of laws again.
The Chair:
Let's have some order on the floor.
Dr
McCallum: I believe that's the case, but I can't swear
to it.
Mr
Christopherson: Fair enough.
The Chair:
That completes your time. Thank you very much on behalf of the
committee for your presentation. It's been very informative.
Dr McCallum: I just notice that
my tax for Ontario hasn't gone down 30%.
The Chair:
Thank you very much.
Dr
McCallum: And I shall send you that information?
The Chair:
Yes. Thank you.
CENTRE FOR SOCIAL JUSTICE
The Chair:
Our next presenters are the representatives for the Centre for
Social Justice. Welcome. Could you please state your name for the
record? You have one hour for your presentation.
Ms Armine
Yalnizyan: Thank you very much. My name is Armine
Yalnizyan and I'm here representing the Centre for Social Justice
as their economist. Thank you for being so punctual, by the
way.
First of all, I want to
very much thank you for the opportunity of addressing this group.
It's a great privilege to have been able to do the work that I've
been doing in the last couple of years. The Centre for Social
Justice is the new organization that has come out of the Jesuit
Centre for Faith and Social Justice. The Jesuits, as you know,
have a long tradition of doing work on economic as well as social
justice issues.
I've been very privileged
in being able to do some of the work with them, for two reasons,
first of all because it's an area of economics that is rarely
looked at: income distribution. Often we look at economics in
terms of dollars and cents and rarely look at the impact that
those changes in dollars and cents have on people's lives.
Secondly, it's a great privilege because for me personally it
permits me to marry my Christian faith with my profession, which
is quintessentially secular. That's important. I know we've just
been listening a lot to what has been happening to stock markets
and whatnot, but all of us here around this room are somehow
connected to a sense of community. The thing about Christian
teachings, not only the gospel but also the scriptures, is that
we are constantly called by this higher authority to build a
community that comes together to do the will of God. Of course
that's the great challenge for us as Christians in this
pilgrimage, to figure out what is the will of God.
Quintessentially for
Christians, the issue of faith is about a willingness to remain
engaged. It's not about living without doubt or questions. I see
institutions like this particular group, this committee, and the
democratic process as a whole as being reflective of that same
sort of process that we're called to through scripture and
through gospel, which is a willingness to remain engaged-not
without doubt, not without question, but a willingness to try and
fumble our way towards something that's a bit better for
everybody. It's in this spirit that I make my presentation to
you, with that preamble.
The important thing I want
to raise our attention to in the process of my submission to you
is that we have come through a remarkable period in the last
decade, one that has brought us through a very deep recession as
well as a very rapid recovery. Part of our goal as forensic
statisticians is to discover what's the net result of this
radical transformation of the world in which we live, as defined
by the labour market.
We're told that the changes
we took part in-and remember, it was a leap of faith we were
asked to take about a decade ago, that free trade would improve
prosperity for everybody; that if you got governments out of the
way by privatizing some of the things that governments deliver,
as well as deregulating the market to make it easier for
businesses to perform in their best capacity, we would all be
better off. Part of our job is to just take a look at the
evidence: Are we all better off? It's for that reason that I'm
going to be taking us through a walk, in part, of what happened
over the course of the 1990s-just strictly what's the evidence on
that leap of faith we all took.
But clearly this particular
committee is most interested in what has happened in the last few
years of economic growth. So first of all, I want to say that
what I am going to try and present is based on this period
1989-97. Why 1997? Because we have no income statistics that go
beyond 1997. I'm presenting you with the most up-to-date
information we have on the distribution of income.
I know that in Mr Eves's
presentation he referred to rising disposable incomes. Indeed
there are rising disposable incomes in the system since 1997, but
it tells us nothing about the distribution of those incomes and
how that is finding its way right down to the bottom. Don't
forget this whole thing was about, "Prosperity will trickle down
to everybody." So part of our test is, has it trickled down to
everybody?
The second thing I want to
say is that the universe I'm looking at here is about income for
families. I'm not looking at wealth. The way I'm defining
prosperity, first of all, is what's our ability to make a living,
to begin with. Part of the equation is, of course, assets, and
this report cannot touch that because in fact we have no
up-to-date data on assets in Canada. The last time Statistics
Canada did a survey of assets and looked at the distribution of
those assets was in 1984. We know there is a study upcoming
somewhere down the road in the year 2000, but we have no
information since 1984 as to the distribution of those
assets.
Finally, the unit of
analysis that I'm looking at is incomes of families raising
children under the age of 18. You may ask, why choose that group?
Statistically speaking it sits in the middle of the entire
distribution of incomes. At one extreme you've got unattached
individuals whose distributional curve of incomes is primarily
much further down the spectrum. At the other end of the spectrum
you've got families with adult children or with no children and
their distributional curve tends to be higher up. Then you've got
seniors. Seniors are a very special case because they've got
pensions and all sorts of other things in the mix, so it's not
telling you a lot about how the market is interfacing with our
ability to make a living.
Families raising young kids
are in fact smack dab in the middle of that distribution, so
they're kind of a touchstone for what's happening to the whole
economy. But maybe
even more important than its statistical significance is the fact
that these are the families that are raising the next generation
of citizens. It's in this context that individual families with
better or worse economic opportunities and better or worse
systems of support are going to raise the next set of leaders and
followers in our society, so that's why I chose that particular
group.
Let's take a look at the
experiment. More market, less government: Does it deliver more
prosperity? It depends, of course, on how you define
"prosperity." If you define it strictly in terms of dollars and
cents, it's indisputable. There is more money in the system. Over
the course of the 1990s Canada's system of national balance
accounts shows that there's about $1.5 trillion more in the
system in the form of assets. As I indicated, we have no way of
measuring how those assets are distributed, but there sure is a
lot more money sloshing around.
What's fascinating is that
that increased prosperity did not translate its way into the
pockets of Canadian families, Ontarian families in particular.
What's the most fascinating is that there wasn't a single income
category in Ontario that was ahead in terms of earning its own
living either measured by what the market strictly delivers in
terms of wages and earnings from salaries as well as
self-employment or in terms of after-tax income. Every single
income category dropped compared to 1989. Clearly, in this
period, 1989-97, there was not increased prosperity as defined by
people's ability to make their own living and support their own
children.
What was startling to me as
an economist was that Ontario, which is the economic engine of
this country-it represents about 40% of the Canadian economy and
had one of the strongest rates of economic growth in the
country-was the place where the slide to the bottom was the most
rapid, and I'm including provinces like Newfoundland and Nova
Scotia. The slide to the bottom was more dramatic in Ontario than
it was in the Maritime provinces, both in market terms as well as
after-tax terms. That to me was startling.
It was also true that the
top 10% of families raising kids were some of the biggest losers
in this country, again only outpaced by the losses for the top 10
in Newfoundland and Nova Scotia. That should give us cause to
pause. I can't explain all of the reasons why this happened, but
I can certainly present the evidence. So it's not just about the
poor getting poorer, but literally everybody in the income
spectrum took a hit in terms of earning power as well as
after-tax incomes in that period.
1410
Though I'm focusing on the
1989-97 period in terms of incomes, I just want to flag, of
course, that we don't think of our incomes every moment of our
lives. Part of what we think about, especially when you've got
kids you are trying to raise, is the nature of supports you've
got in your system, as came home to us very graphically when that
young kid was rushed to the emergency room with an asthma attack
and his parents couldn't get him in. I bet tax cuts was not at
the top of their mind when they were trying to get services.
This is an era in which not
only have incomes dropped but also the range of supports that we
have to raise our families has been eroded and is in further
jeopardy. I'm not going to deal with that part of the context.
I'm saying that just looking at incomes is only part of the story
about what this period has been about. Again, in overestimating
the role of the market to deliver more prosperity for all
citizens, my assertion is that government has neglected its own
very critical role in providing security for everybody. It isn't
just about more prosperity. Surely part of prosperity has to
translate to more security for people.
What I want to first of all
do is walk us through the slippery slope and the degree to which
families in Ontario have actually fallen to the bottom. Both in
market income terms-this is page 2 of the brief-and in
after-income terms there were more families who found themselves
at the bottom of the distribution than in the middle or at the
top over the course of the period.
There's often a lot of
dispute as to whether-when you talk about the poor, it's always a
relative measure. So my idea was to hold things constant at 1989
levels and see how we compared by 1997, taking into account that
we went through both recession and recovery. When you do that,
you see that the very bottom decile grew the most rapidly-deciles
are 10% slices of the population-and that our population of
families with after-tax income thresholds of less than $40,000,
$39,500, actually grew to 39% of the population. Let me try this
out again, just in case this is confusing. In 1989, 30% of the
population of families raising kids had after-tax incomes of not
more than $39,458. That's the trigger after which you end up
being in the 40% of the population. Average incomes are much,
much lower than that threshold. I'm just saying that's the
cut-off.
Using that same cut-off in
constant dollars in 1997, we find that 39% of the population has
fallen under that threshold, there are fewer families in the
middle, and there are even fewer families at the top. As you can
see from the numbers that I presented here, all of the incomes
are falling, both in market terms and after-tax terms. So not
only are there more people at the bottom, but their incomes are
falling, and there are not more rich. So as a social experiment
of delivering more social prosperity, the evidence at least
raises questions that it was worth doing this.
I want to point us to page
3 of the brief. There was some discussion with the previous
presenter about whether after-tax income inequality is growing,
and I heard him say things that I have frequently heard said
about growing income inequality: first of all, that it is
inevitable; second, that economic growth is all we need to get
rid of it. What the evidence shows is that growing income
inequality is not inevitable even under poor economic conditions,
and income inequality, again the evidence shows, is not
necessarily reduced by a good dose of economic growth. I don't
want it to appear that I am against economic growth. I'm just
saying it's not the only critical lever for reducing income
inequality.
Marketing outcomes definitely play a strong
role, but at the end of the day the critical role remains in the
hands of government decisions with regard to how much inequality
is acceptable or unacceptable.
I have a sheet called
"Amazing Facts," and you can see by just looking at the chart on
the other page-what the gentleman previously was saying is that
there is growing income inequality in market terms, just in
people's ability to earn their own living. You can see in the top
chart on page 4 that that is not true. In fact, when economic
times start to recover, more people at the bottom get jobs,
right? The quintessential hallmark of recessionary periods is
that people lose jobs, so some income is better than no income.
Market income inequalities in fact fell in Ontario very rapidly
in the recovery period. What is fascinating by this story is the
second chart on page 4, which is slightly below it, which shows
that contrary to what you would expect, in the recessionary
period the after-tax income inequality did not rise despite the
fact that more people were out of work. In fact, it fell. Yet in
a period of economic growth which did reduce market inequalities,
we seemed to be unable to actually cash in on that market trend,
and after-tax inequalities ballooned.
The question was raised as
to whether tax cuts were the culprit. Indeed, it's partly tax
cuts but it's also transfer cuts, because if you're cutting
supports to the people at the bottom as well as cutting taxes-I'm
sorry, the evidence indicates that the combined effects of all
the cuts as well as transfer changes have benefited the top
income groups the most strongly. We can talk about the numbers
later, but they do include the total combination of all surtaxes,
all health levies, all income taxes. Clearly the tax cuts most
strongly benefited people at the top of the income distribution.
Transfer cuts most strongly af-fected people at the bottom.
Presto bango, you get growing inequality even in a time of
economic growth.
The next page is "Making
the Links." I just want to bring us back to the chapter and verse
of what this whole period has been embedded on, that there are
certain causal links that lead to greater prosperity for
everybody if you get economic growth, so clearly all you have to
do is boost the rate of economic growth to make things better for
everybody.
The four links in the chain
are: Once you get more economic growth, you get more people
working; once you get more people working, that leads to higher
incomes; once you have higher incomes, because there are more
people working at the bottom, you have less market inequalities;
and once you've got market inequalities, you're in from the races
and you've got less after-tax inequality.
Looking at the evidence for
Ontario, you don't see necessarily that any of these links in the
chain hold. First of all, did economic growth mean more jobs?
Clearly in the 1998-99 period you've had more jobs. I've tried to
update these numbers, but you have to understand that for me to
walk you through every link in the chain, I have to end in 1997.
We know nothing about the distribution of income after that. But
I knew there were concerns about how the economy has performed in
the labour market in the last few years, so I wanted to run some
numbers by you.
Yes, it's true that more
people are working. That's indisputable. There are more jobs in
the system. But the fastest-growing trend in the labour market of
the 1990s has been self-employment, not employment. Though that
has been reversed in 1998 and 1999, I want to caution you that
the number of temporary jobs is growing at a faster rate than
we've ever seen before, and the number of contract and term jobs
has grown at an unprecedented rate.
Why is this important?
Because even though you've got more people working, it doesn't
mean that you've necessarily got more economic security. You may
in fact have more economic insecurity. You could have lots of
people working full-time but they don't know if they've got a job
next month or in six months' time, which is devastating for
families that are trying to raise young children.
More jobs don't necessarily
mean high incomes, according to the data. It does depend on where
those jobs are being created. Are they being created at the
bottom of the spectrum? Are the jobs that are lost being replaced
by jobs further down the income spectrum or are they being
created in the middle and upper ends of the spectrum? So part of
the story is, do more jobs create more income? The answer to that
question is, first of all, are the jobs that are being created
more lucrative than the ones that were lost? Secondly, it depends
on whether those jobs have longer or shorter hours or the same
number of paid hours of work.
Clearly in Ontario we have
had a period of massive restructuring of economic activities. The
1990s have been predicated on downsizing: downsizing of the
public sector, downsizing of major private sector players. The
merger, downsizing and reorganization of activities has meant
less jobs in those big firms and certainly the creation of more
private sector full-time jobs, indisputably, because people are
being spun off from the core businesses. This has led to fewer
stable jobs, more contract and precarious work, as seen in the
previous comments, and greater downward pressure on wages. So
it's not a surprise that even though we've got a lot of the
hallmarks of an economic boom, we appear to be sliding down the
income spectrum.
The third point is about
market incomes rising the most rapidly for those at the bottom of
the income spectrum. Indeed, market incomes in a period of
economic growth rose most dramatically for people at the bottom
of the spectrum. As you'll see, the number is a staggering 244%
increase. But look at the actual numbers we're talking about.
Average family income of the bottom 10% rose to a high of $1,962
worth of earned income by 1997. This was a huge erosion from
their position in 1989, which was an average earned income of
just over $7,000. By the way, all this is in constant dollars,
controlling for inflation. It's even worse than it was in 1984,
at the height of the recession.
1420
Market incomes for the
richest 10% of families also fell in the period between 1994 and
1997, and that is the only upper-income group to post a decrease
in market income. That was a bit of a mystery to me, but we can
discuss some of the things that might have led to the top 10%
dropping.
Every other income decile
which is the middle of the spectrum was posting very modest
income gains, in the order of about 2%, in this period of
economic growth. Of course, these gains come nowhere near
restoring what they lost over the course of the period, because
the gains are on the order of hundreds of dollars and the losses
are on the order of thousands of dollars.
The after-tax income gap:
Even though, as I mentioned, we have a smaller gap between rich
and poor in market terms, we have a wider one in after-tax terms.
Why? We cut taxes and transfers in this province between 1994 and
1997. You can see the numbers; they're quite staggering. The
single biggest change was the average amount of transfers to the
bottom 10%. You know what I mean by transfers, don't you? They
are income support programs, primarily social assistance for this
particular group. All transfers for families raising children
under the age of 18 would be unemployment insurance and social
assistance. In 1989 it would have included family allowances, or
what was becoming the child tax benefit. By the end of the
period, that amount gets captured in the tax side of the
equation, because it's the child tax credit. So we're really
looking at only two changes, unemployment insurance and social
assistance. And the big change from 1994 to 1996 for that bottom
decile was social assistance. They are paying less taxes too. The
tax cut apparently reached them, and they are paying an average
of $28 less a year than they were in 1994.
The top 10% also received
less income from transfers. On average they lost $17 dollars a
year from transfers. Their gain from the tax cuts was $3,384, on
average, at the top.
In the middle of the
spectrum, you see there have been marginal increases, and in some
cases no increase in the middle of the distribution. Taking a
typical middle-income decile, you see that average after-tax
incomes budged just a little between 1994 and 1997, arriving at
not even $44,000. But that is 8% lower than it was in 1989. These
families were actually paying more income tax in 1997 than in
1994, probably because they were working more. But they received
$802 less in income supports.
What is the upshot in this
period of growth? Forty percent of the population at the bottom
saw reductions in their disposable incomes, as did the top 10%.
The modest gains in disposable income were restricted to the
upper 40%, excluding, of course, the richest. Again, just to
focus our minds on the value of further tax cuts, the bottom 10%
of families raising children-and this is the most recent
distribution data that I have-pay an average $59 a year in
provincial and federal income taxes. So the amount of tax scope
you have to do something significant for people at the bottom is
quite small.
This brings us to the role
of taxes. There are two sides of the tax cut discussion. First of
all, the economic theory I laid out for you-economic growth leads
to more people working, leads to better incomes, leads to less
disparity, which means more prosperity for all-is mainstream
economic theory. Where we go rightward politically is where we
assume that tax cuts are the primary lever for "goosing" that
rate of economic growth, that that's the best way of getting a
higher rate of economic growth. Again, the evidence does not
support it.
If you take a look at the
changes in this country in the period 1994 to 1997-and I choose
the period 1994 to 1997 because by 1994 every income class of
every province basically shows either an improvement or at least
a stagnation. Generally, it's a recovery period, a meaningful
recovery period for families, and GDP, gross domestic product, is
definitely growing in this period.
When you compare the
provinces that were growing the most rapidly in this country,
Ontario does belong to the group of provinces that grew the most
rapidly in 1994 to 1997, but it is at the bottom of the pack. You
have four provinces that grew fairly strongly, you have four
provinces that grew very weakly and then you have Newfoundland,
which was a basket case in the period.
The four provinces that
grew strongly were, in order of importance, Saskatchewan,
Alberta, Manitoba and Ontario. Now, of the top three performers,
only one of those provinces had tax cuts. There is something
going on in this economy which is connected, perhaps, to the
resource industry, energy resources in particular. It's quite
peculiar that the three provinces where oil is sitting underneath
the ground are the ones that grew the most rapidly between 1994
and 1997. That, I would contend, is less the advantage that Mr
Klein gave to his citizens than the advantage that God gave to
the citizens by placing oil underneath the surface of the
soil.
Again, there is no evidence
that tax cuts are the primary booster of economic growth. I'm not
saying that they don't play a role. Don't get me wrong. I'm not
saying that tax cuts have no positive influence on economic
growth, but to say that tax cuts are the only way you get
economic growth and in fact you get the highest rates of economic
growth if you introduce tax cuts simply does not hold water in
terms of the evidence. It bears mentioning also that sometimes
less is more; sometimes less is just simply less.
This is, of course,
avoiding the other part of it which I introduced at the very
beginning: paying for tax cuts. Of course, they cost something.
Tax cuts cost something to the system. So there's a trade-off.
The trade-off we have agreed to make by electing governments that
have told us they are going to introduce tax cuts is deep cuts to
income supports and other forms of government expenditures. These
cuts disproportionately affect the incomes of the bottom half of the
population, and they affect the quality of life of all of us.
I guess the question I
would pose to the finance minister, were he here, is this: He
said in his brief to this committee yesterday that the tax cuts
are the best public policy that can be pursued. Based on the
evidence, I would have to question that they are indeed the best
public policy that governments can pursue for us all. The heart
of what I'm suggesting is that governments are directed and
obligated to look for the best thing that can be done for all of
us, not just for a select few.
The main message of this
submission is that we live in a very unusual time, because even
though we are living in a period of plenty, we have poverty
amidst plenty. Even though we are living in a period of
unparalleled prosperity, we also have unparalleled economic
insecurity.
The previous presenter was
talking about the Federal Reserve's Alan Greenspan's commentaries
on raising interest rates. It's interesting that just a few
months ago, Mr Greenspan was saying there were no inflationary
pressures in the system and, of course, his goal, just like the
Bank of Canada's goal, is to maintain a lid on inflation. There
are no inflationary pressures in the system. Why? Because there
is great wage insecurity out there and there's nothing pushing up
the wage system.
The American economy has
seen now, I think, 101-or some crazy figure-months of economic
growth, and the average wage increase in Silicon Valley was
reported in the Financial Post today, of all workers in Silicon
Valley-the thing that we keep pointing to as being the best-the
average wage increase in Silicon Valley, in the United States,
was 5%. That goes from the bottom to the top. That's 5%. There is
no wage pressure, because there's economic insecurity everywhere.
I want to get that across to you as clearly as I can.
The 1990s may have ushered
in more prosperity; they have also ushered in more insecurity.
Prosperity is not the only objective for governments; it has to
be also more security. If you're awash in money, surely we can
create more security. Surely the best governments can do can be
something more than simply getting out of our way by providing us
tax cuts and actually increase the security of things that people
need regardless of what their income is, whether that's basics
like housing, health care, education or roads, for heaven's sake.
We all need certain basics. I think we would not contest that
there are basic things that we need to provide.
I'm hoping that in the
spirit of the discussions that these types of committees provide
we can actually have some discussion about the evidence, as well
as options for actually improving the prosperity and the security
of all residents of Ontario.
I thank you very much for
your time.
1430
The Vice-Chair (Mr
Doug Galt): Thank you for your presentation. It's much
appreciated. We have about 30 minutes left, 10 minutes for each
party, starting with the official opposition.
Mr
Phillips: I appreciate your comments. I carry around
this document, Ontario, Canada: The Future's Right Here, because
it's sort of what the government tells their business friends at
the Albany Club and it's useful to-
Mr Arnott:
The investors too.
Mr
Phillips: And investors, sure, exactly. That's exactly
it. Here are the selling points for Ontario:
"Since 1991, Ontario's unit
labour costs, measured in US dollars, have decreased 17.5%
compared to a 15% increase in US costs. Ontario's hourly labour
costs range from $4.71 to $13.65 lower than competing
jurisdictions in the US. Major wage settlements have been 1% for
the last five years. Wage growth in the next few years will be
constrained by unemployment levels and continued public sector
restructuring."
It goes on to other things.
Your numbers, I think, kind of confirm that, that one of the big
selling features of Ontario has been the significant wage
constraint among hourly waged people. If you'd had a 4% increase
in your salary, that would have been equal to what the tax cut
is, 1% a year. It is somewhat of a comment on your document,
which, as I say, is stimulating, to try and determine why average
incomes haven't gone up substantially in spite of "the tax cut,"
particularly vis-à-vis our major competitors. It would
appear to be that the Ontario wage rates have been substantially
constrained versus other jurisdictions. That's just going on the
basis of what this document says.
Has your organization
looked at that? Do you have any comment on what has happened to
wages in Ontario vis-à-vis our competing jurisdictions?
Ms
Yalnizyan: In last year's Growing Gap report that I
published, I kind of decomposed the story of inequality into
what's happening to individuals, because that's how the labour
market works, wage rates, what's the value of your work-right?
That's an individual phenomenon-to what's happening to families,
because we have all sorts of survival tactics. When our wages are
falling down, we do all sorts of creative things because most of
us live in families. There is a discussion of wage rates in this
thing, but it's a little bit dated, given what you're looking
at.
I did not look at wage
rates for this particular submission; nor did I look at it for
the Great Divide document that I just released last week, which
is Canadian data. So I can't address specifically your comment
about what has happened to wages.
What I can clearly say is
that the period between 1989 and 1997 has done some kind of
economic resorting of opportunities in the labour market, where
there are fewer of them in the middle and the top of the spectrum
and more of them at the bottom, to which I attribute primarily
the fact that we have been engaging in a massive project of
restructuring our economy, getting governments out of the way,
privatizing services, downsizing services, down-sizing the public
and private sectors, which has led to the increase in casualized
employment, contract employment, temporary employment, part-time
employment until very recently, but even the full-time has been
on the casual side of
the ledger, and downward pressure on wages. It's completely
consistent with what's happened to this slide to the bottom for
family income.
Mr
Phillips: By the way, I find this a very helpful
document because, as I say, it kind of-
Ms
Yalnizyan: Actually yes, I know the one you're talking
about. One of the things I was thinking of bringing along with me
today, which I did not bring along with me, was an article from
the fall of 1995, just after the election, where the Premier went
to the United Kingdom to rustle up some business, to attract
investors. And of all of the selling points that were mentioned,
not one of them included the proposed tax cuts for which he was
elected apparently. What he was selling was the quality of the
labour force; the proximity to the American market, which was the
fastest-growing market at the time, in 1995; location, location,
location, as they say among realtors; and the fact that this was
a very secure and friendly environment in which to relocate top
executives. There was not one mention of the tax cuts as the
selling point to investors. It's interesting how that flavour has
changed.
Mr
Phillips: It was interesting to me that we got this
document one day and, on my desk virtually the same day-this is a
letter from Minister Palladini of November 26, 1999. He sent us a
magazine, Ontario: Canada's Economic Powerhouse, and said we can
all be proud when an independent publication confirms that
Ontario really is the best place to live, work, invest and raise
a family.
My point is that the
document that he sent us quotes the two major reasons why
companies should invest in Ontario. Well, it says "two of the
chief reasons," and I think they suggest these are the two most
important reasons. One is "the province's abundant supply of
skilled workers and highly competitive overall operating costs,
including labor costs.
"Education attainment here
is among the best in North America ....
"First-class education in
Ontario is highly affordable and accessible."
That was the number one
point.
Number two: "And the second
factor is the Canadian benefits system, which is a publicly
funded system. Employers pay less for such things as health care
than they do in the United States .... A typical company
operating in Ontario might find its employee benefits bill
slashed to one-sixth of what it'd pay south of the border."
The reason I raise this
question is because there is no doubt that in the land tax cuts
have a lot of political cachet, as they say. My concern is that
if indeed those are the two highly competitive reasons, as we
move to lower taxes to compete with the US there is a risk, in my
opinion, that we can no longer afford the two fundamental things
that have got us here: our unique education system, where we have
the highest post-secondary attainment in North America, and the
way we fund health care. We run the risk of chasing a solution
that leads us to a significant problem.
I wonder if you'd care to
comment on whether that's the experience of your organization,
that those are the key reasons, and what advice you have for the
committee on that.
Ms
Yalnizyan: I guess three points. First of all, if we've
learned anything by looking at the evidence from 1989-97, it is
that we were promised greater economic prosperity if we did all
of these things, which included moving ahead on these agendas
that lead to things like more tax cuts to attract investors, and
what was the outcome of that promise? Actually declining economic
prosperity for virtually every income group, from poorest to
richest, over the course of the period in Ontario, the economic
powerhouse of the nation. That's point number one.
Point number two: Now we
are being offered tax cuts-you're right that they have great
cachet and are parlayed into having great cachet because they
touch the Achilles' heel of everything this submission is
bringing to your attention: economic insecurity and, frankly, a
great deal of political cynicism. Because when you keep endorsing
party after party that tells you, "We're going to give you more
prosperity. If you just tighten your belt, if you just follow the
recipe for more economic growth, you'll be better off," and
continually you are worse off, and, "Now the best thing we can do
for you is give you tax cuts, because there ain't no market
solution to increasing prosperity," then there is a certain
malaise in the land, that if the best one can do economically is
to take tax cuts, "Well, give it to me."
The fact is that poll after
poll shows that if you ask a Canadian or an Ontarian, "Do you
want a tax cut?" anyone is going to very enthusiastically endorse
the tax cut. It's like saying, "Do you want more money in your
bank account?"
If you ask an Ontarian or a
Canadian, "Do you wish your government to pursue tax cuts as the
primary priority for you, or a range of other things?" and it can
be a range of a number of things-since 1997, poll after poll has
listed all sorts of different things, including tax cuts-tax cuts
appear consistently at the bottom of the list, as recently as
December 22, 1999. I frankly found it interesting that tax cuts
are still at the bottom of the list. People were more concerned
about health care on December 22, 1999, than they were about tax
cuts. The second-greatest concern at the height of the economic
recovery, when we are in boom times, when we have arrived, is
unemployment. That tells you something about the economic
insecurity that we're talking about in the submission.
1440
Clearly Canadians as well
as Ontarians are looking for something more that their
governments can offer them than simply more cash in their
pockets, because you can get more cash in your pockets but that
family raising children and ending up paying for every child
they're raising under the age of 18 is going to have to pay more
in tuition to get that crack at the labour market that
everybody says you
need. For somebody studying to be a professional you're spending
now-
The
Vice-Chair: I'm going to have to step in here. We're
well over the 10 minutes for the Liberals' questioning. My
apologies. We'll move on to the third party for their questioning
or they may run out of time.
Mr
Christopherson: Armine, thank you very much for your
presentation. I think it's been interesting that since the first
report was published through to the recent one you published last
week, I haven't been aware-and if someone knows of them, please
show me-where anyone has refuted the statistical analysis. They
may disagree with some of the interpretations, which is fair, but
no one other than maybe the finance minister-when he was here
yesterday and I said that incomes are falling right across the
board, he said, "No, that's not the case." On every argument that
I offered up to him he just plain disagreed with the premise, and
yet the facts are here.
I'm sure we share the same
frustration in constantly reading in the mainstream media over
and over the same sort of pushing of the right-wing viewpoint. To
be fair, it probably underscores the lack of ability on the part
of the opposition parties to provide a credible alternative that
people would feel is credible and at the end of the day does
indeed make for a better life. But reports like yours make a huge
difference and I certainly hope you and your colleagues don't
become so discouraged over the lack of attention at this point
and drop off, because we need you in there providing these kinds
of things. Lay people like myself and others can't do it; we need
experts like you. It does make a huge difference, so thank you
for your efforts.
I want to just ask a simple
question straight up. Given all that you've criticized about the
result of the right-wing agenda that's been in power here in
Ontario, what sort of things would you do differently? What
recommendations would you make very clearly and specifically to
this committee in terms of how you think, if you had the
opportunity to design it, a new budget ought to look to reverse
some of these things and undo some of the damage that's been
done?
Ms
Yalnizyan: I think governments at all levels, federal
and provincial, need to take a look at this very historic moment
that we're sitting on. According to your forecasts you're about
one year away from a surplus situation, or at least not having a
deficit situation. We've got a surplus situation at the federal
level and in many of the provinces. We're sitting at a historic
moment that we've not seen before for a very long time, a period
of rising economic prosperity with no recession in sight. I think
we've got an obligation to do something other than to just get
out of people's way when there is so much more economic
insecurity.
From my perspective, which
again is rooted in my Christian faith, which stresses not
accumulation but livelihood-that is all of the teachings. Both
the gospel and the scripture are about having to attend to
livelihood. Accumulation is not the issue. If we cannot provide
livelihood for people and make sure that people can survive,
we've got a problem in the midst of all this prosperity.
What are the basics that we
all need? We all need, in a country as cold as this, housing. It
has to be warm and it has to be dry. If in a period like this we
cannot provide adequate housing for everybody, we've got a
problem on our hands. This is not of course an issue just for the
provincial level of government; I'm talking about all levels of
government. I'm not talking about political parties; I'm just
saying that's your obligation as leaders of people in a period of
such economically prosperous times. We've got an obligation to do
something to make sure everybody's got decent housing in this
country.
Second, health care: It's
incomprehensible to me that we are at this point in our country
where health care appears to be in jeopardy, when we're sitting
on a surplus, when we've got this boom time and we've got
families that are stressed in both directions in terms of
providing elder care as well as care to young kids.
I think there's a lot of
mileage we can do in improving and restoring our health care
system so that it is not a question of whether it is going to be
there or not. It is there. It is a reliable public support for
anybody of any age who gets sick, regardless of your income.
That's surely one of the treasures of an industrialized, modern
society, that that's the type of public service you can rely on
without question.
Finally, education. We're
being told-this has been going on now for over 10 years-that
without post-secondary education you're toast if you're trying to
find a job, and yet we're making it more difficult, not less
difficult, for people who have the willingness to try and get an
education to actually finish it. In fact, right now outside
you've got people across this country talking about either
tuition freezes or tuition reductions. This is one of the huge
issues.
I didn't have the
opportunity to take a look at this data by generation, but one of
the things we did in The Growing Gap report last year was take a
look at this kind of fault line that's emerging between those
over the age of 35 and those under the age of 35. Listen, folks:
People who are raising young kids are having a harder and harder
time leaving home, getting married, having kids, let alone
raising them, and it's partly because of the economic
opportunities out there. If you're going to also double-whammy
them by not providing them child care when they have to work at
crummy jobs because those are the only jobs out there-there's no
system of public supports there-and you're not going to let them
get an education because it's out of sight in terms of their
income abilities, what is left to take away from this next
generation? Why do you think you're going to get political buy-in
that we are engaged in a common project?
That is a piece of work
that could be done, but my guess from the data we had last year,
as well all the hallmarks you have around you, is that young
families, families with heads under the age of 35, are really the
net losers out of this whole game. That's not a legacy you want
to pass on.
Mr Christopherson: One of the
things the government points to over and over is the number of
net new jobs that have been created. I know on page 5 you make
the point, "More jobs don't necessarily mean higher incomes."
Looking at just the headline of how many net jobs have been
created, apparently when you scratch the surface it's not the
whole story. Would you underscore that again for us? The average
person looks at these things and says, "Oh, well, they must be
doing the right thing, the correct thing," yet your analysis
tells a whole different story.
Ms
Yalnizyan: If you take a look at table 8, you'll see
that the long-term trend over the 1980s and the 1990s is
replacing full-time work by part-time work. The rate of part-time
employment continues to grow, and it has continued to do that in
the 1990s, with the exception of 1998. But let us hope that when
you actually reach the apex of economic recovery, you're actually
creating some full-time jobs. One would hope that's the fruit of
all of this.
You know, what goes up must
come down, and that fundamental economic restructuring of
opportunity is still continuing apace through the 1990s. Another
layer that got added on top of that in the 1990s was growing
economic insecurity because of the casualization of work. The
biggest labour market trend of the 1990s is replacing employment
with self-employment. A number of different things are adding to
more and more economic insecurity.
Just to repeat what I said
earlier, there may be more full-time jobs in the economy today,
but more and more people, especially those under the age of 35,
do not know if they will have a job in a month, in six months or
in two years. You cannot raise children with that level of
economic insecurity unless you're providing security in other
forms, that you know you've got health care, you know you've got
education, you know you've got decent housing, you know you've
got child care, that the basics are covered off. Let's make a
decision here about how we're going to govern.
Mr
Christopherson: One of the earlier presenters, the one
just before you, in fact, was making the comment that if you
looked at the Fair Share health care levy, things evened out for
anybody making more than $80,000. If we look at a
freedom-of-information request that our caucus received from the
Ministry of Finance-these are government documents-it shows that
even after the Fair Share health care levy was factored in,
people earning between $78,500 and $83,700 still took home $2,350
more; and between $83,700 and $90,750 it was $2,510; and for
those making over $247,500 they got $15,075.
You know the rhetoric, that
what happens as a result of tax cuts is blown away when we look
at the real stats and the story they tell. A lot of people will
listen to the argument, "We've got to remain competitive." We
know, for instance, that our minimum wage now is well below that
of the Americans, and yet there they are still steaming along
with the greatest boom ever in their history. In fact the
President of the United States in his State of the Union address
the other day implored Congress to raise it yet again.
1450
I'd just like you to
emphasize again what is happening in the families that have the
lowest income right now and the hits they're taking, the loss of
transfers. Could you just expand on that and give us a sense of
what their world looks like right now, both in terms of the money
they receive, the wages they get or don't get, the insecurities,
the lack of transfers, the supports in the community, what all
that means to a family now as opposed to, say, where they were
when you used your reference point 10 years back?
The
Vice-Chair: Thank you, Mr Christopherson. I'm sorry,
time's up. We'll go to the government side, and Mr O'Toole is
first.
Mr
O'Toole: Thank you very much for your very compassionate
presentation and information this afternoon. I would also declare
myself as a Christian, and from that fundamental I think we have
shared values and priorities in life-not essentially you and I-so
I come at this perhaps with a different set of tools to reach a
solution.
I like the premise that you
started with, looking at it purely as a model of economics. It's
a fine thing to do, looking at our economy and its own aggregates
over the period 1989 to 1997. You would know that in that period
the lag effects and the implications of those effects in the
statistics you quote would pretty much curtail that to the two
previous governments. In my understanding, limited as it may
be-and my background is in economics; not quite to the level of
yours, but that's where my undergraduate degree is-I suspect
there's a lag effect, would you not agree? You can respond in
that way.
A change in policies
occurred which would really start showing up in the economy
somewhere in the late 1997 reported income period and onward. I
look at some of the implications during that period: growth in
debt load, which is servicing the debt; debt interest charges.
Every economist would say we were crowding out program spending
initiatives. In fact, during the time of Mr Christopherson and
his government, debt interest was higher than what they were
spending on public education. In fact, it was crowding out their
actual spending in health care. I think you could probably
substantiate those numbers. So our whole standard of living was
at great risk without a re-sorting out of the priorities for the
province; and a complete lack of leadership federally in any
consistent policy in health care and the other distribution
methods through fiscal and monetary policy that they have at
their disposal.
Even today it's the issue,
in the current budget we're all anticipating, the built-in
inequities in their social justice policy. Most important, as was
mentioned here by our finance minister, is the whole issue of
bracket creep. Everyone in the world has talked about it, how it
really penalizes the disposable income-that's the income you've
talked about-for the very group you're talking about. They should
inflation-protect that particular component of income. There are
fewer and fewer people in Ontario paying provincial income tax
because of the way we set the cap on where we max out those who
are actually paying tax. Fewer people in Ontario are taxed
provincially than they are federally.
I'm not telling you things
you don't know, but I think even in the minister's statement
there were other comments of how regressive the federal
government is in its policies now, specifically on those working
people, however you might categorize their income. Ontario
workers and employers will pay $560 more in federal payroll taxes
in the year 2000 than they paid in the previous year. That's
again through their policy with the redistribution of EI and CPP.
These are payroll taxes, primarily, as well as the bracket creep
I mentioned. This nets out into actually a tax on jobs, a tax on
the economy as we see it.
If you look at the broader
scale on tax policy, which may sound right wing-"A tax cut for
the rich," is what Mr Christopherson would say-in fact, that
isn't really the truth. The rich actually pay a higher percentage
of tax, and that was said by the bank person, Dr McCallum, before
you. That's the background where we may have some disagreement,
you and I, even though we're starting from the same boat: "I am
my brother's keeper" and "The poor will always be with you."
We're from the same book, you might say, so to speak, without
being trivial.
Now you did talk about
another point here on page 5 of your presentation. My comments
would be specific here. You talked about jobs and defining jobs,
I'm not sure from what economic premise. I would ask you to
define the future of work itself. That's a purely academic
discussion today, defining the workweek, defining whether work is
a place or a way of life. That's a very important debate going on
today if you are reading some of the journal material on the
theory of work.
Ms
Yalnizyan: Can I address any of these comments?
Mr
O'Toole: No, no, I'm heading somewhere on this. There is
actually a shortage of workers in Canada, in Ontario. You could
say that our governments of the past decade, federally and
provincially, have been all wrong in their training initiatives.
They're training the wrong people with the wrong skills. There's
a severe shortage of people with technology skills today. I think
in Ottawa there's some 25,000 jobs that can't be filled, and the
companies are moving to the markets where the people are, Silicon
Valley, wherever they are moving to. So I criticize the previous
governments again in their policies of establishing the
fundamentals of wealth creation; that is, training,
knowledge.
Knowledge is power and
power is money. You know, those are basic things. Training people
to know about philosophy and sociology is very important academic
stuff-absolutely critical-and a critical thinker should know that
stuff. But you actually have to be able to spell, you actually
have to know technical things to add value, and then once you
have the academic freedom to think laterally and vertically,
that's great. I think people should have a PhD in philosophy, no
problem with that, but you really have to operate some kind of
system here. You have to be able to spell, you have to have some
clinch on numeracy and statistics, or you are actually being
de-skilled.
Having worked in personnel
for General Motors for 10 years, and looked at the shift from
knowledge-based employment to casual employment, I would
challenge you that there is a job shift now and it's some risk
for employers. The use of contract employment has been going on
for the last 10 years. Why wouldn't you? You don't man up for the
peak of job expectations, you man up for the level and you handle
peak through contract or subcontracting. That's what everyone
should do. The reason is because your payroll is such a
significant part of your overall operating budget, especially in
the public sector. So I think that as we go forward and look at
our strategy and translate it into the debate that's going on
today-
The issue of tuition: I
have five children. Why would they pay the same tuition as
somebody in engineering? Well, somebody in engineering is going
to actually have some job-related skills when they graduate. In
fact, they're going be recruited. That's what I did for 10 years.
And they are paying the same as my daughter who's taking history
and English, which is great, by the way, but there are no jobs
for her. And there's 500 in her class and 30 in my son's
engineering class. Who's getting the best product here? I think
it should be related to the outcomes, to the market, and that's
what we've done. We've allowed the governing bodies of the
universities to decide how to attach the tuition component of the
real cost. Tuition doesn't cover half of the cost anyway.
So I think that shift in
policy is redressing so that the dentist who's going to make
$200,000 a year or more is actually paying tuition somewhat
commensurate with their ability to repay, versus my daughter or
daughters or son who are taking kind of the history, sociology
route which ends up basically where I'm not sure they would get a
job, technically. It's good to have the knowledge, though;
knowledge is important.
The after-tax gap can
really be attached to some of the taxing policies we've talked
about before. I have a question here-
Interjection.
Mr
O'Toole: Yes, I do. I found your presentation
interesting, so I listened and I was critiquing some of the
fundamental points. I found a missing part here, though. In the
closing part you do have an ambivalence as to whether tax cuts
really work. You say that in your conclusion.
Ms
Yalnizyan: Indeed, I'm not saying I'm ambivalent. I'm
just saying the evidence doesn't necessarily support that tax
cuts are the key lever.
1500
Mr
O'Toole: I think you should stay tuned, because there
are more people working in Ontario than ever before. We are
competitive. We do have some differences between our tax policies
and the brain drain issue. If we make it more advantageous for the well-educated
people to go somewhere else where they're going to pay less tax,
obviously we won't have the infrastructure to have the economy to
create the jobs for the people who just want jobs without
careers.
If you don't feel the tax
cut policy's working, perhaps you can explain this to the others
who were here this morning, Dr McCallum and others, who
recognized the importance of our own GDP in Ontario, and the
important contribution-probably 80% is attributed to the actual
multiplier effect of giving you a dollar. If I give you $100 a
month, you're liable to buy a car; you're liable to spend
$28,000. If I give it to a government, they'll create some
program that'll never pay for itself, so there is really no
multiplier effect to the same extent of giving you a dollar. My
response is, can you come up with a significant
recommendation-
The
Vice-Chair: I'm sorry, Mr O'Toole, but your 10 minutes
is up.
Mr
O'Toole: No, from a recommendation I just want one
observation-
The
Vice-Chair: I'm sorry. Your 10 minutes are up. It was an
excellent speech and a short question. We'll have to move on.
Thank you, Ms Yalnizyan, for coming before us. We appreciate your
presentation.
Ms
Yalnizyan: Thank you very much for the opportunity. I
look forward to speaking to you, Mr O'Toole, at some other
point.
WARREN JESTIN
ARON GAMPEL
The
Vice-Chair: Our next presenter is Warren Jestin, senior
vice-president of the Bank of Nova Scotia. Would the next witness
now come forward.
There is an hour set aside
for presentation, questions and answers. The time left over after
your presentation will be divided between the three parties
equally.
For the record could you
just state both your names so they are recorded, please.
Mr Warren
Jestin: I am Warren Jestin, senior vice-president of the
Bank of Nova Scotia.
Mr Aron
Gampel: Aron Gampel, vice-president, Bank of Nova
Scotia.
Mr Jestin:
Thank you very much for giving us the opportunity to give you our
views on the outlook for Ontario. I've brought with me today two
documents. One is our Global Economic Outlook, that tries to put
the economic potential of Ontario over the next couple of years
into the perspective of what's happening both in the United
States and globally. The other one is more specifically related
to the issue at hand, entitled Ontario-Extending Solid Growth
into the New Millennium. What I'd like to do is go through that
paper very briefly and then answer any questions that you would
have.
It's our view that not only
is the Ontario economy back on the fast track but it's likely to
remain there. After growing by roughly 5.5% last year, we believe
that provincial output will expand by about 4% this year and
3.25% in 2001. Over the next half-decade we think there's a very
good chance that Ontario will be Alberta's main contender for the
title of the nation's regional performance leader.
In looking at the
statistics, we see the provincial growth has broadened and
deepened into virtually all regions and sectors. Our unemployment
rate has fallen close to a 10-year low of 5.6%. Over the past two
years the average duration of unemployment has fallen by 25% and
most of the 370,000 jobs created over that period of time have
been full-time positions.
With after-tax household
incomes finally outpacing inflation, solid growth and profits and
consumer and business confidence are on a strong upswing. This
confidence is reflected in the 8% growth in the province's retail
sales last year, one of the best performances in the country.
Big-ticket purchases have been particularly strong, with motor
vehicle and home sales setting record highs. Housing starts have
rebounded to their highest level since 1989. Private sector
capital spending has been on a double-digit growth trajectory for
the past four years.
Turning to the future, it's
my belief that the forward momentum that Ontario is showing will
be sustained through the year 2001. The reasons are
straightforward and there are numerous ones. The first one is
that over 90% of the province's exports are destined for the US,
and that economic powerhouse has considerable momentum, in our
view, over the next two years. We expect US output to increase by
about 3.5% this year, which is close to its 4% growth performance
over the last three years, and record another gain of about 3%
next year, so a very good backdrop.
Even with the expected rise
in the Canadian dollar to 72 cents this year and to around 72.5
cents next year, we believe that domestic industry will remain
very competitive in the American market. I'll return to that
issue in a few seconds.
The second philosophy we
have is that the revitalization of offshore activity, with Asia
coming back very quickly, particularly Korea, Europe beginning to
strengthen, and Latin America slowly turning the corner, is very
good news for commodity producers. Stronger and more synchronized
global growth will also boost tourism, with Ontario and other
parts of Canada remaining very competitive as destinations.
The third factor, related
to the global environment as well, is the fact that our other
provinces are doing fairly well. Ontario's trade with these
province should also improve, because all regions are expected to
report solid growth over the next couple of years. Atlantic
Canada is benefiting from expenditures in offshore energy
development and improving commodity prices. Quebec is doing much
better than most analysts had expected even a year ago, and
activity is broadening with the help of key transportation,
communication and pharmaceutical industries. Prospects have also
brightened in western Canada, particularly in Alberta, but in
visiting BC you can
see that that economy also has turned with the improvement in
Asia and the bounce-back in commodities.
Even with the potential for
a setback in North American equity markets, which is a
considerable risk, and the likelihood that interest rates will
rise by roughly three quarters of a percentage point by the end
of the summer, consumer confidence in spending, in our view, will
be reinforced by improving labour market conditions and an
upswing in purchasing power. After the lengthy recession and
restructuring through the first half of the 1990s, households
still have considerable pent-up demand.
For example, provincial
motor vehicle sales should continue to climb, in part because the
average age of vehicles in Ontario has risen to over nine years,
well above US levels. In the late 1980s, the age of vehicles was
both lower and more in line with levels south of the border. Only
43% of Ontario households now own a vehicle under four years of
age, compared with nearly 60% of American households, so US
buying demand on the car side may simply begin to slow down-you
can only fit so many cars in a garage, whereas there is
considerable pent-up demand here, which should put our sales
environment in a much better setting over the next two years.
I could say similar things
about the housing industry. Home sales, housing construction and
renovation activity have lagged US trends and are certainly in a
catch-up mode right now. We believe, by the way, that Ontario
will lead Canada in terms of the rebound and the further
acceleration in the housing industry.
Business investment will
also be driven by some favourable factors: improved cash flow,
rapid technological change and the need to adopt best practices
in a relentlessly competitive marketplace.
The focus on Y2K-related
initiatives over the past two years has created a backlog of
projects that are now being brought forward and that will help to
sustain capital spending momentum. There was considerable worry
that with Y2K behind us business investment would fall off, and
in fact we expect just the opposite. Scotiabank is a good
example. We've spent about $170 million globally over the last
few years on Y2K issues, and that has created a bottleneck of
projects that we want to bring forward. Those are now coming to
the fore.
Tight vacancy rates and the
need for space that accommodates more advanced technology and
communications platforms should also keep commercial and
industrial construction at a high level, particularly in the
technology-intensive regions of the province. You could talk
about the Cambridge-Kitchener-Waterloo area, Toronto, Ottawa.
There are various nodes of high-tech industry in this province,
and we expect all of them to be doing quite well.
The improvement in federal
and provincial finances is also allowing governments to play a
more active role. Lower taxes and increased spending in our
physical infrastructure and social infrastructure will help
sustain the economy's forward momentum.
Turning more to an industry
look, we believe there are key sectors that are geared for very
high growth over the next few years. Ontario is emerging as one
of North America's high-tech leaders. The focus in the press, of
course, is on Nortel, JDS-Uniphase, ATI, Celestica and a few
other names, but the reality is that the industry is made up of a
large number of small and innovative firms that have consistently
contributed to growth. We're somewhat restricted by data and the
way it's collected in terms of division, so we don't get a full
handle on the high-tech sector yet, but in taking the electrical
and electronics sector, which is a key segment of the high-tech
sector, we find that growth has been almost 10% annually over the
past five years.
Unprecedented technological
advances, international communications deregulation, expanding
Internet and e-commerce applications, and the convergence of
telephone, cable TV and PC-based services will keep this sector
in very high growth mode, in our view, well through this decade.
Global spending on optical components and networks is virtually
doubling every year. Ontario's world-class producers of optical
networks and fibre optic equipment are at the leading edge of
expanding Internet and high-speed data transmission.
Ontario's
telecommunications equipment industry will also benefit from the
rapid expansion of global cellular-PCS services. According to
IDC, international subscribers will climb by close to 30%
annually through 2003. The largest markets are in the
Asia-Pacific region, where wireless systems are favoured over
wireline and teledensity is still low. I should point out there
too that this is a region that is coming back very rapidly. The
days of the Asian flu are over and the rebound is beginning to
gather momentum.
1510
The province is a
significant provider of electronics manufacturing services which
provide outsourced integrated components and systems for
computers and electronic equipment. This market is projected to
advance by at least 20% annually over the next four years.
Similarly, the future appears to be very bright for Ontario's
world-class producers of computer graphics equipment and
software.
Turning to the auto
industry, while the US motor vehicle demand will probably slip a
little bit over the next two years after nearly a decade of very
strong gains, we remain bullish about the prospect for Ontario's
highly competitive auto industry. Provincial assemblies set
another record in 1999, accounting for 16% of the combined NAFTA
production. A decade ago that was only 13%, so we've gained
significant market share. The motor vehicle and parts industry
accounted for an outsized 50% of Ontario exports; that's more
than the combined shipments of machinery and equipment,
chemicals, forest products and non-ferrous metals.
Expansions in the industry
at Cambridge and Alliston will lift the province's assembly
capacity by 8% in 2000. In comparison, the gain in the US will be
roughly 1%, so we are continuing to gain production share. The
expansion of domestic
capacity is even outpacing the rapid build-up occurring in the
southern states, the preferred American destination for foreign
automakers. Ontario is poised to overtake Michigan-we've seen
that in the paper quite a few times recently-for supremacy on the
production side for motor vehicles. Moreover, the province's
facilities produce many of the best-selling light truck and
mini-van models, the segment that continues to gain market
share.
Ontario's gains reflect a
clear competitive advantage in the auto sector. Scotia Economics
estimates that the province has a 4% productivity advantage over
the United States, a sharp reversal from 1989 when US assembly
plants enjoyed a 3% advantage. Our industry also enjoys a 33%
labour cost advantage relative to American assembly plants, and
this edge will widen after recent contracts. The reality is that
the exchange rate will have to rise above 85 cents to eliminate
our advantage in the auto-assembly area.
The auto parts sector,
which accounts for two thirds of overall auto industry
employment, has also been gaining market share. Shipments from
Ontario suppliers have been advancing by 13% per year since 1991,
considerably faster than the 9% gain posted by US suppliers. Each
Canadian and US vehicle assembled now contains more than $2,000
worth of Ontario-made parts, nearly double the late-1980s
level.
Turning to the fiscal
opportunities and challenges that lie ahead, obviously Ontario's
economic revival has underpinned a dramatic turnaround in
government finances. The province will have finally achieved a
balanced budget in 2000-01 after five years of major personal tax
cuts and gradual deficit reduction. It's noteworthy that this
will enable the provinces in aggregate to report a budget
surplus-the first ever-capping a dramatic reduction from a peak
shortfall of $25 billion eight years ago.
Having achieved its first
set of objectives, Ontario is poised for the next stage of its
longer-term fiscal and economic strategy. The outlook for further
strong revenue gains provides Ontario the luxury of planning the
allocation of its fiscal dividend among tax cuts, increased
spending and debt reduction. I'd like to present our views on the
weighting of those.
The arguments are pervasive
for continued tax reductions, particularly in today's fiercely
competitive global arena. The trend to lower taxes is widespread
among countries, and with a fiscal surplus rapidly exceeding $150
billion, the United States will soon raise the performance bar in
this key area. It's an important point, because the US has
enormous potential to cut taxes with the type of surpluses that
it's building up.
The importance of having a
competitive environment is well recognized in all the provinces,
who have led Ottawa in both personal and corporate tax cuts.
Small business, for example, has been a prime area of tax cutting
among the provinces, and we certainly have been moving very
aggressively in those areas.
Sustaining competitiveness
also requires constant upgrading of Ontario's physical and
educational infrastructure. The province must work more closely
with both junior and senior levels of government to coordinate
the spending of scarce tax dollars in these strategically
important areas. Greater use of private-public sector
partnerships needs to be part of the solution, particularly with
enormous pressures on the government to ramp up spending on the
health care system.
While tax cuts and
infrastructure spending are essential elements in the province's
long-term fiscal strategy, in my view top priority must
immediately be given to paying down the province's $110-billion
accumulated debt. This is the only way that the $9 billion that
now goes to debt service each year can be freed up for other
policy priorities. With Ontario back on the fast track, it is
unacceptable that 17 cents of every revenue dollar flowing to
Queen's Park is directed to debt service, fully four cents above
the average of the other provinces.
A front-end focus on debt
reduction yields substantial cumulative benefits and greatly
enhances long-term fiscal flexibility. Alberta has certainly
found this. For example, a five-year plan allocating about $2
billion each year to retiring provincial debt could trim the
annual interest cost by close to $600 million by the fifth year.
Adding in savings from high-coupon financing, annual debt service
in five years' time would be close to $1 billion lower.
Now to the risks of the
outlook, and we brought along our global outlook to give a fuller
view as to where we see things going in terms of specific
numbers. A focus on debt reduction during periods of prosperity
broadens fiscal options during periods of economic setback. While
the future appears brighter than it has in over a decade, there
are still considerable risks to the economic and financial
outlook. By the way, almost all economists have a very optimistic
view about where we are going, but as you probably know by past
experience, believing totally in economic forecasts can be very
hazardous to your wealth.
We expect North American
interest rates to rise by only three quarters of a percentage
point this year. By the way, Chairman Greenspan raised interest
rates by a quarter about an hour and a half ago. Then we believe
they will begin to move lower as cyclical inflation pressures
subside. However, consistently strong US growth and rising
inflation could push interest rates higher and keep them there
longer, a clear negative for Canada, for Ontario and for global
growth.
Alternatively, rising
interest rates could be the catalyst for a sudden correction in
equity markets, with the potential for heavy collateral damage to
our economic prospects. The international fallout during the
Mexican peso crisis and the more recent bout of Asian flu, both
of which, I might underline, were not anticipated fully in the
financial markets, dramatically illustrates the power of sudden
changes in market confidence on economic conditions, particularly
in debt-heavy jurisdictions.
In summary, given the very
good economic progress we are likely to make in the next couple
of years-the fiscal
options have not been as wide for quite some time as they now
are. But in our view, if we are weighting those options, the
first and heaviest weight should be to debt reduction, the second
should be to tax cuts and the third would be to spending, with
priority given to the economy's fiscal and educational
infrastructure. Thank you.
The Chair:
Thank you very much for your presentation. We have approximately
13 minutes for each caucus. I'll start with Mr
Christopherson.
Mr
Christopherson: In your presentation, one of your
identified risks is rising interest rates. I appreciate your
telling us what happened today, because we hadn't heard yet. What
are your thoughts on what happened today and what that means for
us?
Mr Jestin:
The Federal Reserve raised interest rates a quarter of a
percentage point today, which was widely expected by the market.
The market initially rallied on the results and, by the time we
left the office, had virtually sold off all the rally. So it was
a very short-term relief for the marketplace, or the bond market
at least. We would expect that next month the Federal Reserve
will increase interest rates another quarter of a percentage
point and, sometime between May and August, a third
quarter-percentage point move will occur. We believe the Bank of
Canada will follow suit, virtually one for one, so by August we
would see things such as the prime business lending rate on both
sides of the border up by one-half to three-quarters of a
percentage point.
In this type of
environment, the bond market is also likely to trend higher,
largely because, in our view, cyclical inflation pressures will
be moving up probably over the next six to eight months. We
believe, however, that oil is not going to continue to go higher.
It's probably going to settle down below $25 a barrel. The
acceleration in commodity prices will probably dissipate, and
overall, some of the long-term disinflationary trends that we
have seen for quite some time will begin to re-emerge. As they
do, we believe inflation will start to move lower by the end of
the year and into next year, which will allow interest rates to
come back down.
1520
That is one of the reasons
we have a fairly optimistic forecast, because we believe that the
interest rate and exchange rate environment will remain quite
favourable to Canada. The rest of the world expanding, the US
doing reasonably well, interest rates at the outside three
quarters of a percentage point and then coming down would keep
our growth momentum quite alive.
I should mention, as I
stressed at the beginning of my presentation, that Ontario stands
to benefit very handsomely from that, being either one or two in
economic performance, in our view, among the provinces over the
next five years.
Mr
Christopherson: Is it fair to say, in your opinion,
conversely to your last point, that if the American economy goes
into a tailspin we're going to feel it first and arguably harder
than anywhere else because of our trading relationship and the
exports driving our economy?
Mr Jestin:
Ontario is most dependent on the US of the any of the provinces,
and particularly, if we had a substantial slowdown in consumer
spending it would have an immediate negative impact on Ontario
because of the weighting of the auto sector in our exports. It's
important to point out, though, that the consumer is not spending
in the US simply because of these huge gains that we have seen in
NASDAQ and the various high-tech stocks. In fact, the US has
created 25 million jobs over the last decade. The unemployment
rate there is at a 30-year low. We have income outstripping
inflation by a very substantial margin. Consumer confidence is
very high, largely on the basis of the job market. Housing prices
are actually going up in the US, which makes the two thirds of
American families who own homes pretty happy.
So even with a setback in
the equity markets of 20%, we may well see, as we saw in the fall
of 1998, the US consumer staying in the stores. What I think will
happen, however, is the US consumer begins to slow the rate of
growth in consumption that it currently has down to its rate of
growth in income, because right now consumer spending is growing
at a much faster rate than income. The adjustment will logically
be to bring that down to income growth, which, in our view, will
still remain pretty healthy.
Mr
Christopherson: On page 3 of your presentation you make
reference to the 33% labour cost advantage that the Canadian
autoworkers have over American autoworkers. I would think that
part of that is of course the fact that we have universal health
care and down in the States they have to purchase comparable
coverage for their workers and it drives that labour cost way
up.
With that in mind, if I
heard you correctly, you mentioned that your number one priority
would be debt reduction. I guess I would be interested in your
thoughts, given what I've further identified from your comments
about the labour advantage and where much of that comes from for
us in terms of our health care system and given the fact that
depending on how big a crisis you want to believe is there, there
seems to be a general feeling across the province that our health
care system is in some form of crisis. Whether that's in
transition or actually the beginning of a slippery slope remains
to be seen. I was curious, therefore, that your first choice
would be debt reduction rather than things like health, which
supports our labour cost advantage for our autoworker segment of
the population, as well as education for that matter, which
provides for skilled workers, which again gives us an advantage
in terms of competition around the world and the American system,
and we seem to have the edge on both. I was curious why those
weren't a priority to you but debt reduction was.
Mr Jestin:
Among all the competing priorities, I think debt reduction has
the ability to free up the cash needed to actually repair the
type of damage that has occurred, for example, in the health care
area and in education. I'm on the board of the University of
Guelph and I certainly see it all the time in terms of the problems
that exist there.
If we could free up a
portion of the $9 billion that we are spending now on debt
service into these other areas, we could legitimately afford the
type of health care that the residents of this province require.
We could afford the improvements in education. However, the
immediate pressure suggests that we are going to have some
upswing in spending. We have to make sure that in weighting the
competing areas we don't let infrastructure slide, because there
is no huge political upside immediately from repairing sewers,
roadways and telecommunications. Those issues are long-term
competitive issues which I think are very important.
Debt reduction is the only
alternative that will actually free up long-term cash. We do, as
a province, pay more than the average in terms of debt service
even though we are, arguably, the most prosperous province in the
country. That is unacceptable.
Mr
Christopherson: Do you support the idea that the tax
cuts came before a balanced budget, for instance?
Mr Jestin:
I believe that we should have moved much more aggressively on the
deficit to get the budget in balance. I'm not suggesting that we
should have or could have followed the Alberta model one for one.
But certainly the dividend that has been paid there is
enormous.
Mr
Christopherson: Because even those who may support some
form of tax cuts as an expenditure priority at a given time have
said that it should have come after they balanced the budget
rather than beforehand.
Mr Jestin:
By the way, it's not so much an either-or. You have to
prioritize. I would have put much heavier emphasis on debt
reduction. The fiscal dividend is really reducing the debt
service cost in my view. It's not the surplus that would be
generated; it's actually freeing up cash that we otherwise are
required to pay for previous overspending.
Mr
Christopherson: Then there would be a political debate
as we had at the federal level, whether that should be an income
tax or further expenditures into social policies infrastructure,
but at least we can have that debate. I think a lot of us, for
instance, the Liberals and the NDP, disagree on a lot of things,
but the whole notion that doing the tax cut when they did was
wrongheaded is one that most of us agree with.
We just had a further
report from the Centre for Social Justice where, again, they
emphasize the fact that during this biggest boom in the North
American economy, we're seeing an increase in the income
inequality between the very wealthy and the very poor. In terms
of your vision of how the Ontario economy ought to work to
benefit the most people, how do you feel about that? If you have
some concerns about that growing inequity, what would you do
about it?
Mr Jestin:
I haven't seen the study, so I wouldn't be able to comment
specifically on it. The technology change that we are
experiencing is creating both winners and losers and at a very
rapid rate. Some companies are doing very well; others are not.
Similarly, incomes in some areas are going up rapidly and others
are falling behind. Largely, within Canada, North America and,
more generally, globally, that's a pattern that will likely
prevail for some time.
We are in the midst of a
vortex of change globally. Governments obviously are attempting
to address some of the most egregious problems as best they can.
But I don't think that is a reason to focus government solely on
that area. Improving competitiveness raises the standard of
living for the province as a whole and, as a result, gives a
bigger pie that can be distributed through society.
Mr
Christopherson: I assume you would agree that government
has a role, in fact a responsibility, to play in terms of what
happens with that growth and with the money that we're awash in
to ensure that we're not increasing inequity. You used the phrase
that they're addressing the most egregious. We would argue, as
does the study that-and I realize you haven't seen it yet and I
understand what that means for your response-based on StatsCan
figures indeed the tax cut has exacerbated that inequity.
We're faced with a
situation in Ontario where the whole notion that this needs to be
addressed is not even on the agenda whatsoever. In fact, all of
the policies of this government have again, to repeat myself,
exacerbated that very situation. If you take it out to its final
conclusion, what it means is that we're going to continue to have
more and more people who will slide from middle class into
poverty and those who are in poverty are in a deeper level of
poverty. They're worse off than the poor have been in previous
generations.
I just can't imagine that
at the end of the day that's good for investment, that that's
good for our competitiveness, when we see a society that's so
polarized, particularly when much of our reputation is built
around being fair-minded and caring about each other. The UN has
chosen us five or six times now as the best place in the world to
live, not because we have the best tax cuts but because we have
the best education system, the best health care system, a great
social net, safe streets, all of those sorts of things. Surely it
must concern you if it continued unabated and we saw this
continuing polarization of our society.
1530
Mr Jestin:
The social agenda has to be founded on a very strong economic
foundation. Going back to my comment on the prioritization of
government, I would say debt reduction is the way we free up cash
for other issues. Tax cuts are certainly absolutely essential to
maintain competitiveness or to regain competitiveness, and we are
following a very aggressive US model, in my view, over the next
little while, so tax cuts would be number two.
Number three would be
dealing with the most egregious of the problems that exist now
because of the cutbacks that we have had in various areas, but
among the spending programs I would suggest that infrastructure
that improves competitiveness ultimately generates the jobs which generate the income
which supports the social agenda.
Mr
Christopherson: The problem of course that we have in
Ontario is, and an earlier presenter-I think another bank
economist-actually made the point, that much of the fiscal
flexibility you might have in a surplus situation has been
limited by the early tax cut, and we don't have as much room as
we had before.
I've been pointing out the
low savings rate that we have and the amount that people are
looking to in their RRSPs and their mutual funds for their
retirement. If all of that bubble bursts, we're in some serious
trouble, and it's going to be the vast majority of Ontarians who
are going to feel that hit. At that point, I would say to you,
with great respect, people are not going to be worried about what
the debt reduction policy of the government is and they aren't
going to be worried about whether there are new tax cuts. At that
point they are going to want to know, "How am I going to find a
job to provide enough income both to raise my family and to be
able to survive when I retire?"
Mr Jestin:
We have a laboratory experiment going on in Canada right now
between British Columbia and Alberta, British Columbia having
reasonably high taxes and Alberta having the lowest ones in the
country. BC used to be the strongest-growing province in the
country in terms of population; Alberta was fairly weak. Because
of a number of circumstances, one of which of course was a
dramatic reduction in taxes, Alberta has now moved well ahead of
BC, so I do believe taxes matter. I do believe taxes create
growth, which creates revenue, which gives the government more
options, but at the same time, harping on my key point, debt
reduction is the one that yields the extra revenues that can
support the entire spectrum of government spending.
Mr
Christopherson: I think you would recognize that BC has
the Asian market, Alberta has oil, and we're tied to the United
States market, so three very different basic economic foundations
in terms of growth.
The Chair:
I now have to go to the other side; your time has expired. Mr
Gilchrist.
Mr Steve Gilchrist
(Scarborough East): Thank you very much for your
presentation. I think when we see the difference between the
previous presentation and yours, it shows the merits of having
these hearings, because there's certainly a wide divergence of
opinion out there on whether the glass is half full or half
empty.
Your comments about
productivity: I would appreciate if you could expand on the
importance of that. To the previous presenter, Mr Phillips read
from one of our publications and made what I think I could
confidently call disparaging comments about the suggestion that
we have a competitive advantage over the United States, and I
guess he created the impression that somehow that was a bad thing
or arose from improper fiscal or monetary policies-
Mr
Phillips: I never said anything of the kind.
Mr
Gilchrist: -whereas I think you clearly lay out in your
presentation that it has a lot to do with productivity and the
fact that our companies have had to, of necessity in some cases
because we started off with a smaller market to serve, be more
efficient, and therefore with the creation of free trade
opportunities we're able to exploit those efficiencies in a much
larger market, not just in the States but for many companies very
successfully around the world.
You mentioned as well that
productivity, particularly in the automotive industry, will play
a very important role in Ontario's continued growth. I wonder if
you could perhaps put some minds at ease even more by elaborating
on the importance of productivity even if the American economy
was to suffer a downturn. Let's deal with our automotive
factories to start, as a concrete example. If we are more
productive in the manufacturing of a particular automobile, would
it not stand to reason that it will be the American factories
that start reducing their production before an Ontario factory
would?
Mr Jestin:
It would all depend on complex things such as models, popularity
and things like that, of course. The auto sector is one segment
that there is a lot of data around on. We have a productivity
advantage with newer investment, but we also have a substantial
labour cost advantage, partly because of the exchange rate and
partly because our inflation rate has been below the US since
1991, which is the longest time on record. So there are a variety
of things that have really cemented in the success of that
particular industry.
If I were looking into the
future-and my colleague Aron Gampel has done quite a bit of work
on this-the areas that I think are the ultimate top performers
will be in the high-tech sector. Here, I suspect, we can match
the US in many ways one for one. Our equity markets do not give
the same multiples and the same potential for expansion as in the
US-we don't have a whole lot of companies where price-earnings
multiples are 200 to 1 on this side of the border-but overall we
believe that in the knowledge-based sector it's the uniqueness of
ideas and the success of ideas that are going to push us forward,
and I think we're doing very well there. It's much more than
labour costs that are at issue; ideas have enormous value if we
get them correct.
Mr
Gilchrist: Given that, would you be prepared to make any
suggestions about specifically how we would change the tax system
right now? You mentioned that you believe tax cuts create wealth
and that they create increased revenues for the government, but
they can accomplish other ends as well. If you were to believe
that the high-tech sector offers the best opportunity for
long-term growth in our economy and retention of the sort of
high-paying jobs that I think we're all being told will be the
hallmark of successful companies in the 21st century, should we
be targeting tax reductions? Should we be offering tax incentives
to companies that make R&D investments, for example? Have you
individually or as a bank given some thought to how we would
target further tax reductions?
Mr Jestin:
I'll give you an answer, obviously, as an economist on that
particular issue. Back in the early 1990s there was some work done in Ontario about
industrial strategy, essentially picking winners and losers. If
you go back to that work, the auto industry was decidedly put in
the also-ran category. If we had looked at that particular vision
of the world and if the auto sector hadn't been around in Ontario
through the dark days of the 1990s, we wouldn't have been in a
recession; we would have been in a depression.
My concern is that while I
believe there are certain areas of very high growth potential,
putting policies rigidly in place that pick winners and losers
can ultimately lead to huge mistakes. So I would rather see
policies that are targeted more broadly to improving
competitiveness. Again, however, rather than reducing taxes as my
number one priority, it would be debt reduction that would give
the potential for both tax cuts and spending increases.
Mr
Gilchrist: Fair enough. That's a very reasonable
position and one which I think we would echo.
There is something I would
love to have you put on the record, though. We hear often from
the other side and from other critics that somehow the tax cuts
to date have unduly increased the debt of the province. When we
first arrived here in June 1995, the province was losing $11.3
billion a year. This is going to sound like an awfully simple
question, but it needs to be stated, and coming from you I guess
it will carry more weight than when we put it on the record.
Would it not follow that the only way the province would have
stopped any further increase in the debt would have been to
immediately eliminate $11.3 billion worth of spending? To balance
our budget from day one, which would be the only way we would not
have a higher debt today than on June 3, 1995, we would have had
to eliminate exactly the same amount of spending as was the
amount of the deficit.
Mr
Kwinter: Or increase revenue.
Mr Jestin:
I think the issue boils down to whether a longer process of debt
reduction or a short-term process of tax increases boosts
prosperity the most. We have no agreement on that among the
economic fraternity. I believe that tax cuts have mattered and
have created job growth, although if I were to look at the
estimates that have been put together sequentially by various
federal and provincial governments on the job-creating potential
coming out of various government measures, I think we would have
the unborn fully employed for the next few decades if we totalled
them all up.
1540
Essentially, I think lower
taxes have helped. At the same time, we are, next to the US
economy, the strongest economy in the world that has had an
unprecedented economic expansion. In weighting the alternatives,
while tax cuts were very important, I think initially putting
more emphasis on developing a surplus would have paid larger
dividends.
Mr
Kwinter: That's not quite the answer you wanted, but
pretty good.
Mr Arnott:
Thank you very much. I want to commend you on your presentation
today, particularly on your suggestion at the end, your
recommendation that debt reduction, debt retirement, has to be a
very high priority of the provincial government now that we're
entering into this phase where the deficit is almost paid
down.
I think what you've said
bears repeating. You've said this: "A front-end focus on debt
reduction yields substantial cumulative benefits and greatly
enhances long-term fiscal flexibility." Then you go on to say, "A
focus on debt reduction during periods of prosperity also
broadens fiscal options during periods of economic setback." This
is common sense of the type that I hear day to day, week to week,
in my constituency from people, and I also believe very strongly
that this needs to be a high priority of the government.
The government is committed
to retiring at least $2 billion worth of debt over this term of
office. Do you think that's enough or should we be striving for
something higher? Should we not be looking at this as sort of a
long-term problem, with committing ourselves as a government to a
long-term debt retirement plan with, say, interim targets every
five years of how we're going to pay down this debt over the next
25 years? Would you agree that that would be a reasonable
approach for the government to take?
Mr Jestin:
I think a consistent debt reduction strategy, obviously with
adjustments over an economic cycle, is very important. If I can
give you a federal example, I think it's very important as well.
If Washington continues on its current policies without big tax
reductions or spending increases, it will pay off its market debt
in 18 years. At the current modest debt reductions at the federal
level, it will take us between 100 and 150 years. So there are
degrees in here. I don't think we have to opt totally to the
Alberta model of very rapid debt reduction, nor to the US
potential, because there are a variety of other circumstances and
priorities that have to be taken into account. But to the same
matter, $2 billion over the length of the mandate, which is what
the finance minister indicated, in my view is too modest. We
should, in a period of very strong and sustained expansion, be
trying to raise the bar and shooting more aggressively.
The idea that we could save
$1 billion annually within five years by paying $2 billion down a
year-that is a very large payback. By the way, that is around in
perpetuity. That money is available each and every year because
it is essentially wiping out a dead-weight loss that we now are
burdened with in terms of debt service.
Mr Galt:
I'm curious. You mentioned, number one, paying down the debt so
we don't have to service that debt with some $9 billion a year.
Half of that occurred in the first half of the last decade, in a
period when we drove 50,000 jobs out of this country while the
rest of Canada was creating some 350,000 net new jobs. We
wrestled the economy right to the floor of all the other Canadian
provinces. In your opinion, was it necessary to spend and
increase the debt by some $50 billion in the first half of the
last decade?
Mr Jestin: Unfortunately, we
can't relive history. Fighting the recession rather than the
deficit in the rearview mirror looks like a very unfortunate
error. The problem with suggesting that we wouldn't have had a
run-up in debt, of course, is that Ontario was going to be hit
very viciously by that recession because of a number of economic
circumstances that were occurring within the global and the North
American context. But we are burdened with that debt now and we
do pay more debt service than the provincial average. We do not
enjoy the fiscal flexibility that a province such as Alberta has.
We do not have the fiscal flexibility that the US has. They are
principal competitors of ours. We have to get our finan-ces more
in line with our principal competitors or we'll have a
competitive disadvantage. That's basically the message. So a
little bit of pain now in deferring spending will yield
substantial long-term benefits, in our view.
The Chair:
Go ahead. You have a minute left.
Mr Galt:
I'll pass.
The Chair:
Thank you very much. I'll go back to the official opposition.
Mr
Phillips: Mr Gilchrist has once again deliberately
distorted what I said.
To the presenter: The
government has already said what they're going to do with the
fiscal dividend. They've announced $5.3 billion in tax cuts-$4
billion on personal income tax; roughly $1 billion on property
tax, although that will show up as an expenditure; $300 million
on corporate tax-$2.5 billion a year on health and $500 million a
year on debt reduction.
I have two questions on
that. You've done some calculations on revenue growth. As the
economy grows, tax revenue grows. In answer to one of the
previous comments about how you get rid of a deficit, my
recollection is that tax revenue grows at roughly the rate of
nominal GDP growth. But my question is, have we already to a fair
extent committed for the future fiscal dividend with those three
commitments? Have you got some revenue estimates that you could
provide us? The government will not give us a single estimate on
revenue beyond the last fiscal year. Has the bank done some
estimates on what we should be looking at in terms of revenue
growth?
Mr Jestin:
We certainly have done some work in that area, and I could
provide that to you if you like. The point of whether we have
fully spent or allocated the fiscal dividend largely hinges on
the upcoming prosperity in the economy. We're very bullish on the
economy. If we are overly bullish on this-and economists are
notoriously bad at picking turning points-then we will find that
either higher interest rates or a sudden reduction in growth will
immediately cause the deficit to re-emerge and begin to
accelerate because of commitments. That's one of the reasons why
we're concerned and one of the reasons why we think debt
reduction should have top priority. We can see situations,
although we would not give them high probability, where interest
rates would be higher longer, which raises debt service in two
ways: (1) slowing down the economy to the actual cost of debt, or
(2) a setback in equity markets triggered by the US consumer
could really slow down exports and as a result feed back into
growth and revenues.
If we continue to sail
along, we will have some fiscal flexibility in upcoming budgets,
but if somehow this unprecedented expansion in the US, or in
Canada as its emerging and in Ontario, begins to unwind, we will
quickly find ourselves back into the fiscal goo again. In my
view, the only prudent thing to do in that situation is to focus
more seriously on debt reduction.
Mr
Kwinter: Mr Jestin, I want to just make a comment. I
totally agree with the priority being debt reduction. That's an
economist's point of view, and it's typical Keynesian economics
that in good times you pay it down so that in bad times you have
a buffer so that you can look after some of your needs. That's
great as an economist, but the budget is a political document,
not an economic document.
My concern-and I'd like to
get your response as to what you would suggest-is that we had a
presenter just before you who was saying: "My God, times are
booming. How come we've got homeless, we've got problems with our
health care, problems with our education? This is the time we
should be beefing these things up." The economist's point of view
is: "No, that's not the time to do it. When times are good that's
when you should be paying down the debt." How do you reconcile
that?
During the first mandate,
at the beginning of the election campaign, Mike Harris publicly
stated: "We do not have a revenue problem, we have a spending
problem. We've got more money than we know what to do with. Our
problem is we've got to get our spending under control." The
problem with that of course-and Mr Gilchrist mentioned it-is that
they all seem to think if spending is the problem you can also
raise the revenue.
My point is this: How do
you politically start taking $2 billion a year, as you say, which
would be great, and pay it to debt reduction when there are all
of these pressures? We now have a situation where this government
is committed to spend more money in their budget than any other
government in history in Ontario, and those pressures are going
to continue. If the squeaky wheel comes along and they can't take
the heat, throw some money at it, and before you know it, you're
compounding the problem. Do you have any comments on that?
1550
Mr Jestin:
In the type of revenue trajectory that you would probably see,
given the growth estimates that we have here, there will be a
substantial increase in revenues. The issue then becomes, what is
the distribution of that revenue stream? What we're suggesting
among the competing alternatives is a slower pace of spending.
Perhaps a slower degree of tax cuts would leave more on the table
for debt reduction. It's not an either-or situation. We obviously
have big competing priorities, and one of them, I should
underline, is physical infrastructure. My point under the
physical infrastructure statement I made was that we need a lot
more co-operation among the municipalities and the federal
government with the province in these joint ventures because no
level of government can uniquely fund these particular projects.
But we have to slow down perhaps the degree of tax
aggressiveness, maybe slow down the trend in increased spending
so that we leave more on the table for debt reduction. That's
basically our proposal.
Mr
Phillips: I'm quite interested in your estimates on
revenue and I appreciate you providing them to the committee.
One of the challenges is
that in 1999-2000 the sale of the 407 had a one-time infusion of
$1.6 billion. The federal government increase in support of
health care was most heavily oriented to this fiscal year. So
we've got those things bringing the revenue growth down for
future years.
We've got two things
offsetting it. One is the gambling revenue. The government has
got a windfall-not a windfall, but they're going to rake in a
bundle of money. I think just from the slot machines they're
going to get $500 million or $600 million. What should we expect,
first, if you don't assume any tax changes? What sort of formula
should we be using for growth in tax revenue?
Mr Jestin:
We would suggest a one-for-one relationship between nominal GDP
and growth. It varies substantially from year to year over the
cycle. Using that as a rule of thumb would probably be as good as
any, given the variance that occurs on an annual basis.
The degree of revenue
growth hinges very much, as I said, however, on continuing US
expansion, which feeds directly back into Ontario. My concern is
that we become a little more prudent as we go forward, leaving a
little bit more in contingency or whatever you want to call it,
which would ultimately be used on the debt service side.
Mr
Phillips: Your recommendation on private sector
partnerships on infrastructure is interesting. My own view is
that the users of the 407 got completely ripped off by that sale.
Those tolls are going to go up at inflation plus 2% every single
year for 15 years. They were hung out to dry. Based on what we've
heard about infrastructure, there are two big things where the
private sector would be involved. One is build-lease, where
they'll build a school-and that's what most school boards are
doing now-or where you would sell off a stream of revenue, which
essentially is a toll road or somebody will build a sewage plant
in return for being able to put a surcharge on your monthly
bill.
Both of those things are
just a different way of either taxation or borrowing money. Are
there certain things in the infrastructure that you can think of
where the public will not end up with either a user fee or paying
the debt through a lease cost?
Mr Jestin:
In terms of expansion?
Mr
Phillips: You're saying that we should be looking to
refurbishing the infrastructure, we should be looking at more
private-public sector partnerships, which I intuitively like, but
can you give us some examples of what you have in mind here that
will either add a new tax in the form of a fee or result in
simply paying debt in a different way?
Mr Jestin:
One of the things that may well be worth considering and which
may well come down in the federal budget is setting up
single-purpose-not a corporation but a crown entity or
corporation that essentially is funded by federal money,
provincial money and municipal money, with the potential to bring
in private sector partnerships.
The millennium fund is a
potential example of that, I guess, but I'm thinking much more of
using that for a corporation that is at arm's length, or more at
arm's length, from the government. If it may be directed towards
sewers or highways or technological infrastructure, it allows all
governments to participate in terms of the funding but having a
separate group that essentially ad-ministers and prioritizes
things and seeks ways of bringing the private sector in. It's
basically setting up the availability of capital to fund these
initiatives that I think is very important.
If we look at government
spending on infrastructure, the private-public partnership
proposals that are on the table can bring in a substantial amount
of money. You may remember back in the early 1990s Ontario was
spending roughly $4 billion annually on infrastructural costs.
That will only come to fruition if we have SuperBuild, plus the
entire private sector participation, bringing it up to $20
billion over five years. I worry that we don't have enough money
directed to that, and perhaps setting up these corporations,
putting them more at arm's length, would help.
Mr
Phillips: To change the subject a little bit, on pension
expenses in the province, the province pays out in cash payments
to the pensions $1.1 billion, but on the books, on the financial
statements, shows a profit of roughly $300 million. That is
because the way they account for it is that because the pension
funds have seen such an appreciation in their assets-the pension
fund on an annual basis has increased more than the expenses, so
you subtract the two. The teachers' pension, I think, is now 70%
in equities. We're now showing on pension expense, as I say, a
profit of $300 million on the books, but in cash payments we're
paying out $1.1 billion.
This is the first time, I
think, where a substantial downturn in the equity markets hits
the financial statements dramatically. Have you had an
opportunity to look at that and do you have any comments for us
on that?
Mr Jestin:
I couldn't comment on the Ontario government case. Having read
some of your material over time and things like that, I know
you're the expert on these particular matters-
Mr
Phillips: I wouldn't say that.
Mr Jestin:
-and I'd defer to your judgement on that. But one of the things
you're pointing out is very well taken, and that is that pension
funds have been flush with what's been happening in the markets.
We've been in a sustained bull market for quite some time, and
inevitably there would be major adjustments, not only in your
personal finances and household finances, if there was a
significant setback or a move to lower growth, but also in
the outlook for
pension funds, which would change the entire investment dynamic
coming out of these funds.
Pension funds and large
pools of capital essentially are becoming much more dominant in
overall funding in Ontario and around the world, so it is a very
significant issue.
The Chair:
With that, we've run out of time. On behalf of the committee,
thank you very much for your presentation.
1600
NESBITT BURNS
The Chair:
Our next presenter is the senior economist and vice-president of
Nesbitt Burns, if you could state your name for the record. On
behalf of the committee, welcome. You have one hour for your
presentation.
Mr Douglas
Porter: Thank you, Chairman, and good afternoon. I'd
like to thank the committee for the opportunity to present my
views today.
Basically, I'd like to make
a three-part presentation today. I've brought along a small
handout, which I'll only refer to on the periphery; it includes
our regional economic outlook. Some charts I'll be referring to,
and a short article which is really meant to be an appendix,
which I recently wrote.
I'd like to keep my
economic overview relatively brief just because it's not terribly
different from the one you just heard, but it might be helpful to
go through some of the charts starting on page 4.
Basically, the big story
here is the tremendous turnaround in global growth that we have
seen in the past year. It's quite a turnaround from the situation
of just a little over a year ago when almost every news magazine
you could look at, whether it was Newsweek or Fortune, was
warning of a recession or worse in 1999. Of course, 1999 turned
out to be quite a good year.
With Asia and the rest of
the emerging markets in full recovery, we're actually looking for
above-average economic growth both this year and next year for
the world economy, something a little bit better than 3.5% for
both years. Again, Asia has simply left the crisis well behind
it. Equity markets there are back to the levels they were before
the crisis and growth is as well. We've also seen Europe begin to
pick up after a bit of a lull at the start of 1999, and even
Latin America is recovering after a recession last year.
Most importantly, the US
has not skipped a beat. We saw above-average growth last year and
we expect above-average growth this year. We're looking for US
growth of about 4%, which would be the fourth straight year. We
think, if anything, the risks are to the high side, that we might
actually be underestimating growth.
One thing we've seen
year-in and year-out during election years is that the economy
actually tends to accelerate; that is, if you look over the past
40 years, US GDP growth has, on average, been about one
percentage point higher than in non-election years. There are a
number of reasons for that. Obviously, there is the direct
spending on the election. There's indirect spending by
congressmen who might want to be re-elected. There's the fact
that election years take place during leap years, which means we
all get to work one extra day. It also takes place during Olympic
years. This time it takes place during a census year, and
there'll be 500,000 census workers employed this year. The bottom
line is, if anything, the risk is that we may actually be
underestimating the strength of the US economy, at least in the
year ahead.
Canada is a similar story.
We're likely to follow along. We think growth will be about 3.5%
or slightly better this year. That's the fourth straight year
we've seen 3% growth or better. That's the first time we've
actually done that since the late 1970s. Ontario, since it is
most closely tied to the US, is expected to grow by 4%, after a
5% gain last year. The full details of the Ontario outlook are on
the back page of the handout.
The long expansion is
clearly spinning off tremendous job growth. We've seen over a
million jobs created in Canada in the past three years alone. If
you saw, Stats-Can actually revised up the number of jobs created
last year and now the unemployment rate actually stands at 6.8%.
Unemployment is tumbling almost in every province. We actually
expect it to move below 6% by the end of the year. We're already
there in Ontario. That 6% may actually sound quite dramatic,
especially compared to the trend of the past 20 years, when the
unemployment rate, as you can see from the one chart, has
averaged 9.5%. But if you look back to the late 1960s, early
1970s, before the real crest of the baby boom entered the labour
market and before the first oil crisis, an average unemployment
rate was actually only 5%. We think those kinds of levels are
achievable again.
This dramatic decline that
we've already seen in the unemployment rate has given a
tremendous boost to consumer confidence and business confidence.
In fact, the Conference Board came out today with their
fourth-quarter numbers on consumer and business confidence. Both
accelerated quite sharply and they are at some of the highest
levels we've seen in the past 10 years. That's being reflected in
things like consumer spending. After a bit of a lull in 1998,
consumer spending was quite strong. That's continuing into the
year 2000, where car sales are still rising at about an 8% trend.
If anything, just looking at the number of cars sold may actually
underestimate the strength of vehicle sales because consumers are
increasingly buying larger and more lavish vehicles. Retail sales
as well have been quite solid, particularly in Ontario. We saw a
record year for home sales last year. Starts have increased. Of
course, they're well below the peak levels we saw in the late
1970s, but they're pretty close to underlying demographic trends
at current levels.
That broad-based strength
we're seeing in the economy is a big reason behind the upswing in
interest rates. As was mentioned by the previous speaker, the Fed
did raise rates by another 25 basis points, and we believe there
are more to come. Actually, our rate forecast is very similar to the one previously
presented. We do believe the Bank of Canada will follow tomorrow
morning.
This upswing in the
interest rates is likely to lead to some sort of slowdown in
2001. We're certainly not looking at a recession. We think that
growth will be still a little bit above average in 2001 but
perceptibly slower from 2000. We believe that the Fed will do
what it takes to bring growth to what they're more comfortable
with, and the common view is that the Fed is comfortable with
growth on the order of about 3% to 3.5%.
That leads me to the second
part of my presentation. For the second and third part, I'd like
to go over two primary concerns I have on the fiscal front, which
may seem somewhat contradictory but I'll explain later.
The first concern is that
with the economy booming and the fact that we're more closely
tied into the US than ever before, we are, of course, more
vulnerable than ever before to the US economy and, similarly, to
the US equity market. Manufacturing, unquestionably, is on an
absolute roll. We've seen employment in the manufacturing sector
rise by 6% in the past year. Remarkably, this is at a time when
US factory payrolls are actually falling. Effectively, what we're
seeing is a real diversion of production from the US to Canada,
and we think, quite simply, a big reason for that is the highly
competitive Canadian dollar.
This has been especially
noticeable in the auto industry. We now produce almost one in
every five vehicles produced in North America, and that includes
Mexico. As was mentioned earlier, we produce as many vehicles as
Michigan, with a similar population base, but here's the rub:
Michigan is one of the most cyclical state economies in the US,
and we believe that Ontario too will become even more prone to a
boom-bust auto cycle.
Make no mistake, we are at
the crest of an auto boom. If you look at the chart on US auto
sales, you can see just how far above long-term trends auto sales
are now. There is some reason to believe that there can be a bit
of a level upshift in US sales. In other words, they are probably
on a permanently higher basis than what we saw through the late
1980s and early 1990s, but it's very hard to believe that the
kind of auto sales we saw last year, ie, close to 17 million, are
sustainable going forward. The main message is that it would be a
mistake to assume that revenues at current levels are sustainable
forever and to build future spending plans around an assumption
that these are normal economic times.
Also, the US boom is
clearly tied to the equity market run that we've seen. Greenspan
and the Fed have estimated that about one percentage point of
growth in each of the past four years has been tied to the equity
market boom. What the equity market giveth to the economy it can
also easily taketh away.
In a similar vein, the
economy is performing extremely well already. I think it's in
little need of a major fiscal boost at this point. In fact, our
ramp-up in spending could aggravate wage and price pressures that
are already building. We are seeing the first signs of wage and
price pressures beginning to emerge. The Bank of Canada, for the
first time in a long time, is actually beginning to raise rates
to cool down the economy, instead of just trying to support the
Canadian dollar. Almost every rate increase we saw through the
1990s was in response to a very weak Canadian dollar, but that is
obviously not the case with the rate hike in November and the one
that's likely to come tomorrow.
Essentially, a substantial
loosening in fiscal policy could actually stoke the boom that's
already in place and would ultimately force the Bank of Canada to
raise rates even further, in other words, move even beyond what
the Fed will do over the course of the next year. Essentially,
that would be a repeat of the late 1980s.
The second source of
concern on the fiscal side-this is the third part of my
presentation, and as I said, this may sound somewhat
contradictory to the first concern, but it isn't-is the
persistence of high marginal tax rates in Ontario.
If I can direct your
attention to the table on the bottom of page 8, you can see that
even after years of cuts, while the Ontario top marginal rate is
the second lowest among the 10 provinces, it's really not out of
line with most of the other provinces. It's not significantly
below any of the Atlantic provinces or the Prairie provinces and
it's also still well above US rates. I'd argue that the high
top-end rate is arguably not the biggest problem for Ontario but
rather the low-income level that they kick in at. This is
certainly not a new issue to anyone here, but I think it is worth
stressing again. A common criticism of the United Alternative's
or the Reform-Conservative's 17% tax proposal is that it's not
progressive, but you can make the case that Ontario's current
set-up is also not terribly progressive either, with everyone in
the middle class and up basically facing the top marginal
rate.
1610
Second of all, we believe
that the brain drain is impor-tant. It may not be reflected in
the big emigration numbers but we are sympathetic to the view
that top performers or stars do matter and that losing only a few
of them will cost the economy plenty. Tax rates are certainly not
the only factor in the brain drain, they may not even be the
biggest factor in prompting top-flight talent to leave, but tax
rates are one of the few factors that policymakers can control,
unlike the weather. Canada is already operating with one hand
tied behind its back on many fronts and it doesn't make sense for
the government to tie the second hand behind its back with
punitive tax rates.
In fact, the tax gap with
the US is at risk of widening, especially if George Bush is
elected. Admittedly that looks somewhat less likely today than it
did yesterday, but he does plan to cut the top tax rate to 33%
from 39.6%, with the states averaging another 5% to 6% on top of
that. Even Gore and McCain are also planning tax cuts.
Importantly, the top tax rate in the US does not kick in until
about an income level of $400,000 Canadian. In Canada it kicks in
at about $63,000. Just to put that in perspective, in 1966, the
top rate was not reached until an income level of $100,000.
The bottom line, and this really goes to the
small article I attached, is that further cuts in marginal rates
are needed just to keep Ontario competitive with not just the US
but most other countries.
To conclude, how to
reconcile these two concerns on the fiscal front, ie, not
engaging in an overly loose fiscal policy, and the need to reduce
marginal tax rates? First of all there are basically four
strategies to reconcile these. One is, keep a rein on the
spending side of the equation. Two, cuts in marginal rates do
have supply-side impact. It does take time to work but it does
increase the incentive to take risk and to invest. In other
words, while it will stoke the economy a little bit, it also does
help to increase the supply side and is less inflationary than
just a spending increase. Third, the government can focus on
low-cost and high-return tax cuts, such as the surtaxes or
capital gains. That only applies if Ontario sets out its own tax
regime. And fourth, the government can set long-term goals on
lowering tax rates and move towards them as fiscal circumstances
allow. It at least gives income earners hope that their
investment will be rewarded later and also should help stem the
brain drain.
If there are any specific
recommendations, it would be to raise the income threshold when
surtaxes kick in and/or even reduce those surtaxes, and also
raise the income threshold for when the highest rate kicks in.
That concludes my prepared remarks.
The Chair:
Thank you very much. We have approximately 15 minutes for each
caucus. I'll start with the government side.
Mr Galt:
Thank you very much for your presentation. It was most
interesting. Just a couple of quick, short questions. The last
presenter was talking about debt reduction, tax cuts and
spending. If you were to put it into priority, what would your
priorities be now that we're coming to look like a balanced
budget-not quite as fortunate as the feds but it's our economy,
our policies that probably got them there and they haven't made
any tax cuts, but that's beside the point. What would your
priorities be for the province as we head into a balanced
budget?
Mr Porter:
I'm operating under the assumption that we actually already are
at a balanced budget and that the latest estimates are on the
conservative side. The top priority, I believe, should be
reducing the top marginal rates, or marginal rates across the
board; second, debt reduction; and third, selected spending
increases. Admittedly it's extremely tight between the top two,
there are no two ways around that, but I think for the
longer-term health of the economy and in terms of improving
competitiveness, the top priority should be tax cuts, that is,
bringing down the marginal rates.
It is a close call, no two
ways about it. Part of that stems from the fact that-keep in mind
that Ontario's debt, while it is large in historical terms, in
the greater macroeconomic environment, a little bit more than
$100 billion really does not stack up that importantly against
the federal government's debt. If you could make the case for
what's the greatest risk to the Canadian economy going forward,
it's the federal debt; it's not the levels of provincial
debt.
Mr Galt:
Which on a per capita basis is roughly double what Ontario's
is.
Mr Porter:
Actually, I don't think it's necessarily a fair comparison,
looking at things like debt to GDP and feds versus the provinces,
because the federal government has many more tools at its
disposal in terms of debt operations. In terms of what matters
for Canadian interest rates and investor sentiment towards
Canada, it really is the federal debt that will weigh the
heaviest and have the most say in the credit rating of the
country as a whole and where the currency is going. So in terms
of the macroeconomy, I think the province's debt just doesn't
weigh as heavily as the federal debt does.
Mr
O'Toole: I just want you to dwell a bit on bracket
creep, the brain drain, the difference between the US rate and
harmonizing. It was mentioned a couple of times here. You
mentioned, thinking long term, that it became an issue and sort
of went away. I don't know why it went away because I think long
term, for our infrastructure and capital-I'd like your response
as to how important critically in the longer strategic thinking
process is that issue of knowledge drain, whether it's doctors or
researchers.
Mr Porter:
I think part of the reason the issue may have gone away, although
I'm not convinced it has gone away, but maybe the reason it fell
off the front pages at least is that it's not a simple issue. We
were basically bombarded with all sides of the debate and even
the statistics seemed to conflict. We had studies from C.D. Howe
and from Statistics Canada that couldn't even agree on whether
the brain drain was important. I would assert that even
Statistics Canada's numbers showed there was a significant brain
drain, at least in the health care field.
I really don't want to get
into the whole debate again, but suffice it to say that we
believe that even if we lose a few stars, a few top-flight
knowledge workers, that's too many and that can impart a large
cost to the economy. We should be doing everything we can to
create a healthy environment for investment and one that
encourages skilled workers to stay here. Again I would stress
that one of the few things the government can have an impact on
is taxes.
Mr
O'Toole: I think it's an important issue.
Mr Porter:
I fully agree. While the public and the media may have lost some
interest, I think it's critical for the long term.
Mr
O'Toole: On the research side too. I know personally
that's where the money is. That is where the researchers and
high-techers go. I know that personally.
Mr Arnott:
I'm sorry I missed the first part of your presentation, I had to
leave the room for a minute, but I appreciate your coming here
and advising us the way you have.
You left with us a paper
you've written. I don't think you made too much reference to it
while you were making your presentation, but something that is
really interes-ting to
me is detailing the tax cuts that are taking place in Britain
right now under a Labour government and tax cuts that are taking
place in Germany today under a social-democratic government which
is generally considered to be the left of the spectrum in
Germany. It would seem that the traditionally left-wing parties
in Europe have caught on to this. It's interesting in Britain to
see them cutting capital gains taxes, of all taxes. Obviously
they see that as a positive thing.
1620
Mr Porter:
It seems to me that things like corporate tax rates and capital
gains taxes are almost a no-go area for governments, and
certainly for the federal government. Basically what our paper
was trying to stress is that there are a number of historically
left-of-centre governments that are fully embracing tax cuts at
the corporate level, or capital gains taxes. They recognize that
there is this intense competition for business investment
throughout the world and that capital is extremely mobile and
will go to the most favourable jurisdiction. That's a simple fact
that I believe has been borne out quite clearly in the past 10
years, and we should try to get over this "taboo" that we can't
bring down corporate or capital gains taxes.
Mr Arnott:
The one thing that concerns me, I guess, looking at the position
we're in today in Ontario-you probably heard the presentation
that was made yesterday by the Ministry of Finance officials
talking about the trends. They're all positive and some of them
overwhelmingly positive, which is good news, yet we can't allow
ourselves to become complacent, as you say, in terms of
international investment and globalization, where we have to
continue to work to be competitive if we're going to get new
international investment, which we need to create new jobs. We
have to continue to be vigilant all the time. That's where I see
our biggest challenge today as a provincial government where we
have to, in terms of this committee, take forward advice to the
minister as to what should be in the budget. Would you agree?
Mr Porter:
Absolutely. Basically, again I would stress that by bringing down
marginal rates you sow the seeds for growth down the road. While
there may be a small fiscal cost short-term, ultimately it will
strengthen the economy and increase investment. That just leads
to a much stronger economy over the medium term. That will also
help us limit the damage from the boom-bust cycle.
I would go to the first
half of my concern, though, and stress that we shouldn't get
lulled into a sense of complacency that these are "normal" times.
Clearly, revenues are absolutely exploding, but I don't believe
this is a sustainable trend. It's not necessarily wrong to have a
long-term goal to-we don't have to do it overnight or anything,
but it would be nice to sort of set a North Star to aim for.
Large-scale the tax cuts are perhaps not the best medicine for
the Ontario economy right now, given that the economy is already
in the midst of a very strong upturn, but since there are
supply-side benefits from marginal tax rate reductions, again, I
think that can help sow the seeds for longer-term, more
sustainable growth.
The Chair:
Any more questions? If not, I'll go to the official
opposition.
Mr
Kwinter: Mr Porter, thank you very much for your
presentation. I want to talk about two separate issues. First,
you've spent a great deal of time talking about the automotive
industry, and rightly so; it's a major engine of the Ontario
economy. I have been following this for some time and I find that
there's a bit of a dichotomy in that you say it's boom time in
the auto world and Canada is doing great, but there hasn't been a
new greenfield investment in Ontario in the automotive sector
since the early 1980s. There have been add-on investments to
things that are here, but nothing that is greenfield, started
from scratch.
Earlier this week, General
Motors announced that they are putting the first major plant that
they've built in the United States into Michigan to build the
Cadillac. You have Mercedes, BMW, lots of Japanese companies all
going to the southern United States. Notwithstanding that, we are
supposed to be so competitive. Do you have any explanation as to
why, if that is the case, these greenfield investments, which are
new plants in new locations, are not coming to Ontario because we
are the centre of the automotive industry?
Mr Porter:
I actually don't find it that worrisome that there isn't a lot of
new construction, because one trend we've seen in business
investment for the last 10 or even 20 years is basically a more
intensive use of existing facilities; in other words, perhaps
triple-shifting or increasing the number of machines within a
given plant. We've actually seen very lacklustre non-residential
construction. Even in the US, the main thrust of business
investment has been in machinery and equipment and using existing
facilities more intensively. That's essentially what we've seen
in Ontario as well over the last 10 or 15 years. I actually don't
find it that problematic. Essentially the automaker sees the auto
market as quite mature, and the last thing they want to do is
build all kinds of new facilities that will eventually be shut
down in the next bust. They want to use the existing facilities
as intensively as they can during a boom and then scale it back
during the next downturn. So I don't necessarily regard that as
overly worrisome. I think all you have to look at is the amount
of production that is now going on in Ontario. That sector at
least has benefited mightily over the last 10 years.
Going back to an original
point, though, I think it's important to stress that while the
auto sector has done very well and Ontario has done very well in
the last couple of years, don't get me wrong: The 1990s were a
brutal decade for the Canadian economy. There's no two ways about
it. Our growth rate was only a little bit better than 2%
throughout the 1990s-that's for Canada as a whole, and Ontario
wasn't far away from that-versus almost 3% in the US. It's not as
if the Ontario economy has just gone through a long-term, 10-year
boom or anything. On
balance, it was quite a rough decade for the economy as a
whole.
Mr
Kwinter: The other point I want to make is, you refer to
various economies that are following suit and making changes to
their tax structure. Over the last few years, the poster country
that tax cutters were using was New Zealand. I even heard my
colleagues on the other side using New Zealand as a model of what
could happen with the right government approach to taxation.
I had occasion to see a
report just recently where New Zealand is now considered to be or
was a basket case, and a new government has come in to totally
change all of those particular initiatives.
Do you have any comment on
that? Have you been following what's happening in New
Zealand?
Mr Porter:
On the periphery. I have to admit that New Zealand is not such a
large economy that I think it deserves as much attention as it's
gotten in the last 20 years. The one thing I would say is that
New Zealand is still, to this day, a highly commodity-based
economy. They are still very much driven by the farm products
they have, and they were extremely hard hit by the Asian crisis
and the ongoing weakness in food prices and farm products. I
think that actually explains quite a bit of the pain they
suffered in the last couple of years. Admittedly, Australia, with
many of the same attributes, has absolutely sailed through the
last couple of years, but I think that goes back to the fact that
Australia is in the process of widespread restructuring and
taking many of the right steps.
Turning back to New
Zealand, the only thing I would say is that I think that while
they have suffered a little bit in the last couple of years, they
are still in much better shape than they were back in 1984 before
all the restructuring came into play and they are much better off
than they would have been had they not restructured. I don't
think you can judge an economy by one or two years. You have to
look at it over a broad scope, almost over 10-year periods. I
think on that basis New Zealand is still doing quite a bit better
than it was in the early 1980s.
Mr
Phillips: One of your charts here shows Canada's
corporate tax rate substantially higher than any other
jurisdiction. At the same time, I've got the Ontario document
here that says Ontario's combined corporate income tax rate-this
is for manufacturers-of 35.6% is four percentage points lower
than the US average, indicating at least for the manufacturing
sector that Ontario, when you take the federal and the provincial
tax rates, is substantially lower than the US on corporate
taxes.
Are we looking at apples
and oranges here? It would be very helpful to our committee, and
certainly to me, if you can supply us with sort of the comparable
tax rates in neighbouring jurisdictions.
Mr Porter:
Admittedly, this table basically looks at the top corporate tax
rates, so effectively this would be for a service sector
corporation. This goes back to the Mintz committee report that
basically looked at the extreme differences within corporate
taxes even within Canada and questioned whether that was still an
appropriate policy to have, basically to favour the manufacturing
sector which, as I pointed out, is doing extremely well in any
event largely because of the highly competitive exchange rate
and, probably to a lesser extent, the relatively favourable
corporate tax rate.
1630
I think you could make a
strong case that where the growth will be over the next 10 years
will not be in manufacturing per se. It will basically be in the
high-tech industry, which is not typically manufacturers. This is
really where we should concentrate on helping to level the
playing field and bring down corporate tax rates to at least
close to the same levels as they are in the US.
We can certainly get
different answers depending on what state we look at, what
industry we look at. We can probably find some cases where Canada
has actually got a more favourable corporate tax regime than the
US. That does apply in the case for manufacturers against
neighbouring states. Where the growth is going to be, and
certainly the stock market is pointing to that, is in the service
sector. We should try to balance the playing field a little bit
between service and manufacturers.
Mr
Phillips: A fundamental difference between us and the US
is the way we fund our health care system or the way we pay for
it. You can see in the provincial budget it's well over $20
billion. In income tax we raise around $16 billion. It is
substantially different than the US. At the same time, we hear
from lots of people that we've got to find a way to get our tax
rates down very similar to the US. The issue then is, if we have
identical rates to the US and the average productivity in the US
is higher than us, I think we put our health care system at
risk.
It is a bit of, as they
say, a conundrum. As we move to presentations like this where we
compare our tax rates to our neighbouring jurisdictions, how do
we factor in the completely different way that we've chosen to
pay for health care in Canada?
Mr Porter:
There are two points to make there. First of all, I'm not
necessarily advocating absolutely mirroring the US tax regime,
especially since it looks as if the US will be bringing down
their rates even more. It's more that the wedge between US and
Canadian rates has absolutely exploded in the last 20 years. We
should at least begin to bring that wedge down, not let it widen
further, which it is at risk of doing. The faster we could bring
it down, the better, I believe, for a long-term healthy economy,
for competitiveness and productivity. We should at least begin to
address that wedge.
Second of all, I do believe
that the fiscal costs of reducing marginal rates, or at least
increasing the threshold to which the top marginal rate kicks in,
does not carry that big of a fiscal burden. It's not going to put
the balanced budget, or even a small surplus, at risk in the
years ahead. I am a firm believer that it can improve the supply
side of the equation. In other words, it actually increases
investment and increases the incentive to work. It helps keep our
best workers here. It really doesn't carry that big of a fiscal
cost. I'm not convinced that bringing down some of the top marginal rates would put the
health care system at risk.
Finally, the third point to
make is, while health care is a huge share of spending, it still
is only roughly a third of the dollar. There's still another $40
billion in spending that we can work on, or at least keep tough
restraint on it.
Mr
Phillips: The government has estimated job growth at an
average of 165,000 jobs a year for each of the next five years,
which is considerably higher than your estimates would put it
here. The government believes that's going to lead to
unemployment potentially in the 2% to 3% range in Ontario. Do you
have any comment on-I shouldn't say "how realistic"-the impact of
them achieving 165,000 jobs a year in each of the next five
years?
Mr Porter:
I don't have the percentages in front of me. You wouldn't happen
to be able to tell me what kind of percentage growth rate that is
per year, would you, 165,000?
Mr
Phillips: On about 5.5 million.
Mr Porter:
It's about 2%, then, a little bit better than 2%.
Mr
Phillips: Yes, 2.5% to 3%.
Mr Porter:
That does strike me as being a little bit aggressive for a
five-year outlook. I think something on the order of about 1.5%
as a trend would be realistic. In other words, that would be on
the order of about 100,000 a year, perhaps a little bit stronger,
because I think it's going to be quite strong growth in the year
2000. But that does strike me as being a little bit aggressive. I
could see the Ontario unemployment rate coming down quite a bit
further. I think something in the fours would be reasonable
within the next couple of years, but 2% is, needless to say,
quite aggressive. Even the lowest unemployment rate state in the
US is only around that level, and I don't think we're quite in
that zone yet.
Mr
Phillips: One comment, among others, that stuck with me
was this analogy to Michigan. I think you said we're roughly the
same population, we produce roughly the same auto parts, auto
business, and so the auto seems to be roughly equivalent, and
that they are the most cyclical economy in the US, which is at
least a cautionary flag to us here. "A cautionary note" I think
is the expression you gave to us. What do you think we should be
doing to prepare ourselves for that kind of an environment?
Mr Porter:
I don't want to harp on the late 1980s, but during that boom
phase basically spending matched the growth in the economy and
maybe even exceeded it, and I think it just stoked the boom. I
don't want to revive painful memories of how the rest of the
country was pointing their finger at Ontario as being the cause
for the overly tight Bank of Canada policy, but I think that we
are at risk of repeating that same experience if we don't keep as
much restraint on spending as possible-simply put.
Mr
Christopherson: I want to ask you about the fact that at
least five times now the United Nations has chosen Canada as the
best place in the world to live. They didn't predicate that on
who has the best tax breaks for either corporations or rich
individuals. They didn't base it on who can water down the
environmental protection the fastest and to the greatest degree,
who can water down their labour laws, who can water down health
and safety legislation. All these things had nothing to do with
why we were chosen. In fact, the things that chose us as the best
place in the world to live were the very things that are
suffering now under a regime, with respect, that seems to me to
match pretty much what you're calling for. I have personally and
my party has some real difficulty with our continuing this kind
of agenda.
I realize that from a
purely economic point of view, where nothing matters except the
numbers-and in large part that's what you do-when the government
flashes up one of their charts that says corporate profit is
taking off, that's great news. For most people it's probably
comforting because they think what it means is that there is
going to be some element of security around them economically in
terms of their jobs and that maybe, if they hope against hope,
some of this benefit will trickle down to them. Yet we have a
study from the Centre for Social Justice that points out that
just the opposite is happening. People are feeling more insecure.
There is less sense of security around jobs, around community.
People are worried about the health care system and they're
worried about the education system in terms of what it means for
the future.
I'd like to hear how you
think we ought to be balancing off these things, recognizing that
based on the Stats-Can numbers, if we just continue where we're
going, what we're going to create is exactly the kind of province
and, given how large we are in the Canadian context, ultimately a
country that no longer reflects the kind of reputation that the
United Nations gives us by virtue of choosing us over and over
again as the best place in the world to live.
At some point in the
equation, quality of life should come into this, and yet by
supporting the ongoing agenda of the current government, the
opposite is going to happen. We're going to see a continuing
erosion of those things that make this a great place to live, the
best place to live, and we're going to see greater and greater
disparity in terms of the inequity of the after-tax income
between the very wealthy and the poor, recognizing that we're
getting a larger pool of poor people because the middle class is
being squeezed out, and they're not being squeezed up, they're
being squeezed down.
1640
What are your thoughts on
how we balance all of that, or if you don't think we should, what
do you say to those sorts of things that public services provide
for the vast majority as opposed to the very few in our province
who have the luxury of being able to buy through private,
disposable income whatever kind of health care, education,
recreation, location of home etc that they choose? Just some of
your thoughts on that.
Mr Porter:
First of all, one thing to keep in mind about the UN survey is
that if you look at the countries that rank near the top and the ones that rank
near the bottom, it is very closely related to income levels.
Many of the services that you talk about, things such as high
literacy or health and well-being and a clean environment, are
tied to income. In other words, a good environment and a good
health system are closely related to a strong economy, so getting
a strong economy should be priority number one in achieving many
of the other benefits.
I would be the last to
question the UN's methodology and be the last person to question
whether Canada is the greatest place to live. I fully believe it
is. But one thing I would point out is that it doesn't have that
fine a line between income levels. In other words, a country such
as Canada, where income levels are 20% or 30% below those in the
US, was treated almost equally in terms of that measure in the UN
survey. In other words, the US doesn't really get any benefit
from the fact that it has a 30% or 40% higher disposable income
than Canada does in that methodology, just for your interest.
In terms of your remarks on
the Centre for Social Justice-unfortunately I haven't seen that
report-you mentioned that people are feeling more insecure about
their employment situation. That's actually very hard for me to
understand, because we do have the lowest unemployment rate in
almost 25 years. I think either that survey is based on somewhat
dated information or that it can't really be correct, because
it's hard to believe that things can get much more favourable on
the employment side than what we've seen recently.
Finally, in terms of the
middle class being squeezed down, I think that goes right back to
one of my main recommendations and that is not to have a punitive
tax rate kick in and apply to even what most of us would consider
middle class.
Mr
Christopherson: Fair enough, I appreciate your comments.
I'm going to respond to a few of them.
First of all, we had one of
the strongest economies in the world in the post-war era, after
the Second World War. That's where the great investments were
made that we're living off now, in terms of our road
infrastructure, our health infrastructure, our education
infrastructure, particularly post-secondary education, our new
college system, all under Tories, I might add. It was those
investments that allowed us to benefit from the boom in North
America that existed at that time. So we had a strong economy. At
one time, it wasn't that long ago, we had a strong economy. We
had growth and we had emerging social benefits that did benefit
everyone, not just those in poverty who needed help with
somewhere to live and food, but overall, and helped create the
very middle class that you and I are making reference to. I just
find it troubling that we've decided that because of global
competitiveness and free trade agreements none of that is any
longer possible and we have to let go of all that.
When you say we need a
strong economy in order to provide for the things that I've
mentioned, the reality is that under a regime where tax cuts are
the number one priority at the expense of these other parts of
our society, the middle class is dropping. Virtually every income
group has lost ground, and the lower you are down on the income
scale, the greater the ground that you've lost under the Harris
government which has put tax cuts as the number one issue. Our
concern is that if this continues unabated and this gap, this
polarization, this inequity continues to grow, we're going to
lose an awful lot of what we are all about as well as watching
virtually tens of thousands of our neighbours and fellow citizens
slip out of middle class and get close to poverty.
I worry, especially when
you and others do recognize that there's a number of risk factors
out there, that the bubble could burst with this economy. If it
does, and the American economy starts to slip, we're going to
feel it big time. All of the economic gains that you've talked
about, in my opinion, will vanish, they will just vapourize, and
all that will be left is an economy basically waiting for the
American economy to pick up steam, because that's what's pushing
us right now. At the same time, all the things that made us great
in the past have now been weakened to the point of almost being
destroyed. I just don't understand how that is a worthy goal of a
province and a country like ours.
Mr Porter:
Which goal specifically?
Mr
Christopherson: The goal that we would become one of the
most competitive economic states within the world that we trade
in, but at the same time we make sure that it's not just the very
well-off that are benefiting from it, that we're reinvesting it
in quality-of-life things like education and health care that
ensure that everybody benefits. I point that out because right
now the stats are showing us that under the Harris regime the
opposite is happening. People are losing ground. People are
slowly slipping down in the middle-class bracket and eventually
out of the bracket. Unless something changes, I don't see why we
wouldn't just continue to see this polarization until we hit the
point where the bubble bursts. When the bubble bursts, where are
we?
Mr Porter:
I think that the Ontario economy would be vulnerable to a
downturn in the US regardless of what fiscal policy was in place
in Ontario. It's a simple fact of life that after the free trade
agreement we inevitably hitched our wagon to the US very closely
and that we are going to ride the wave with the US almost more so
than we ever have in the past. That's nothing really new.
I think the question there
is to what degree do we suffer when the US does ultimately
falter. If we set the stage for a strong domestic economy and we
have the fundamentals right here, then we can ride it out a lot
better than if we don't have the right fundamentals. If we have a
huge and growing tax wedge with the US, that is simply going to
aggravate the downturn when it comes in Canada.
Mr
Christopherson: You talk about riding the wave. Again I
would point out that the stats are showing us that in riding the
wave now people aren't getting ahead. They're riding the wave but
it's in reverse. They're losing ground. Virtually every income
group in terms of after-tax income from a family perspective-it's
done as family
units-is losing ground, every one of them. So somebody is riding
the wave, I agree, and somebody is making tons of money.
Corporate profits are up and the government has balanced the
books. They've done it on the backs of municipalities and health
care and education. There are some winners, but they're not
people, they're not families. The people and the families that
make up this economic entity called Ontario are losing
ground.
Mr Porter:
I would point out that disposal incomes took their biggest hit
between 1990 and 1995 and they've been slowly but surely creeping
back since then. That's average or median disposable incomes.
Mr
Christopherson: That's not what the stats support.
Mr Porter:
Admittedly, average disposable incomes or median disposable
incomes per person adjusted for inflation are still lower today
than they were in 1989, but the quickest way to redress that is
to reduce taxes and increase disposable incomes.
Mr
Christopherson: Here's where I have a problem. If you do
that in the way that's been done so far and in the way that I
think, if I'm interpreting your material correctly and your
presentation, you would support and urge the federal government
to adopt also, it means that these tax cuts are exacerbating the
very situation I'm describing to you. They're pushing those who
already have further away from those who don't. That disparity,
that inequity, has not been the Canadian tradition.
Mr Porter:
No, I don't think I'm advocating that. I think marginal tax rates
should come down for everyone. It shouldn't just be for the very
top-end earners. I think the whole broad spectrum of marginal
rates should be brought down so everybody has more incentive to
invest and to increase their skills in order to earn more. Again
I would stress that one of the most important things that can be
done is to raise the threshold at which some of those higher
levels of taxes kick in, and the people who benefit are
low-income earners or middle-class earners.
1650
Mr
Christopherson: Again, though, I don't want to be
argumentative, but the stats are showing us that it's straight
up: The lower that you are down in terms of income the less you
benefit. Now the government plays with percentages and talks
about the bulk of the money goes here, there and the other thing.
When we're talking family units and quality of life and standard
of living, the reality is that when you do tax cuts in the
fashion that this government has in Ontario, those who are
already well off are a whole hell of a lot better off and those
who were at the other end of the income spectrum are dropping
down further. For the life of me I fail to understand how that's
a good thing, given the tradition.
You mentioned that we have
the right fundamentals. I guess the difference is that I can't
limit myself when I think about the right fundamentals to just
the economic fundamentals like interest rates, inflation rate,
GDP, all of the things that are normally the fundamentals. For us
in Ontario, the vast majority of citizens would see the right
fundamentals as being a growing and improving health care system,
not one that's deteriorating, and the same with education. In
health care alone, the previous presenter talked about the fact
that there was a 33% competitive advantage for our auto workers
versus Americans, and a big chunk of that was our health care
system. So not only is it a quality-of-life issue but it's a
competitiveness issue. Yet we're paying a price in our health
care system and education in order to impose the tax cut regime
that we have and that I think I'm hearing you suggest be
continued.
Mr Porter:
You're hearing me correctly all right. Again it's important to
stress that the only increases we've seen in disposable incomes,
even for the median person, for the average person, have been in
the last few years. Things were devastating in the early 1990s
because of the deep recession and the restructuring that we saw
in Canadian manufacturing and whatnot, and we are at long last
starting to see those incomes come back.
Mr
Christopherson: I'm sorry, but the reality is the stats
are showing us that during the recession from 1990 to 1995, the
gap, the inequity between the wealthiest and the poorest, was
actually decreasing. The gap was going the other way. We were
getting more equity, not more inequity. Now, with a different
regime and a different priority, ie, tax cuts, in the greatest
economic boom we've ever seen, we've now got a reversal where we
have more inequity. That's the reality and that's what's
frustrating for some of us in looking at what's happening. The
difference between what a headline says and what's really going
on and what the government says and what's really going on in our
neighbourhoods and in our communities is completely
different.
Mr Porter:
In the early 1990s incomes were converging towards zero, so if
that's the goal you want to achieve, so be it. All I can say is
that, again, the middle-income earner has improved in the last
few years, whereas they were hit very hard in the first five
years.
Mr
Christopherson: Let's agree to disagree, because I
certainly do disagree and I think there are stats that bear it
out. It's not just an ideological, philosophical exchange of
ideas. The stats are now there to show us that's not the case.
The middle class has lost ground and has lost more ground under a
government that's imposed tax cuts and this whole right-wing
regime than in the past.
The Chair:
With that, Mr Christopherson, the time has expired.
Mr
Christopherson: Thank you for the opportunity to have
the exchange.
The Chair:
Mr Porter, thank you very much on behalf of the committee for
your presentation.
ONTARIO SECONDARY SCHOOL TEACHERS'
FEDERATION
The Chair:
The next presenter on the agenda is the Ontario Secondary School
Teachers' Federation. For the record, gentlemen, could you please
state your names.
Mr Earl
Manners: Earl Manners, president of the Ontario
Secondary School Teachers' Federation. On my left is Dale Leckie, a
researcher on educational finance on our staff, and on my right
is Mark Ciavaglia, our legislative liaison.
The Chair:
On behalf of the committee, welcome. You have 30 minutes.
Mr
Manners: Thank you very much. I believe you have a copy
of our submission in front of you. I do not intend to read it. I
will do my best to summarize it as quickly as possible so there
are opportunities for questions.
I'd like to begin, however,
by setting the context. I note today that the finance minister is
reporting that we have a robust economy, that there are increased
revenues, that he's projecting a balanced budget this spring and
that we have economic prosperity now and for the foreseeable
future in this province. Government representatives may be
pleased to hear that I am prepared to accept that as a fact.
I am not going to debate at
the same time the causes or the merits of how that was achieved
either. You may be happy with that statement. But I would hope
that you would show the same degree of recognition when I say at
the same time that all of that is true, not everyone is sharing
in the prosperity equally.
I think we're all familiar
with the plight of the homeless. We all know-Statistics Canada
has recently published a report on this-that working people have
seen their real incomes decline, especially in Ontario. The old
saying that the rich are getting richer and the poor are getting
poorer, I think is more true today than it has been. These are
real people, real families, and they are real children we see in
our schools, and the effects of that we are seeing in our schools
as well.
I also want to say that
it's not just those people I identified who are not sharing in
the prosperity, but it's also some of the public institutions
that are there to serve all citizens of this province that have
not shared in the prosperity as well. There's been a lot of talk
recently about the health care system, but I would add social
services and in particular, from my point of view, public
education.
I want to talk about public
education in particular, because the government has purported to
be providing stable funding to our public education system, but
it is the public boards that are bearing the brunt of that
so-called stable funding. I think you have a chart in front of
you that shows you that all but two public boards are getting
less and less because of the government funding formula. What
we're seeing is a ratcheting down of support for public schools
to the very lowest common denominator.
Even if we go to the
government's definition of stable funding, I want to point out
that it includes restrictions as well, because in the
government's definition of stable funding it says that the
government will claim that per pupil funding will increase if
enrolment increases, but to a maximum of 4%. If there is an
enrolment increase beyond 4%, school boards do not receive any
additional funds, so even in that definition there is a cap. If
that cap is pierced, school boards in effect lose.
Our report on the first
page also points out that some of the additional requirements for
boards and staff to implement some of the reforms that have been
identified are for the most part unfunded and not included in the
funding formula, so they represent an additional cost that's over
and above the so-called stable funding.
Finally, when it comes to
stable funding I want to refer to the Education Improvement
Commission, the government's own self-appointed commission, when
it says that boards have been living off the avails of mitigation
and transition funding to assure program delivery, that there are
cuts coming. They have been deferred for a year or two, but they
are coming, and in that definition of stable funding, those cuts
will be imposed next year and the year after and the year after
that. So the government has built mitigation and transition
funding into part of, I would say, the mythology of stable
funding.
I think we all have to be
concerned about that because the passage of Bill 7, the taxpayer
referendum legislation, establishes an artificial ceiling for
education spending, but it does not provide a floor for public
education to stand on. What happens is that as these cuts come in
and as there are further cuts to business and property taxes,
that will automatically mean less money for public education
unless there is going to be some offsetting funds from other
general revenues, and we don't have any guarantee of that. If the
economy ever turns bad, it would require a referendum just to
maintain the status quo on funding in the future. That concerns
us greatly.
1700
It's very real, because
right now you know the government has told municipalities only to
give 98% of business and property taxes back because they have
changed the accounting practices. They have changed the approach
to taxation of vacant properties. All of those mean, because the
province has taken control over education, an automatic decrease
to education funding unless it's offset by other revenues. I hope
to hear today from the government members that that's not going
to happen. That's one of the reasons why OSSTF does not believe a
provincially controlled system of education funding is going to
be sensitive to Ontario's diversity.
The third interim report of
the EIC I think supports our concern. They mention, for example,
the new Toronto District School Board and its predecessor boards,
that they had worked in partnership with municipalities in the
past to try to ensure the diverse social and economic needs of
children were met. They relied on a common property tax system to
do that. They developed integrated services, which is something
this government purports to believe in, yet they are unable to
provide them now because some of those services they were
providing in concert with the municipality are not covered by the
funding formula.
One of the other areas that
the EIC identified was the learning opportunities grant. It is a
grant to try and address socio-economic, new immigrant needs in
various communities.
However, it's based on 1991 census data. I think everyone would
agree that a lot has changed in the last decade in this
province.
I'll just give you one
example. London, I understand, is one of the fastest-increasing
areas for new immigration to this province, yet it's not being
recognized in the current funding formula because it's based on
1991 census data. That has led to, for some reason-and I don't
have an explanation for it-the Thames Valley public board getting
just about half the learning opportunities grant that the London
Catholic board receives. So, one, we're not dealing with
up-to-date data, and, two, it seems that the public board in
particular has been hit the hardest by changes in the funding
formula, one of the reasons why it is on the list on the downward
cycle.
That is why our first
recommendation is saying that we hope the government will
consider that there has to be some flexibility built into the
funding formula to deal with local needs through the local
taxation system in co-operation with municipalities to get the
kind of integrated services we all want.
Let me remind you that
Minister Eves pointed out on May 4 and July 21 that the growing
Ontario economy, which is riding the coattails of the US economy,
means the government can reinvest in items that mean most to
families, like education. Despite the minister's assertion, our
public education system continues to experience cuts.
I would ask you to look at
page 7. There you will find a chart which shows you the decline
in the number of elementary and secondary staff per 1,000
students in our school system across the province. I want to
emphasize that this graph is not about administration. It's about
school secretaries, who are the first contact to students who are
absent. It's about custodians, who are often the eyes and ears
and who protect students and identify unauthorized people in our
schools. It's about maintenance staff. It's about library,
computer and audiovisual technicians. It's about educational
assistants. It's about professional student service personnel
such as speech language pathologists, psychologists and
attendance counsellors. It's about teachers of adult education
and English as a second language, library teachers, guidance
teachers, special education teachers.
They have been declining. I
would think that all of us in this room would agree that they are
not administration, yet in the funding formula some of those
people, who provide very important services in the school, are
identified as administration. You can see the result in the last
few years, what has happened to those employees. They don't know
that we live in a prosperous society in Ontario anymore. They're
not sure there is prosperity in the future when they see
government documents that are leaked purporting to cut a further
$800 million from education.
I want to emphasize that
OSSTF does not support the definition of the government about
what is "administration." Those personnel we've just identified I
don't think are administration, and I don't think anyone believes
they are administration, yet they are being cut today. That's
something we've got to address.
While the total number of
staff has decreased, average class sizes are increasing. That
just makes sense. If enrolment is going up and the number of
teachers is decreasing, you can do the math. That means the
average class size has to go up despite what it says in Bill 160,
because Bill 160 only described an average maximum class size,
and the word "average" unfortunately means nothing. For every
special-needs class of 12 students, there will have to be an
academic class of 32 to meet the funded average of 22. There are
many, many classes over the average, and the biggest classes are
often those which parents feel are most important; for instance,
English and math. Many collective agreements I want you to be
aware of prior to Bill 160 included maximum class sizes for
various programs, but going to an average class size has put
pressure on school boards to cut programs for students at risk
which require lower class sizes and are not funded for those
lower class sizes or, on the other hand, increase academic class
sizes well beyond what they had thought was a reasonable standard
maximum in the past.
I should also point out
that the funding formula doesn't even mention remedial programs
that are mentioned liberally throughout the new curriculum
documents. If we're to provide those programs, probably with
lower class ratios, then that issue has to be addressed.
I want to talk about
staffing a little further and ask you to look at table 1.7 in
appendix A, which highlights the fact that student-teacher ratios
in Ontario have been climbing since 1995, while in Quebec and the
United States they've been declining. We're becoming less
competitive in the education sector as a result.
I want to point out too
that under freedom of information, OSSTF received documentation
from the ministry which showed quite clearly that prior to Bill
160, the average class size in the public secondary school system
was below 22, so that in actual fact mandating an average class
size of 22 hurt the public school system. It meant our classes
had to go up in size.
I think you can see from
the chart that two thirds of those job losses have been in
teaching positions as a result of that and other cuts. That is
money from the classroom. It's had an effect, and I want to
re-emphasize that there are fewer teachers and support services
as the student population continues to climb.
There are other storm
clouds on the horizon, and those have to do with staffing
shortages. I'm not just talking about teachers; I'm talking about
all staff. There are reports of increased use of temporary staff
because we cannot get employees, secretaries, to work in schools.
We have education assistants who have not gone through the
college system. And of course the study by the Ontario College of
Teachers shows that serious shortages of qualified teachers will
soon affect schools in every part of the province and that almost
every teaching specialty will be hit. This will be exacerbated if
the gap between public and private sector salaries grows, as was
pointed out in the
London Free Press article reporting on the Conference Board of
Canada survey that showed the wage gap between public and private
sector workers was continuing to widen.
1710
I think we all know that if
you want to ensure you have good, qualified people in front of
the classroom in our schools, there's a good way to attract that
staff. You make sure you pay them well and you make sure the
working conditions are there so that they can do the best job
they possibly can.
I note on page 12 that even
the Canadians for Responsible and Safe Highways say the same
thing in concerns about a driver shortage. We've had a lot of
this talk about our highways lately as well. They say exactly the
same thing.
Educational employees have
seen their working conditions and salaries deteriorate over the
last eight years. You know as well as I do that teachers and
support staff, for the most part, have not had a raise throughout
the 1990s. That has to be addressed if we're going to overcome
that looming problem on the horizon.
I won't spend a lot of time
on other parts of the funding formula that we have concerns
about, but we are concerned about the closing of schools,
especially in rural and northern communities. The reason that's
happening is that the funding formula encourages school boards to
consolidate schools. You get money for every student. If you can
house those students in bigger warehouses, you can keep the
money. So it's encouraging school boards to create the big box
buildings, much like we see in suburbia now, replacing our
small-town stores that were the heartbeat of our communities.
That's the same logic that is being used in our education funding
formula. That's why even the Ontario Federation of Agriculture
has come out and said that they are taking an interest in
education, because when a school closes in a community like where
I taught, in Flesherton, Ontario, that community dies.
I don't want to portray
everything as bleak. I want to go back to what I stated as a fact
at the beginning. We live in a prosperous province and we can
afford to do better for our education system. Ontario, over the
last four years, has slipped to 55th place out of 63
jurisdictions in per pupil expenditure, but we know we're not the
55th best economy in North America; we're much better than that.
I think our support for education should reflect that.
The Ontario alternative
budget suggests that if we are going to restore the funding cut
from education spending over the last four years it would require
some $570 per student in Ontario. Inflation has been running a
little in excess of 1.8% in the last six years, so it's going to
cost more than that. You can see our statistics on that at the
bottom of page 15.
I know members of the
government have not accepted this calculation of 55 out of 63,
but I think there is an-other way to compare expenditures on
education and that's on gross domestic product. If you take a
look at the graph on page 16, you'll note that Ontario is 10th
out of 12, out of the 10 provinces and two territories, in per
pupil expenditure as a percentage of gross domestic product.
If Ernie Eves is correct,
and I believe he is, that the Ontario economy is growing by some
7% perhaps, as he said, then that percentage is going to get even
worse un-less our public education system benefits from the
prosperity. We would accept a definition of stable funding that
is tied to the increase in the gross domestic product as one way
to ensure that our education system is getting the kind of
support that it deserves.
In our recommendations we
are saying clearly that we need to build in some local
flexibility and input into the funding of programs for our school
system. We have to make sure that public education benefits from
the growing prosperity by ensuring that we fund many of the
components in the foundation grant to take into account
inflation, to improve and restore staffing and learning
conditions in our schools, to recognize that our educational
employees deserve a raise and that per pupil expenditures have to
reflect student need. The learning op-portunities grant, for one,
is an area that needs attention, as does our special education
grant.
Finally, one way perhaps to
address this in the future is to establish an independent and
public process for the annual review and revision of the funding
formula that's accountable to the Legislature and not just to the
govern-ment of the day. That way we would have a bipartisan
approach to education funding and support for students and each
new generation.
I want to conclude by
reminding you again of Ernie Eves's statement, in both May and
July 1999, that we have a growing economy and that we can afford
to invest in what is important to families in Ontario, like
public education. My only question is, when are we going to see
it?
The Chair:
Thank you very much for your presentation. We have approximately
12 minutes for each caucus. I'll start with the official
opposition.
Mr
Phillips: Thank you for the presentation.
The Chair:
Oh, I'm sorry, it's not 12 minutes; it's about six minutes. It
was a half-hour presentation.
Mr
Phillips: Everything is cut in half here, grants to the
schools-they keep chopping.
Mr
Manners: I'll keep my answers short and to the
point.
The Chair:
When you're Chair, you can chop.
Mr
Phillips: Yesterday the government provided us with the
educational expenditures. I don't know whether you've had a
chance to look at them or not.
Mr
Manners: I haven't had a chance to look at them
closely.
Mr
Phillips: They released the wrong chart initially. I'd
appreciate OSSTF looking at it and seeing whether in fact it's
consistent with what you're experiencing. What it seems to show
is that the money raised off property taxes has dropped by about
$360 million to $5.5 billion, and it appears to show that the
province has increased its share by a similar amount. It appears to show
that total school board operating expenditures are about $12.7
billion, which is up marginally over the last five years, from
roughly $12.4 billion. Would that be consistent with what your
belief is?
Mr Dale
Leckie: As the municipal taxes are generated locally,
the design of the funding formula is that whatever level the
municipal tax creates, the ministry tops it up to the funding
formula allocation. One of our concerns is, as the municipal
level decreases, the requirement of the government to make up the
difference, according to the funding formula. At some point,
we're concerned that they're not going not to top that up. If
that requires some sort of referendum to do that, then that's our
concern.
Mr
Phillips: One of the challenges we face is that the
language around this is kind of all "funding formula" and it's
relatively antiseptic. It's difficult, certainly for the public
and I think for many of us, to humanize this. It has been a
debate around the funding formula, and as long as the debate is
on that ground, frankly, probably the government can avoid the
debate on the other stuff.
You do have one
recommendation in here which suggests that there be some kind of
an independent body that can provide an objective view of it,
which intrigues me, although realistically the government will
want to control that. I am very interested in trying to quantify
what's really happening out there, because as long as the
government says, "We're increasing classroom spending and it's
just that the dastardly school boards aren't doing it properly,"
you can get away with a lot. I wonder if OSSTF can help to
humanize this and give us a human scorecard on what's
happening.
1720
Mr
Manners: We'll be producing a report in March that
summarizes all of the 5,000 responses of teachers and support
staff from across this province in secondary and elementary
schools about the impact of all the chan-ges that have occurred
to our education system over the last few years-from the new
curriculum to the funding formula and its impact on various
programs, to the textbooks issue. We are going to be publishing
that in March. It's based on 5,000 random responses to a
questionnaire, and we think that will give us very much a human
picture of what teachers and educational workers are facing in
schools and classrooms and school boards today.
We are working with some
university personnel in order to do that and to ensure that it's
objective, and we hope that it will lead to some suggestions
about how we can do further research, with the assistance of
education departments in various universities from around this
province, to provide us with some clear data about what is
actually going on in our schools. We look forward to releasing
that in March.
One of the reasons we
talked about things like student-teacher ratios and the number of
staff to students was an attempt to humanize it. I think everyone
understands that if there are more students in a school but fewer
staff, the students aren't getting the same level of service,
whether it's the teacher in the classroom, whether it's the
custodian who cleans that classroom or whether it's the secretary
who's making sure that student's application for university or
college gets there on time. You can't guarantee all those
services as the actual number of staff decline. That's the
easiest way we think we can try and portray the funding formula
and its impact in human terms.
The Chair:
With that, Mr Phillips, I'm sorry that I cut your time in half,
but that's the reality of it.
Mr
Phillips: Twelve minutes fly by.
Mr
Christopherson: Earl, thank you very much for your
presentation. Three quick things in the time I've got.
Number one, on page 11 you
refer to the number of teachers who are retiring and that they
have "jumped at the first opportunity." I think we've all seen
that. I just wanted to add my voice to that.
The level of discontent and
stress and concern within the ranks of teachers in Ontario ought
to be something that alarms all parents. It's sometimes so
convenient for many in the public to sort of lump all teachers
together and then start commenting on the things they don't like.
But individually, it's been my experience that nine times out of
10 the teacher is sort of up on a pedestal like the family doctor
in terms of "I've got to pay close attention to everything they
have to say about my kid; it has major implications." Those very
individuals are under so much stress that I'm not surprised
they're jumping.
Where it really registered
with me was the number of doctors in Hamilton who told me that
the number of teachers they have who are off on stress has jumped
to numbers they've never seen before. When you get that kind of
endorsement of the message from someone who has no vested
interest whatsoever, for doctors to be saying, "I've got more
teachers coming in with health problems, stress leaves and all
kinds of ailments they didn't have before," then we'd better
start realizing that those are the very individuals who are
standing in the front of the classroom and their mental attitude
towards the work they're doing and whether they feel they're
getting the support of their government or not makes a huge
difference to the kind of classroom instruction and education
that our kids get. Your working conditions are our kids' learning
conditions. I don't think you can put it more succinctly than
that.
Very briefly, and then I'll
give you a chance to respond on those, you mentioned the school
closures. Again, how many teacher groups do we have to have come
in who continue to talk about yes, some of their own
circumstances around funding issues, but the vast majority of the
presentations, I say to the government members, from teachers who
have come in so far are talking about everything else that's
going on around teachers except teachers themselves. They're
concerned about school closures and the impact-you talked about
this, Earl-on small communities. I've talked to you about this
and I know you're aware of it. The impact on inner-city
neighbourhoods, where you have schools that are the centre of
social activity for a lot of families and kids, is the same
impact as one school in a small town or a village, except that it's replicated maybe a
dozen times across a community like Hamilton-Wentworth.
The EAs continue to be an
issue in Hamilton-Wentworth, and again I've spoken to you about
this. I speak about it everywhere I can. It's outrageous that
we've got kids who a few years ago were receiving all the
supports they needed to get the education they're entitled to and
now they aren't. It's simply because the funding formula has
shortchanged our boards. That's it. We've got disabled kids not
getting the education they deserve and they're entitled to
because this government cut the money that school boards get in
order to give effect to their tax cut. It's disgusting.
The last thing-and this one
is a question-is you talked about the ranking of per pupil
funding in terms of us being 55 out of 63 right now. I want to
ask you what your and your association's impression and feelings
are about how that's going to affect the quality of the education
that our children will have once they come out of the school
year. What does it mean in terms of their ability to market
themselves, the quality of life they'll be able to build for
themselves and their families as a result of the income they can
generate and, on an issue we hear over and over here all the
time, on competitiveness? What do you think it means to us
overall in terms of our ability as we move more and more into the
information economy? What does it mean for us as an economy in
Ontario if our kids don't have the knowledge and skills they
should have?
Mr
Manners: If Ontario is 55 out of 63 in terms of
investment in education and every surrounding American state is
investing far more, then I think we are leaving ourselves
vulnerable, not only in the short term but in the long run, to
hurting one of the factors that contribute to a strong economy,
and that is a well-educated workforce, a well-educated citizenry.
You can't keep making cuts and asking people to do more with less
without it having an impact on the way they are able to do their
jobs.
I think that's why you are
hearing more and more concerns about stress and morale. I think
teachers and educa-tional workers bend over backwards to do an
effective job for kids, because that's what they are there for,
but what I'm hearing is: "I'm reaching the last straw. I can't
keep doing it at the levels I am and being expected to do more."
There's proof of this now too. You talked about LTD. In 1995, the
level of LTD among teachers was 7.8 teachers per 1,000. It has
jumped, more than doubled, to 16 per 1,000 in 1999. You can't
ignore that statistic. That means something. That's a human
statistic. That's about people who are saying, "I can't take it
anymore." That does affect the classroom and we've got to do
something about it.
I don't have the statistics
for support staff, but if you are an education assistant and you
are trying to deal with four special-needs kids instead of one,
as you had in the past, something's got to give. I think what has
given in various areas around this province is that some kids are
not getting the service they had a couple of years ago. That's
not me speaking; that's their parents.
Mr
Christopherson: Could I just ask for a clarification,
Chair? The 7.8 was in 1995 and the 16 was in what year?
Mr
Manners: In 1999.
Mr
Christopherson: Thank you, Earl.
Mr
O'Toole: Thank you for your presentation. The tone is
appreciated, because there have been difficult relationships. I
think there are always two parties to a debate or disagreement,
and I appreciate that the tone isn't totally adversarial. That's
productive. I just want to be on record as acknowledging that,
because I recognize there has been some dislocation; you
translated it into LTD, or the use of that. I think if we could
slow down the rhetoric part a bit you may be able to help as
well.
1730
I hope too that
historically you would recognize that-I don't want to simplify
this, but I'm limited to only six minutes. The debate on this
chart has been going on since 1982, about 1980 roughly. It's
public versus separate. My point-it's two questions really. When
you break your arm in Ontario, whether you are public, separate,
Jewish, Arab or whatever, it's the same. Do you support both
systems-four systems, actually-being funded equitably across the
province, called public education? That's part one. Part two is,
what is your view with respect to the UN ruling that
denominational schools, more or less in a voucher sense, might be
a prudent way of making sure parents of various cultures and
values, inner- and outer-city school issues, have a significant
role in this issue?
For instance, our culture
is changing. Many of our teachers aren't culturally prepared to
deal with the issues, let alone technologically prepared to deal
with the virtual classroom or distributive learning. These are
very complex issues. I think teachers today, as in most jobs,
should be thanked. They are going through a tremendous amount of
change, which I think sort of articulates itself in the
curriculum.
I would put a third part to
this: Don't you think we had to freshen up the curriculum and
standards? I mean this in a positive way. If you think "no" is
the answer to all of these, then get out of the sand, because
it's-as much as I dislike it, I had a job for 30 years: That's
finished. Would you agree? Not just teachers but all careers will
go through significant change.
Mr
Manners: I appreciate you comments regarding my tone.
Your last comment about new curriculum, I think, is one thing
that may have been forgotten in some of the rhetoric of previous
opportunities where we have had a chance to meet, Mr O'Toole. We
were very much involved in the secondary school reform process
and in the assessment review process. We continue to be and
always were-even when our differences were at their height, we
continued to put a strong emphasis on improv-ing the quality of
our schools and improving curriculum. I think you will know that
it was our recommendation to the government that the best way to
improve schools is to improve the curriculum. We are really glad
the minister adopted our position on that. I'm quite pleased
about that.
With respect to public versus separate and the
chart we put in, I would make a different interpretation. What
that chart is showing is that the public school system is being
shortchanged, that they had a standard or a level of education
they had become accustomed to and, rather than trying to ensure
that everyone had that standard, the standard has been lowered
and now the public school system is being ratcheted down.
Quite frankly, if you are
asking me if that's fair, no, it's not. I don't believe I should
be paying for other people's religious convictions, and I would
hope you don't either.
Mr
O'Toole: Well, I think it's fair to-
Mr
Manners: Let me finish; you asked a question. I don't
think you would disagree that there is a separation of church and
state in our society. We believe in a fully funded English and
French school system. We also believe that in a multicultural
society we believe in one strong public school system and that we
can provide, like we do with heritage language programs, heritage
religion programs.
But I want to correct you
on one thing. The United Nations did not support vouchers. They
said that the current system of funding was discriminatory and
you had two choices. You have no obligation under the United
Nations human rights covenant to fund religious schools. So other
states-other provinces, recently, Newfoundland and Quebec-have
chosen to fund one strong public school system. That is something
they said was a viable option. It's one I would support. I do not
believe in going the other way and funding all religions. I can
think of some pretty wacky religions that you and I, through our
taxpayer dollars, would have to fund. I'm sure you don't want to
support that.
Interjection.
The Chair:
Mr O'Toole, I'd like to thank the presenters for their
presentation, but we've run out of time.
COUNCIL OF ONTARIO CONSTRUCTION ASSOCIATIONS
The Chair:
Our next presenter is a representative from the Council of
Ontario Construction Associations. Could you please step forward
and state your name for the record. You have 30 minutes. On
behalf of the committee, welcome.
Mr David
Surplis: Great. Thank you very much, Mr Chairman. My
name is David Surplis and I'm president of the Council of Ontario
Construction Associations. I notice on the agenda it's singular,
but we are in fact a council of many associations, and that's one
of the things I want to talk to you about.
With me is Andy Manahan. He
knows all the answers. We intend to be brief in our
presentation-as you can see, it's not all that voluminous-so that
we can in fact engage in some question-and-answer with you.
That's what we would like to do, and I think you would too.
For those of you who
haven't met us-I don't see very many around the room who haven't,
actually-we represent the Council of Ontario Construction
Associations, a federation of more than 40 associations across
Ontario, in the non-residential construction field. We'd throw in
all those big names there-PCL, Ellis-Don and so on-that you'll
recognize, right down to the mom-and-pop, two-person construction
companies familiar in all your neighbourhoods and all your
ridings. So we cover everything. About 7,000 companies, actually,
are represented through COCA, all trades, all disciplines;
everything, as I said, except residential. We're not in that. The
Ontario Home Builders' Association looks after that aspect.
We would like to start off
by saying to the government, to Mr Eves, yes, thank you, we are
growing, we are rebounding. The crane is not an endangered
species any more. You see more of them on the horizon every day,
and we're grateful for that. But to put it into perspective, as
we start here, we did drop. We dropped a lot from 1989, roughly.
We got to a low of 6.7 billion-that's all our sector of
construction did in 1995-and we're up to about 9 billion, as Mr
Eves's figures show, for 1999. But in 1990 we were at over 12
billion, many millions of hours. We've got a long way to go.
They're crying where we are. There are cycles and all that, but
we haven't rebounded to where we were. As we say in our
presentation, the SuperBuild fund and the amounts committed to
universities, colleges, hospitals, schools and so on are very
welcome by all our members and we're certainly hoping to get the
2008 Olympics here. That would be a real shot in the arm.
Yes, we're grateful, but
even with the boom I wanted to point out to you that historically
the construction employment-and that's all, including houses-is
roughly 6% of the workforce. Right now we're at just over 5%. So
in other words there's growth in the Ontario economy but we're
not sharing in it, we're not growing as the rest of the economy
was. That's a concern to us. So is the drop in apprenticeship
applications-a drastic drop in apprenticeship applications. Of
course, we've been following these hearings today on the
television, as much as our doctors advise us it's bad for your
health to do that, but we have. I would like to say, for
instance, Mr Galt mentioned the loss of jobs over the last
decade. In construction, we actually lost 85,000 jobs in that
period-that's just construction-and over 100,000 from the
workforce disappeared in that period of time.
1740
What concerns us, of
course, is nobody seemed to notice that. When a van plant shuts
down or something, everybody goes into high gear, "Let's fix that
up," but when 85,000 jobs are lost in the construction industry
nobody seems to notice, which is perhaps as much our problem as
anybody else's.
But as we point out, and we
will talk about it, we hope, perhaps later, one of our problems
is we don't have a minister or even a department of a ministry
responsible for our sector of construction. Mr Kwinter would know
that well, having been the Minister of Economic Development and
Trade. Over there in MEDT they have all kinds of sector areas and
so on. The non-residential construction industry, all thousands of companies
and billions of dollars of output that we have, merits in that
ministry one half of one researcher. There's no department for
construction or anything like that. There's aerospace and IT, and
all of those are important, but there's one half of one
researcher in that ministry devoted to non-residential
construction.
We hope things can change.
We're not asking for a ministry of construction or anything crazy
like that, but there are things we're starting to talk to the
government about that we can do to do that.
Now let's talk about the
budget. That's what we're really here for.
We're thrilled that the
deficit is being wrestled down and that the jobs are returning.
We're torn, as others are presenting to you, with what to do with
the income after the deficit is removed. Keep paying down the
debt or spend some on capital projects? Naturally, we're asking
for capital projects because we frankly see them as an
investment. Sewer and water main, for instance, is in dreadful
shape, as the Provincial Auditor told you more than a couple of
years ago now, but it's a thing that's easily forgotten. It's
underground. People forget about it, take it for granted.
We, frankly, agree with one
of our main members, the Ontario Sewer and Watermain Construction
Association, who have been pushing for years for full cost
recovery of water systems in Ontario. We don't see why the
average household is subsidized to the tune of around $500 a
year. We don't see consumers trying to pay less for their gas,
their cable, their telephone or anything like that. Why is water
subsidized?
I know the answer from the
government has always been, "It looks like we're raising a tax on
somebody." We don't quite see it that way. We see it as full cost
recovery. That's what the freight is. Let's pay the freight in
water and then require the municipalities to have funds to
maintain and upgrade those very precious systems, especially with
regard to water, that are important to us all.
So we're very keen on
infrastructure and, as our Catherine Swift said earlier today,
real infrastructure. That's what we want to see: real sewers and
water, real roads.
Roads, of course, are
another very important concern of ours. We think that Queen's
Park has done a pretty good job. In fact, our members tell us
that with the maintenance and upgrading of the highways under
your control, the job is pretty good. But those ones that were
passed off to other jurisdictions, they have some concerns about.
They don't see the other jurisdictions being able to keep up and
certainly to expand, and that's what we need. With NAFTA, with
the pressures of international trade and so on, we need more
attention paid to highways-we really do-border crossings and so
on.
We recommend, as does our
member the Toronto area Road Builders' Association, that you
co-operate with the federal government on the federal highways
program. It sounds to us from the noises coming out of Ottawa as
if the federal government caucus in Ontario wants to spend money
on roads, is willing to spend money on roads in Ontario. Fine. If
that's the case, let's do it. We're not sure if politics
interferes with that or what, but if there's money, let's get to
it.
We want to talk to you
briefly about revenue leakage, because it isn't just at the
Workplace Safety and Insurance Board, which is a whole other
problem and it isn't under your purview right now. We see that
problem as a huge one at the board, and it carries over to the
provincial sphere.
We think that this business
of the so-called independent operators, which are just burgeoning
all over the place-according to our research less than 50% of the
workforce in construction is registered at the Workplace Safety
and Insurance Board.
The rest are-we don't
know-well, frankly, we do. Lots of companies are evading by just
not reporting. But all kinds of other companies-and this is a
fascinating concept-are firing their employees on Friday, the
employees whom they had for years and they were paying for this,
that and the other thing, making the deductions, and hiring them
back on Monday as independent operators for whom they make no
remittances and no deductions. They pay them cash at the end of
the week and "presumably" the worker pays those remittances
himself or herself. We don't think that's the case. We certainly
know it's not the case in terms of WSIB.
Just a quick example for
the economy, for the budget here-and we have mentioned this to Mr
Eves's staff: The cut-off for EHT is a payroll of $400,000. If
you have 10 construction workers averaging roughly $45,000 per
year for 1,500 hours, you get nine of those workers and you break
that barrier and you pay EHT. You remit EHT to Queen's Park. But
if the nine workers are independent operators not one cent is
paid to Queen's Park.
Frankly, we think that's
wrong. If the test is not met, if they're not true independent
operators-and most of the ones we see, believe me, are not
independent operators-there's something wrong there, and we'd
like to work with the government on that kind of thing. We
frankly think that if that's the case and if there is that kind
of interesting arithmetic, shall we say, at the board where
people are avoiding their payments-which, by the way, causes huge
problems for us in terms of the companies that can't avoid-the
companies that pay are going to have to pay higher and higher
premiums as more and more people escape their obligations and
don't pay. The board, for instance, says, "Oh, well, you have a
dreadful accident record." Not so; our accident record has been
dropping like a stone, but people have been diving out of the
rate groups and declaring their own rate groups and so on.
Anyway, we think that transfers into the sphere of provincial
income, especially with regard to EHT. It's so easy to avoid and
evade.
We want a competitive and
growing construction industry. That goes without saying. A
dynamic, growing construction industry reflects greater
production, investment and revenues, both private and
governmental. We don't
have a minister responsible for construction, but you can carry
that message back.
We want very briefly to
mention-we'd like to start discussing with somebody in
government, and we did have a chance with the one window to get
started on that process with Mr Beaubien-that in the state of
Victoria in Australia they've made some wonderful advances,
amazing changes. They have taken the whole construction industry
and packaged it. They've required everybody to be registered and
show your coverage on this, that your liability insurance is
there and all those things are there before you get a building
permit. Simple carrot and stick. If you don't have a health and
safety program that works, if you don't have this, if you don't
have workers' compensation coverage, you don't get a building
permit, so there's compulsory registration.
They've privatized the
inspection and approvals process-great idea. Much like the TSAA
here, the Technical Standards and Safety Authority. They've hived
it off from government. It's self-funding by the industry in
Australia. It ought to be a natural for the government to look
at. They've also put limitations on liability for the
practitioners but have required them to have liability insurance
that covers that period. In other words, 10 years is your
liability window, but you must have coverage. If you design a
building or a bridge or something and you retire, your insurance
has to be there for the next 10 years.
Those are some of the
things we wanted to bring to your attention. Basically, our
message is we are improving, very much so, in the industry. We
could improve a lot more and we'd like to, and we'd very much
like to have a minister to talk to in terms of non-residential
construction. So, any questions, monsieur?
The Chair:
We have about three minutes for each caucus.
Mr
Christopherson: Thank you for your presentation. I
wanted to echo your concern around the sewer and water systems.
Again, having spent five years on local-regional and city-council
prior to coming here, I'm quite familiar with this as a problem,
both in terms of what it means for the environment of local
communities, the health of the residents of those communities and
the cost. You're right: Out of sight, out of mind. People flush
the toilet, turn on the tap, and never give it another thought.
In Hamilton, and I'm sure you've run across this in a lot of the
older established, larger communities like ours, we still have a
lot of the combined sewage and it still creates huge problems. We
have the overflow tanks that help during some storms, but you
still can't catch it all that way. At the end of the day, they've
got to be replaced, they've got to be separated, they've got to
be brought up to date.
1750
I know the Americans had
talked about undertaking an infrastructure renewal program, and I
wonder if you could tell me what you know about that. Are they
still at the advocating-lobbying stage or have they actually got
money committed, cost-sharing with states, and is the work
getting done? If so, where does that leave us vis-à-vis the
relative comparativeness of our mutual infrastruc-ture systems,
recognizing that in some ways it's like the roads? If you have
problems there, things are going to shut down and you're not
going to get services. But can you give me an update on where we
are with that?
Mr
Surplis: The Ontario Sewer and Watermain Construction
Association had a big presentation on that last year. Federal and
provincial things-the things you're talking about would be more
looked after by the Canadian Construction Association. We would
take our lead from there.
Mr
Christopherson: I see.
Mr
Surplis: But we do understand-just a quick answer-the
program is underway. Money has been alloca-ted and is being spent
on those very things. Everybody at the conference was saying,
"How about here?"
Mr
Christopherson: Do you have any sense of why the
provincial government so far has not signalled more positively to
our federal government their willingness to partake? Do you have
a sense of what that is? Or maybe colleagues from the government
backbenches can do that for us.
Mr
Surplis: I haven't a clue, no. Well, for instance, we've
got a similar sort of problem that we talked to Mrs Cunningham
about on apprenticeship. We don't have an agreement, Ontario and
the federal government, to flow some funds on that, and we
recognize there's a problem there. We'd like it resolved but
that's all we know, that there's a problem.
Mr Galt: I
thank you for your presentation. I'm a little surprised you watch
the legislative channel. I thought it was only my mother who
watched it on a regular basis.
The figure I was using was
net job loss during the first half of the decade, not the grand
total job loss.
Just a clarification. The
way you were saying it, it sounded like once you went over
$400,000 in payroll to that ninth person, you then had to pay it
for them all. My understanding was that the first $400,000 was
deductible, so to speak.
Mr
Surplis: Absolutely, but if you have a payroll over
$400,000, you pay.
Mr Galt:
It's a little bit over.
Mr
Surplis: It's the cut-off or whatever, yes.
Mr Galt:
Your comment about "fire on Friday and hire on Monday," is that
all about the excess payroll taxes that companies found
themselves in and to bail out of that, that requirements are so
much less if it's contracted? Is that the reason they went that
route?
Mr Andy
Manahan: There was a study released in November 1998 by
the Ontario Construction Secretariat, a labour-management type
organization. They looked at the underground economy and they
looked at a number of factors that precipitated that. They said
one of the major ones was the introduction of the GST in the
early 1990s. Obviously we were in a recession during that time,
and so there were contractors and workers and so forth who wanted
to avoid certain obligations.
That attitude, unfortunately, has pervaded the
industry so that now certain companies are underground. Even
though things are a little bit buoyant, they've become accustomed
to that system and so they've tended to remain underground.
In the whole issue about
gravitation towards an independent operator, we're seeing a
trend, certainly in the non-residential side as well right now,
in terms of piecemeal type work. A company that used to be very
large and had, let's say, 15 employees has now subcontracted a
lot of that work out. That gets passed down the line and everyone
is responsible for paying their own benefits, so you're actually
getting down to a situation where you might now have 15 companies
with one individual so they don't have to register with the
board, they don't have to pay the EHT and that sort of thing.
It's an unfortunate trend in the industry. To a certain degree it
represents an efficiency in the industry, but it certainly hasn't
helped governments and organizations like the WSIB collect money
and has put those other firms that have to pay for the injured
workers and so forth at quite a disadvantage because there are
fewer legitimate companies that are trying to cover those
costs.
Mr Galt:
Is there a little time for my colleague Mr Arnott to ask a quick
one?
The Chair:
He's got 45 seconds.
Mr Arnott:
I want to ask about your suggestion concerning full-cost pricing
for the provision of water services. Water's an essential service
for every household, yet I think your idea would lead to improved
water conservation and we should be concerned about that over the
long run. You said the provincial government ought to set
standards. Can you expand somewhat on that?
Mr
Surplis: We could and we will. Actually, we're carrying
the message for our member, the Ontario Sewer and Watermain
Construction Association. They have all the studies on that and
can tell you more about that. But yes, they have the figures.
They have a very convincing argument. It was just always that
people were loath to pass it on because people's costs would go
up: "It looks like I'm going to pay more." Well, yes, they
would.
Mr Arnott:
If it means ensuring over the long run-
Mr
Surplis: Exactly. If the provincial government sets
those standards, requires a fund to be set up by the
municipalities for those purposes-there's more detail. We will
send it to you and obviously to the Treasurer.
The Chair:
Thank you very much. For the official opposition, Mr Kwinter.
Mr
Kwinter: Thank you very much for your presentation. This
whole underground economy situation is something we've looked at
over the years, and it would seem to me that it's really endemic
to your particular industry because of the nature of it. It's a
transient kind of thing. It isn't that you have a factory at one
site and someone can come in and do an audit, say what you're
doing. Unions are a problem when tendering takes place. They want
to be competitive, so they want to get non-union labour. There is
all sorts of motivation on behalf of the general contractors who
are bidding on jobs to get competitive and to try to be so. How
do you deal with that as an industry?
Mr
Surplis: It's so hard. Everybody's had a look at it. As
I suggested, in Australia they've done it by requiring everybody
to register-everybody. You just can't get a building permit
unless you do that. That's pretty strong stuff, and a lot of our
members weren't very thrilled about that kind of talk a number of
years ago, but when they saw that it might correct things-we have
an interesting experiment going on right now; labour and
management together are promoting the use of smart cards in the
construction industry to show people's health and safety training
and their this and that, all of those things. It's very
economical. You can track everything. We're not suggesting Big
Brother statism here, but the costs are so horrendous. It's
getting to the point-and by the way, I would like to point out
that it isn't just the construction industry. There are all kinds
of industries that are hiving off their employees and having
people work at home and so on as independent contractors. They
don't have employees any more, so therefore they don't make the
deductions and so on. There are lots of big companies out there
that have maybe four or five employees and 200 or 300 independent
contractors working with them.
But back to construction.
It took four years in Australia to bring their system into place.
It required bargaining and horse trading and all of that kind of
thing, but believe me-we're expecting a third report on how
things are operating in Australia in about another six
months-everybody apparently down there loves it and it's really
working. I think it's helped stem the underground economy there
too. So perhaps that's the answer.
Mr
Kwinter: Do you have any idea of what proportion of your
business is underground?
Mr
Surplis: It depends. According to the study done by the
construction secretariat last year, anywhere up to 40% and 50% in
some areas.
Mr
Kwinter: That's significant.
Mr
Manahan: It was higher on the renovator side of the
residential industry, less so in non-residential, but we have
seen a gravitation on both sides.
Just on the aspect of the
smart cards, there was a presentation put together by an
individual from the millwrighting council which is quite good,
and I will get you a copy of that presentation.
The Chair:
Thank you very much on behalf of the committee.
That completes the agenda
for today. This committee will reconvene in this room tomorrow
morning at 10 o'clock. We're now adjourned.
