1991-92 BUDGET





Thursday 20 June 1991

Cross-border shopping

1991-92 Budget

Honourable Floyd Laughren

Afternoon sitting

Ministry of Treasury and Economics



Chair: Wiseman, Jim (Durham West NDP)

Vice-Chair: Sutherland, Kimble (Oxford NDP)

Christopherson, David (Hamilton Centre NDP)

Hansen, Ron (Lincoln NDP)

Jamison, Norm (Norfolk NDP)

Kwinter, Monte (Wilson Heights L)

Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

Stockwell, Chris (Etobicoke West PC)

Sullivan, Barbara (Halton Centre L)

Ward, Brad (Brantford NDP)

Ward, Margery (Don Mills NDP)

Substitution: Miclash, Frank (Kenora L) for Mrs Sullivan

Also taking part: Turnbull, David (York Mills PC)

Clerk: Decker, Todd

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

The committee met at 1018 in committee room 1.


The Chair: I think I am going to see a quorum and begin this because, as Mr Kwinter indicated, at 10:30 he has to go to a meeting and we want to be sure that we wrap this up so that when the Treasurer comes in at 11 o'clock we are done with the cross-border shopping.

Where would we like to begin this morning? Have we noticed any changes we would like to discuss or are there any outstanding issues we need to address?

Mr Christopherson: On the first point from Anne, "Does the committee wish to indicate in the report those recommendations that are unanimous?" obviously we would like to. I think that is entirely in the hands of the opposition members as to what their comfort level is with that idea.

Mr Kwinter: Both our party and the third party have indicated we are going to be putting in minority reports. There are certain proposals in here that I personally, and I assume my colleagues, do not have a feeling about one way or the other. It was not something sufficiently outrageous or contentious that we wanted to dispute it, but it also was not something we thought was the be-all and end-all. It was just there and we said: "We have no problem. If you want to put that in, go ahead and put it in. We don't really have a problem with it." The ones we do have a problem with we are going to address in our minority report.

From that point of view, I would be just as happy without commenting one way or the other whether it is unanimous or not. The fact is it is in the report. It is the report of the committee and we will sign it, but I would feel a little uncomfortable giving the impression that I have 100% agreement with every single one of these things. I do not have any great disagreement with them but there are two or three of those things I just do not have a feeling about one way or the other. I do not know whether anyone else wants to comment.

Mr Christopherson: That is fine. That really is fine. No argument from us whatsoever. I can appreciate your position. The only thing I would suggest is that some of the recommendations may have added weight with the cabinet if it were indicated that these are things the three of us agree on. I just leave that thought out there, and if the opposition is not comfortable with that way, we certainly respect that.

While I have the floor, I would just acknowledge that on the next point, the two recommendations from Anne are also acceptable. On the third point, I think it is probably appropriate that we indeed show the revised estimate and keep the report as current as possible, as close to the date that appears on it that we completed our work. I think that makes good sense.

Ms Anderson: If I can just make a suggestion for some wording for that, perhaps on page 6, at the end of paragraph 2, we could add some words, something to the effect of, "A subsequent study by the Ministry of Industry, Trade and Technology, publicized after the committee's hearings, estimates the loss of retail sales to be $2.2 billion, more than double the previous estimate."

Mr Christopherson: Whatever reflects the truth.

The Chair: Are we comfortable with that? Any discussion on that? Seeing none, are there any other points?

Mr B. Ward: Are we wrapping up the report?

The Chair: Yes, we are. That is our hope. My sense from the committee was that is what we would try to do this morning.

Mr B. Ward: Before we finalize everything, two or three weeks ago I asked research to see if it could find information on the economic status of the American border communities and states. We received a report that was a tax comparison between us and the Americans, but we never did get information on the economic wellbeing of the American communities. I am just wondering if it was perhaps too difficult or we just could not do it. Some questions, in my mind, are still there.

If Buffalo is receiving all this economic activity from Ontario companies through relocation, why in the last year or so did it feel compelled to shut down its transit system because it could not afford to pay for it? New York City's mayor, just a week and a half ago, went on record as saying that they are going to have to shut down every fourth streetlight because they cannot afford to run them. I do not know why they have to do that. Perhaps Anne could clarify that. Maybe that information is not out there and that is why our research could not come up with some report on the economic health and wellbeing of the American communities and states at borders.

Ms Anderson: The information is difficult to compare between the different states and the different --

Mr B. Ward: I am not saying comparing.

Ms Anderson: Perhaps there was a slight misunderstanding. I thought you were trying to find some kind of comparison between the bordering states and Ontario, and that is partly what the tax information was to address.

Mr B. Ward: That was what we received, the tax comparison, but it never really covered why the American communities and states are in financial trouble if they are doing so well. It never really touched on that. Perhaps it is too late, because we are closing the book on this chapter, but if we happen to have cross-border shopping come back to this committee, that is something we would want to take a look at in greater detail.

The Chair: Mr Sterling moves that we add recommendation 18 to the report, and that recommendation 18 be, "The Ontario government should roll back the gasoline, fuel, alcohol and tobacco tax increases imposed by the 1991 budget."

Mr Sterling: I would like a recorded vote on this, Mr Chair.

The committee divided on Mr Sterling's motion, which was negatived on the following vote:

Ayes -- 4

Kwinter, Miclash, Phillips, G., Sterling.

Nays -- 5

Christopherson, Hansen, Sutherland, Ward, B., Ward, M.

The Chair: Mr Sterling moves that we add to this report as recommendation 18, "The Ontario government should harmonize its provincial sales tax with the federal goods and services tax."


Mr Christopherson: Just a question. Norm, for simplicity's sake, are you just moving the recommendations that were on your page?

Mr Sterling: Yes. It is recommendation 2.

The Chair: Hearing no discussion, all those in favour?

Mr Sterling: I would like a recorded vote as well.

The committee divided on Mr Sterling's motion, which was negatived on the following vote:

Ayes -- 1


Nays -- 8

Christopherson, Hansen, Kwinter, Miclash, Phillips, G., Sutherland, Ward, B., Ward, M.

The Chair: Mr Sterling moves that the Ontario government should produce and make publicly available an analysis of the effects of any relevant legislation or regulations it proposes to introduce or amend on the competitive position of the Ontario economy or, where appropriate, on specific sectors.

Mr Christopherson: Briefly, I just want the record to show that in our previous discussions we did offer up a response to that. There is now language in the main report that we believe deals with the substantive matter contained in the motion, but we recognize the changes that the opposition would like to see, and hence the motion that is before us, but the record should reflect that we do believe we accommodated much of what recommendation 4 says.

The Chair: Further discussion?

Mr Sterling: It is a recorded vote too, Mr Chair.

The committee divided on Mr Sterling's motion, which was negatived on the following vote:

Ayes -- 3

Miclash, Phillips, G., Sterling.

Nays -- 5

Christopherson, Hansen, Jamison, Ward, B., Ward, M.


The Chair: Mr Christopherson moves the adoption of the report as contained in draft 3 with the amendments that were made today.

Mr Sterling: I am going to vote against the report and we will be submitting a dissenting opinion. I consider the report to have no significant recommendations which will, in effect, deal with the cross-border shopping issue and alleviate the concerns of border communities. I believe most of it is recommendations which will have, perhaps, a little effect, but not very much effect on the problem.

The committee divided on Mr. Christopherson's motion, which was agreed to on the following vote:

Ayes -- 6

Christopherson, Hansen, Jamison, Sutherland, Ward, B., Ward, M.

Nays -- 3

Miclash, Phillips, G., Sterling.

The Chair: We need to have a deadline for the dissenting opinion so that we can get the report to the Treasurer; he has indicated to me that sooner rather than later would be his preference, so what is the will of the committee in terms of the dissenting report?

Mr Sutherland: If I could make a comment, I think it is important that we have this report ready to release before the House adjourns. I think the positions have been very well-thought-out. The Liberal caucus has brought forward its recommendations, and we debated them, and I think they know where they are going. As for the third party, I think we have been very accommodating in waiting for initial recommendations to come forward. I think one of the reasons they were delayed is because the two members who were supposed to represent the third party on this committee decided that the budget hearings across the province by their caucus should take precedence over the official business of the House, and we have been very accommodating there. So I hope we would have a very short deadline so that we can have this report tabled in the House before we adjourn next week.

The Chair: Are you recommending a date, Mr Sutherland?

Mr Sutherland: I guess I need to know, once those reports are in, how long it would take to attach them and then have the whole report tabled in the House. I am not quite sure; is it a day process, is it a two-day process?

The Chair: The clerk is informing me that it has to be translated, then bound, then prepared to present to the House. Perhaps you would like to comment on the possibility of doing it before next Thursday.

Clerk of the Committee: The translation is really the time-consuming process. Even if we had the dissenting opinions by tomorrow, I am not sure we could get it translated in time. The committee could agree to table an English version, with the French to follow, although last week in discussion, the committee agreed that it wanted it together, back-to-back in the same document.

Mr Hansen: Is it not possible to translate this document here? It would be a very short document from each of the other parties, the opposition party and the third party, and possibly we would be able to meet the deadline.

The Chair: As the clerk has just informed me, it depends on the deadline for the dissenting opinions; obviously the deadline would have to be sooner rather than later. Do we have a date?

Mr Sterling: I would hope to be able to provide you with a dissenting opinion by Tuesday of next week, which is only three or four days from now. I had hoped that there would be changes with regard to the government's report, as I call this committee's report. We may be able to have it done before that time.

The Chair: The clerk has informed me that the body of the report could be sent out to begin translation today, and that the dissenting reports could be translated and in some version, not bound, but perhaps a photocopied version that could be tabled in the House by the end of sitting next week.

Mr B. Ward: If you get it Tuesday.

The Chair: Is that the instruction to the clerk? We need a motion.

Mr Christopherson moves that the opposition be requested to provide their dissenting reports by Tuesday of next week, to the clerk of the committee.

Motion agreed to.

The Chair: Do we need a motion to table it in its unbound form?

Clerk of the Committee: No, that is not a problem, but does the committee want to have the report simply tabled, or tabled and debated with a motion to adopt the recommendations?

Mr B. Ward: Do you need a motion for that?

The Chair: I would think, yes.

Mr B. Ward: I so move.

The Chair: Which one?

Mr B. Ward: What is normal procedure here?

The Chair: With the pre-budget document -- it was just tabled -- there was no debate.

Mr B. Ward: Is that normal procedure?

Mr Sterling: That does not matter. They do that in case they want to debate it some time in the future, because it is up to the government House leader to call it or not. That is the normal procedure.

The Chair: Standing orders also give this committee an option to ask for comprehensive comment from the government on the recommendations within 180 days of the tabling of the report.

Mr Sterling: Sounds good to me.

Mr Christopherson: This side of the room, the government side, has continually said how important we consider this matter to be, and that we want this report to have some strength to it. That has not been rhetoric; we mean it. I think that asking for that kind of response is consistent with the message that we have sent our colleagues, and I think we would agree to make that request also.

The Chair: Are there any other comments or discussion on the report? Then I consider this matter to be closed and I thank the committee for their co-operation. The Chair has appreciated that. Since the Treasurer is not going to appear until 11 o'clock, are there other matters of business this committee should consider before we hear from the Treasurer?

Mr Christopherson: Is Norm going to be driving the bus when we travel in August?

Mr Sterling: Are we travelling in August?

Mr Phillips: Have the dates been set yet?

Mr Sutherland: Correct me if I am wrong, but I thought we were meeting the last week of July, starting 29 July, for four days here --

Mr Christopherson: Could I interject for a moment and indicate that we are now moving into the discussion of the budget and the budget itinerary for the upcoming hearings.

Mr Sutherland: Probably what needs to be done is another subcommittee meeting just to confirm some of those details before we formally discuss it here. I was under the impression that we are meeting, starting 29 July, the week before the civic holiday, for four days, and then we take the week of the civic holiday off, and then we are back for, I believe, three more weeks of four days travelling around. That is tentatively what I have heard. I would not want to be held to that as a final in-stone decision.

Mr Sterling: What are you going to do if we do hold you to it?

What are the four weeks? Do you know, Mr Chairman?

The Chair: Other than what Mr Sutherland has just said to you, I --

Mr Sterling: Okay. Why do we not discuss it when we have the information?

The Chair: The other point we have to settle here concerns the expert witnesses who are being brought forward by the parties.

Mr Sutherland: May I suggest, Mr Chair, that if we could have a subcommittee meeting on Monday some time, we might be able to get all those issues resolved in terms of what weeks the committee is holding hearings and who exactly the expert witnesses will be. I do not know whether Mr Kwinter is coming back --

Mr Phillips: He will be back.

Mr Sutherland: Okay. Maybe we can agree as to when we can have a subcommittee meeting on Monday to finalize those details.

The Chair: All right. Are there any other matters before the Treasurer arrives? Should we take a short recess until about five to 11, so that we are here in time for the Treasurer? Is that agreed? I think it is agreed.

The committee recessed at 1041.


1991-92 BUDGET

The Chair: I would like to call this session to order. We have with us this morning the Treasurer of Ontario to discuss the budget. Welcome, Mr Treasurer. I understand you have some opening comments you would like to make.


Hon Mr Laughren: Thank you for the invitation to appear here. Despite what others might have said, I welcome these hearings. I think they are an opportunity to have a good debate on the budget and substitute some light for the heat that has been there on it. So I really do look forward to it.

I am very pleased as well that you have decided to travel; I gather you have decided to travel. I do not know your exact schedule, but I am really happy about that because there are a lot of people out there who want to know the whole story on the budget, not just the distortions that have been raised about it. So I am really happy that you are going to be travelling across the province. I do not know how much time I am going to be able to spend with you on that, but they are not my hearings anyway. They are your hearings, not the Treasury's.

With me this morning is Bryan Davies, who is the Deputy Treasurer. He will help me out on any questions you might have that I do not know the answers to. There are some other people from Treasury here too who will help out if you have questions that are perhaps too technical or that I simply do not know the answer to.

I think the job you have to do is an important one. As a long-time advocate of the committee system in this province, I almost envy you, Mr Chair, as you head across the province in August, I believe, conducting these hearings.

It has now been about two months since the budget was brought down, the first budget we have ever had the opportunity to deliver in this province. There has been a lot of debate over the budget, some in the Legislature, although not as much as I would have liked. I really wish we could have got on with the debate on the budget, but that is history and I will not dwell on it. There has been a lot of debate in the media and the fax lines have even heated up, dealing with the budget. I am happy that we are now in an open legislative process, where we should be debating the budget. It is an important budget, it makes some important statements and I am really pleased that we have reached the point now where elected representatives are having an opportunity to debate it.

I wanted to start off by putting the budget in the context of the economic conditions in which we find ourselves and in which we found ourselves as we were drafting the budget. The recession, as we know, is the worst that we have experienced since the Second World War. We lost over 250,000 jobs last year, basically private sector jobs, in this province. The manufacturing sector in particular experienced a very severe decline in output. House sales and car sales dropped dramatically and capital investment was down as well.

We just received the Canadian figures for the first quarter of the calendar year, the January to March period. Taking that first quarter and transferring it into an annual rate, the real gross domestic product declined at an annual rate of 4.6%. When you combine that with the fourth quarter of last year, which was down to minus 4.9%, it is the worst two-quarter decline in GDP since the recession. That is how serious the recession has been.

Interjection: Since the war.

Hon Mr Laughren: Since the war at least, yes. That is why there were 260,000 jobs lost in the economy of Ontario. Ten years ago when there was a recession, there were about 223,000 jobs lost, so it is more severe. I will comment on the nature of some of the closures too.

The drop in economic output in Ontario saw a decline from an average of 3.6% of annual increases in the 1980s to minus 3.3% in 1991. That gives you an example of the magnitude of the drop.

We are certain as well that the recession has signalled some very fundamental changes in the Ontario economy. The shift is going on away from manufacturing and toward the service industries, and that has been accelerated while this recession is on. We need to adjust to that new reality.

It was against that backdrop of a severe recession that we found ourselves planning for and then delivering our first budget as a government. We made a decision, and I have not had a moment of doubt or second thought or hesitation that our decision, a deliberate decision to fight the recession rather than the deficit, was the right one. I would do it again. I am proud that we decided to fight this recession and protect people in the worst recession since the Second World War.

The $9.7-billion deficit that people do not like was not caused by a wild spending spree. By no stretch of the imagination was it caused by that. The effect of the recession on revenues and expenditures is really what got us there, not because we are a big-spending government.

If you look at the results of the recession just on our revenues, for example, you will see that in 1991, if we were to experience the same revenues as we had because of growth in the 1980s, our revenues would be between $3.3 billion and $3.7 billion higher for 1991-92. In other words, if we had had the same kind of growth that we had been rolling along with in this province, approximately $3.5 billion in increased revenues would have come our way.


On top of that, we had the federal government. I do not think anybody has disputed this fact; not even the Tories in this House have disputed the fact that the cutbacks in transfer payments from the federal government cost us about $1.6 billion. We had to make up for that, my friends. You never bring that into the equation when you talk about it in the assembly, I notice.

We have statutory obligations to pay people assistance when they lose their job, at least partly because of the new regulations on the UIC, I might add. We have a statutory requirement to pay those people assistance when they go off unemployment and on to social assistance. Unless you believe we should just turn them on to the streets, we have an obligation to pay those people some income maintenance. In 1991-92, that will be up by about $1.4 billion. That is a lot of money and that is a statutory requirement. That is a 40% increase, and do not tell me that this government had any role to play in causing those welfare rates to go up 40%. You might look to some other people as to why we have a recession like this.

That is why I get very angry when I see the federal Tories criticizing Ontario. Their high dollar and high interest rates had more to do with this recession than even the previous government did, so I think we should put in perspective just why we are in this recession and how we had to cope with it and why we had to cope with it.

I want to get into some more options that we could have dealt with if we had wanted to satisfy the Tories and not have this deficit, and I am going to be very specific this morning.

We really believe we made the right choice. This year we are spending $4.3 billion in capital expenditures. When the private sector tells me we are spending too much and that the deficit is too high, I say to them, "Should we cut back on capital expenditures?" I hear, "Well, no, you really shouldn't cut back on capital expenditures because that is an investment in the future."

Besides, who does the capital expenditure work? When we spend money on capital, who does the work? It is the private sector that does the work, so there is an advantage to the private sector in our spending that $4.3 billion in capital.

More important, it is an investment in Ontario. I hope the people in this room will read budget paper E attached to the budget because there is a clear statement in there of how we view Ontario. We believe that putting money, capital expenditures now, is what is going to make Ontario competitive in the future. We feel very, very strongly about that and I have not had too many people complain about that.

We know as well that the deficit has helped maintain and create -- a combination of those two things -- 70,000 jobs. If you think that 260,000 jobs is not enough jobs to lose in the province and you would rather have 330,000, then stand up and say so, because that is what this deficit did; it protected or created 70,000 jobs.

The anti-recession package alone, the $700 million package which, when you add on the local government contribution, came to pretty close to $1 billion -- the last number I saw was about $940 million or $950 million -- created about 14,000 jobs in the province; person jobs, not all full-year jobs because a lot of the projects were short-term and it was all capital project jobs.

Those were not programs. They were not programs that are going to be built into the system and continued; they were capital works that needed to be done anyway. They were on the shelf waiting to be done. We either did them in the future or we did them now. But why put them off? Why not do them now when they are desperately needed? The jobs are needed and the improvements to our infrastructure in this province are needed now as well, so why not do it now? And yet I hear the Tories telling me that we should not be doing that kind of thing because our deficit is too high. Well, fine. Tell us that you do not want those jobs out there, but do not pretend that you can have it both ways, that you can create jobs without having a deficit at a time of recession. It is simply not possible.

We did in this budget expand training opportunities for workers who want to enter or re-enter the workforce. We are committed to reforming the social assistance system and we have put $215 million into reforming the system, because if I feel strongly about one thing, it is the term "transitions" in that Social Assistance Review Committee report, transitions from welfare to work. We want to do that in a very positive way and that is what that $215 million in the budget is designed to do. We think that is what people want; they want that system reformed. Everybody tells us that, the private sector, the public sector, the recipients, everybody wants that system revised. Well, you cannot do it for free. You better get that in your heads. It costs money to reform the social assistance system and get people back to work, and we think now is the time to do it, both in terms of training and counselling and getting people back into the workplace.

For people at the bottom end of the income scale, we are providing tax relief through the Ontario tax reduction program, the largest enrichment in the history of this province, and we are very proud of that. Unless, of course, you believe those at the bottom of the scale should not be getting any benefits out of the system; then I suppose you would tell us that we should not improve that, either.

We are improving the supports to employment program to help social assistance recipients keep part of their net earnings while on welfare to help them get back into the workplace, because we got a lot of complaints that you go out and work and then it does not pay you to go out and work. We think that is an important ingredient in that whole transition concept as well.

We increased the grants to municipalities, which had been frozen, as you may recall, in order that they can cope with some of their demands. We did not do the offloading that the federal Tories did. That would have been part of the solution of keeping the deficit down. We could have stuck it to the municipalities and to the school boards and to the hospitals, but you do not tell us to do that; you just tell us to keep the deficit down. It is time there was some honest debate around this deficit and this budget.

We are increasing the supply of affordable housing with an additional 10,000 rent-geared-to-income units. If you think those should not be there, say so, but I think they should be. I think it is an important part not just of economic development but of social development, and housing is one of the best economic stimulants there is, because when you build houses, you also need furniture, appliances and landscaping. It is a very good economic stimulant, a good multiplier, and we think that is an important statement to make.

We also decided not to put the provincial sales tax on top of the GST. That in itself saved almost $470 million. If the Tories think we should be putting it on top of the GST, they should say so. Say if that is the way you think we should be reducing the deficit so at least we will know where you stand.

I wanted to get into some of the alternatives we had, because I think that is something people have not been talking about very much. Just to put it in perspective, we ended last year with a $3-billion deficit. I really have not heard anybody blame the government for that, not even the Tories. They are blaming us for the $9.7 billion this year, but not the $3 billion. I have not heard anybody do that. There may be some, but I think most fair-minded people understand that we inherited a government in the midst of a recession when the bottom was falling out of the Ontario economy and we certainly were not the cause of that.

But if you put into perspective what we could have done to satisfy the Tories on reducing the deficit back to the $3 billion -- not even back to zero; I have not heard you say that, but you certainly think we should have kept the deficit down to $3 billion, I understand -- there are some things we could have done.

We could have flat-lined the major transfer payments to our major transfer partners. I think people understand that means the municipalities, it means the school boards, it means the hospitals and it means the colleges and the universities. I remind you that enrolment is going up in our educational institutions, we have an aging population, so there is increased utilization of the health care system.

Talk to any municipal politician, talk to people at the local level and see what they think about having their property taxes go up. See what they think. Tell them that is what you want them to do. Tell them you want the provincial government to keep its deficit down, offload the costs on to the municipalities so the property tax will be higher. Be honest; say that to them. I have not heard you say that, but that is what is implied in what you are telling us.


If we had done that, if we had flat-lined transfers to our partners out there, as we call them, enrolment in colleges and universities would have had to be cut, we think, by about 25,000 students. Almost 5,000 hospital beds would have had to be closed; 10% of the hospital beds in this province would have had to be closed in order to meet those numbers. We think that without any additional funds for municipalities and school boards, either property taxes would have had to be increased by 4.2% over 1990 levels or 6,000 classrooms would have had to be closed, and public health operations would have been slashed by 33%.

That is not all we could have done. We could have eliminated all new spending initiatives, undertaken no new spending initiatives by the government whatsoever. We could have discontinued the home care programs for seniors and the disabled. We could have discontinued entirely the legal aid program. We could have eliminated the winter maintenance program for provincial highways. We could have eliminated the technology fund, slashed welfare rates by 10%, dropped the Ontario drug benefit for both seniors and social assistance recipients. Those are some of the things that we could have done, and do you know what? Even if we had done those, we could not have kept the deficit at $3 billion.

I am waiting to hear what we should have done. I want to hear this, how we could have got back to the $3 billion. All I am hearing is that the deficit is too high. I agree the deficit is too high. Who wants a deficit of $9.7 billion? But I think it was the responsible thing to do in the midst of the worst recession since the Second World War, and I do not regret that.

Do I have a time limit, Mr Chair?

The Chair: About four more minutes.

Hon Mr Laughren: Oh, I did not know I had a time limit. I am sorry. But I can tell you that if we had made all those cuts, there would have been substantially higher unemployment in this province. Is that what you want? Do you want higher unemployment in this province? I have not heard anybody say that. So I think that the alternatives were not only unpalatable, they were simply unacceptable. We just simply could not do that, and we wanted to make sure that Ontario is ready for the recovery, and by investing in Ontario, we think it will be.

I hasten to add though that we are concerned about the deficit and we are going to tackle it. There are some things we have already done, such as the agreement with the Ontario Medical Association. We put in the budget a medium-term fiscal plan which has the deficit dropping to $7.8 billion in three years. I know that is a high number, and a lot of people are concerned that number is too high, but we wanted to be very realistic in that number too. We did not want to put in a number that we could not achieve. We really wanted to be realistic about that.

We know that debt servicing is going to stabilize at a little over 12 cents on every dollar. I remind you that the federal level is 34 cents on every dollar and we are determined not to make the mistakes the federal government has made. We are determined not to get into that trap.

As I say, we have put in place for the first time in Ontario an agreement with the medical profession to contain the costs of health care -- it is the first time that has happened -- and we are reforming the drug plan. We are containing out-of-province health care costs as well. We have the Fair Tax Commission churning away. We are hoping it will help us develop a fair tax system in the province. We are putting in place a Treasury Board, which I believe is going to be debated this afternoon. I look forward to that debate in the Legislature, which is going to be completely preoccupied with expenditure management. There has not been in this province a process to look at entire allocations, entire ministries, entire programs. It has split between Treasury and Management Board, and we are really going to try and get a focus on expenditure management.

I wanted to end on -- there is more I could say -- a positive note because I think things are looking a little better. There are some numbers coming in that are encouraging. There was an increase in employment in Ontario in the last numbers, the house and car sales are up, interest rates have been dropping. All of that is very helpful, but we are not expecting the rebound from this recession will be as strong as it was in 1981-82. If you look at the unemployment numbers for the next three years, they stay very high. I think even by 1995 they are still over 7%, almost 8%, as I recall. That is a very high number. That is why we had to be very realistic about the medium-term fiscal plan, so really, I would also ask you to think about the future in Ontario and the kind of economy we want to have.

I think most of us understand that we must have a high value added economy here. If we cannot have in Ontario a high value added, high-quality, high-wage economy given our positioning with our expenditures on education and infrastructure, who can? We are extremely well positioned to play a leading role in high-quality jobs and high value added jobs in the 1990s. We cannot survive in a beggar-thy-neighbour approach where we try to cope with the lowest possible wages anywhere in the world. That is ridiculous. We would not succeed if we tried. So let's make sure we have a plan to go the other way.

We want to work together with the organized labour movement in this province, with the business community in this province. I also recognize the fact that we have to work very hard with the business community to make a partnership work. I understand that, because there is scepticism that we have to overcome. We are prepared to work very hard at that; we are trying and we are determined to make it work.

I am hoping that people will see it is in all our best interests to work together, because we believe very strongly that is the route we must go. We have confidence in the future of this province. That is why are investing in it as strongly as we are, and I look forward to the comments of the members of this committee. I wish you very well in your travels across the province. I think you will hear an interesting array of opinions on the budget and I almost -- not quite -- envy you your task. Thank you very much for this opportunity.

The Chair: We have approximately 30 minutes. The time will be divided equally, 10 minutes per party. We begin with the Progressive Conservative Party.

Mr Sterling: I would like to welcome you, Floyd, to the Mike Harris hearings here in the Legislature.

Hon Mr Laughren: Thanks, Norm. Where is Mike Harris, by the way?

Mr Sterling: He is at his son's graduation in North Bay.

Hon Mr Laughren: I noticed he was not here. I thought he would attend his own hearings.

Mr Sterling: He is in North Bay.

Hon Mr Laughren: I understand.

Mr Sterling: Thank you for your courtesy, and letting me have my say.

You blame a lot of other people for the problems that are found here: transfer payments, federal government. We have heard that time and time again. Do you take any responsibility at all for the lack of confidence the business community has shown in your budget and in Ontario over the two months since your budget?

Hon Mr Laughren: The business community I talk to has confidence in Ontario; the investors I talk to in Ontario and the United States have confidence in Ontario. I do not believe the business community has a lack of confidence in this province. They may not like some of the principles which this government stands for, but I think that when we sit down and talk to them, they at least understand where we are coming from. We are not trying to surprise them. We are determined to consult with them very widely.

I understand the fact that people in the business community do not like a high deficit, but at the same time, when I ask them if they believe we should be investing in the future of Ontario, they say yes. When I ask them if we should be closing hospital beds, they say no. When I ask them if we should be investing in our educational institutions, they say yes. They do not like the macro numbers, if you will, but they like the fact that we are maintaining a very high level of education and of capital expenditures in this province. I think you have to be careful in a blanket statement like, "They do not have confidence in the government." I do not think that is fair.


Mr Sterling: In terms of talking to business people, chambers of commerce, boards of trade, which both Mr Turnbull and I had the opportunity to do on the Mike Harris task force, that certainly was a message we were getting. Can you tell me whether you have taken any major steps on your part to restrain government spending? What steps have you taken?

Hon Mr Laughren: Absolutely. I am pleased to. I perhaps should have expanded on it more in my opening statement. I think probably the best example, while some people may not like it, was the fact that we worked out an arrangement with the Ontario Medical Association. It was a major commitment on our part to contain the costs of health care, which have been escalating at a remarkable rate, the total health care costs I think about 12% a year and the drug part of it around 19% a year -- remarkable increases. Someone will correct me if I am wrong, but those are average numbers, the way they have been increasing, and we are finally going to get a handle on that. This may sound almost glib, but I think if we are going to save medicare, we have to control the costs of medicare. I am not saying this because you are a Conservative, Mr Sterling, but the federal government is making it very difficult to contain the costs of health care with its refusal to allow its transfer payments to increase the way they should. So that is one thing, the agreement with the Ontario Medical Association.

We are taking a look at the containment of costs in the drug plan and the out-of-province costs as well, and I touched on those briefly.

The establishment of the Treasury Board: Basically, its sole purpose is to engage in multi-year planning and looking at entire programs for expenditure management, so I think that is a major commitment.

A fairminded person would do this, and having known you as long as I have, Mr Sterling, I know you will recognize the fact that you do not suddenly stand all social programs in a province the size of Ontario on their heads and make massive and wholesale cuts your first eight months in government, before you have had a chance to really establish priorities and look at entire programs and do them in a serious way, and consult not only with the people who are recipients of those programs but also with the people who deliver those programs. We are determined to do that.

Mr Sterling: Some would argue very strenuously that what you have done with the OMA is exactly the opposite; that is, you have handed it over to an arbitrator to make a decision on a major part of our budget, I believe somewhere in the neighbourhood of $4 billion or $5 billion. Turning over to the arbitrator a decision to spend taxpayers' money, in our view, is a mistake.

I asked you before about the confidence of the business community in your government. Bill 70 was brought forward by the Minister of Labour. It has been gutted over the last two weeks because of the strenuous objections by business and the opposition. What are you going to do to gain their confidence? What are you going to do in the future to show that in fact you are sensitive to their needs and concerns at this time?

Hon Mr Laughren: I think that is a fair question. I would take issue with your use of the word "gutted." When we do sit down and talk to them about their concerns about a piece of legislation, that is not the law of the land but a bill that had been introduced. Surely to goodness, one of the purposes of first reading of a bill is to get it out there to allow people to look at it and think about it, so when we sat down and talked to people in the business community and they expressed concern about the liability issue, we listened and we made changes.

You can call that gutting the bill if you like, if you want to be pejorative about it, but it seems to me it was part of sitting down with the business community, taking its concerns seriously and being prepared to compromise the original position in the bill, and I think, quite frankly, we have a better bill now. You can call it gutting the bill if you like; I prefer to see it as that is how we want to deal with the business community and others out there.

I cannot make any announcements today because there are too many t's to cross and i's to dot yet, but when we heard the concerns of the business community and others about the gas guzzler tax, we brought them in, we sat down, we talked to them and we are working very hard to come up with the fine-tuning of that.

So I hope those are important signals we are sending out, because we are serious about it. These are not some kind of optics in which we are engaged. If it were, we would not be making the changes. We would sit down and talk to them and say, "We listened to you; we are not going to make the changes." That is not the case. Now I am not saying that every time we sit down with organized labour or the business community or anybody else we will be able to make changes. I am not pretending that, but when we can and when there is a better idea, we will take it. I think those are very strong signals we have sent out and I think the business community will recognize that and appreciate it.

Mr Sterling: I am going to turn it over to Mr Turnbull in a minute, but quite frankly I think the business community did not think the Minister of Labour or the government thought through Bill 70 very carefully before it was introduced. That is its concern and its lack of confidence in your ability to govern.

Mr Turnbull: Treasurer, you are going to double the debt in the next four years. You are going to double the amount of debt we have built up since Confederation to something around $70 billion. According to your budget documents you are suggesting we are going to start coming out of the recession towards the end of this year. Much as I dislike Keynesian economics -- but you seem to espouse them -- you are not following even John Maynard Keynes' theory that you pay back as times get better. Are you going to whine through the next four years that times are bad and consequently you are going to dump all this debt on the backs of our children?

By the time you leave office, you are going to have $8,000 debt for every child born in this province. When they are born, they owe $8,000. You are very keen on dumping on the federal government, and I might do some of that myself, but I have to tell you that we should not be repeating in this province the mistakes that have been made elsewhere. We should learn from that.

Hon Mr Laughren: I happen to agree with you completely.

Mr Turnbull: But you are doing it.

Hon Mr Laughren: I do agree with you. We should not be duplicating the mistake the federal government has made. If you look at those numbers carefully, you will notice that in the budget we are separating capital from operating, not to disguise the consolidated deficit by any stretch of the imagination. People are not stupid, they would see through that, but --

Mr Turnbull: Are you suggesting there was not a capital component before?

The Chair: Mr Turnbull, your time is up.

Hon Mr Laughren: Let me finish. You talked about the increase in the debt in the next four years, and you are quite right; there is a substantial increase in the debt for the next four years. You can see that in the numbers. But if you break down those numbers into capital and operating, you will see that by the end of the three-year, medium-term forecast, which is 1994-95, the operating part of the deficit -- if you take away the capital component of it, which everybody agrees needs to be there --

Mr Turnbull: But it is still a debt.

The Chair: Mr Turnbull, please.

Hon Mr Laughren: It is still a debt, but everybody agrees we should be putting that money into capital.

Mr Turnbull: But we have always put it into capital.

Hon Mr Laughren: But we have not always had the kind of times we are having now either. I want to hear from you what your options are, and I hope that as this committee travels the province, you will put out your options for getting the deficit down.

Mr Turnbull: We have, and you have not been listening.

Hon Mr Laughren: Oh, I have heard. Do you know what I have heard you say? I have heard you say, "Reduce the wages in the public sector."

Mr Turnbull: We said, "Cap the increases," instead of giving $11,000 to senior civil servants.

The Chair: Excuse me, Mr Turnbull, we have two other questioners.

Hon Mr Laughren: Let me give you an example of those numbers. Let me tell you something: Even if we went stronger than you are suggesting, if we put a freeze on every civil servant in Ontario, a complete freeze this year, do you know how much we would save?

Mr Turnbull: You would save $750 million if you kept it to 2%.

Hon Mr Laughren: Let me finish my sentence. If we had put a cap on every directly employed civil servant, we would have saved, I believe, about $250 million. If we had frozen the salary of everybody who is vaguely connected to the public sector in the province, all of those people out there in the hospitals and schools and everywhere else -- if we had frozen them, not even the 2% that you have said -- we would have saved $1 billion. So now you are down to $8.7 billion.

Mr Turnbull: It is pretty significant.

Hon Mr Laughren: It is a significant number. Is it fair? Is it a fair start, Mr Turnbull?

Mr Turnbull: It is a fair start.

Hon Mr Laughren: Oh, I see. Okay.

The Chair: Excuse me. It is now time for the Liberal Party.


Mr Phillips: I appreciate the Treasurer being here. I think this is the fourth time he has been here and that has been exemplary on his part.

The most interesting table in the budget to me was on page 55, and that outlines your thinking over the next four or five years. You have often said that in tough times you have to spend money, but then there are good times coming, the 3% or 4% in real economic growth and we are still seeing deficits in the $7-billion to $8-billion range. I think you have answered this before, but that presupposes, even to get to the $7.8 billion, about $5 billion in new taxes. Then for the following three years I do not think you get below about a $7-billion deficit, even in 1997-98.

I think this is what people are looking at as a signal from the government, that good times or bad times, we are looking at major deficits in the province. If my numbers are right, the debt will go from maybe $40 billion when you came in to about $100 billion in 1997-98. I think that is the number. Is that kind of a philosophy you will pursue, that there is not going to be a balanced budget?

I remember your remarks to this committee here about not hiding capital, because I know you say you will balance the operating 1997-98 but, as you said, "I think it would be so transparent to try." This is talking about not putting capital in.

So what I am saying is that I think the business community -- and I do not just mean the business community -- but I think the community out there could accept that in bad times you spend but in good times we can see some light at the end of the tunnel. But I do not see where our deficit ever gets below $7 billion, even in good times seven years from now with all the restraint programs. I think that is what is worrying people.

Have I accurately reflected how you view the budgets, and is that what we should look forward to realistically?

Hon Mr Laughren: I would put things a little differently than you put them, Mr Phillips. Also, we did mention in the budget, I think, that by 1997 the amount of deficit would be reflected by capital spending. In other words, the operating would be in effect in balance. That is a funny way of putting it.

Mr Phillips: Right, and I assume there will be $7 billion of capital spent by that year.

Hon Mr Laughren: I thought it would be less than that; I thought it was around $6 billion.

Mr Phillips: Okay.

Hon Mr Laughren: I think it is a little unfair to say we are not working at the -- you did not quite say that, but about in good times getting the deficit down. You will notice in the table on page 55 to which you refer that the deficit does indeed decline every year and it will continue to decline.

Mr Phillips: But that assumes new taxes.

Hon Mr Laughren: It assumes new taxes and growth in the economy, absolutely. When you are working that far ahead, you do not know what that mix will be, but you are quite right, of course it does. I feel confident that as long as we stick to our guns on reducing that deficit every year people will understand that we are not spendthrifts, that we are determined to get the deficit down.

It is like a mortgage on your house. I do not want to be overly simplistic about it, but I think most people understand they cannot go out and pay cash for their house and they need to have a mortgage, and often a very substantial mortgage, but as long as their credit cards are not running way over all the time -- and if they are high, then they start working those credit card balances down.

I feel very strongly about that. We have to do that, because I happen to believe, and I suspect you would agree with this, that our credibility is going to rest on how well we are able to manage the economy and get those deficits down. I have no doubt about that whatsoever, so my determination is fierce in that regard, and so is the Premier's, I can tell you. If you ever go to the speeches he or I make largely to the business or financial community, you will see reflected in our comments in every single case that we are determined to do that.

Mr Phillips: Just a difference of opinion: On the OMA agreement, I know this is sort of the centrepiece of your cost-saving --

Hon Mr Laughren: So far.

Mr Phillips: -- but first, the OMA has a fundamental disagreement with your numbers. You say 5%; they say 1%. They say unfettered, binding arbitration. I believe you have turned over 10% of your budget to an unfettered, independent arbitrator, so have you resolved the difference of opinion between yourselves on this?

Hon Mr Laughren: Wait a minute. Let's be fair about this. The payments to physicians are 10% of the provincial budget right now, not of the health care budget.

Mr Phillips: It is $5 billion.

Hon Mr Laughren: Yes, roughly about that. I am using fairly round numbers, but that is right. The health care budget is almost $17 billion this year, I think, so it is almost a third of that. I think that for the very first time in the history of this province we are putting a cap on expenditures. I am being fair about this. We are going to get some heat on this; I have already had some letters saying "You shouldn't be cutting back on this out-of-province cost."

Mr Phillips: On which expenditures?

Hon Mr Laughren: Health care. That is part of the agreement with the OMA. We are going to work with them, in the sense of partnership, but we want to contain and control the number, distribution and remuneration of doctors. Let's be fair about this. For the first time, in a spirit of partnership with the doctors and with the medical association we want to get a handle on it. They agree with this and I give them full marks. As you may recall, it was not an agreement that was unanimously approved by the membership of the OMA, so there are people who think it was too tight, but we think it is the beginning. I am sure there will be fine-tuning required as we go down the road with the medical profession, but we had to start somewhere.

Mr Phillips: Do you agree that it is unfettered, binding arbitration?

Hon Mr Laughren: That is not what they tell me. I did not do the negotiations with them and I do not pretend to be an expert on that part of it, but I am told they must consider the economic conditions of the province or all the details on that. It was my sense that it was not unfettered.

Mr Kwinter: I would like to talk to you about the process. A couple of comments made by the Premier, by the Minister of Industry, Trade and Technology and by you really got me a little disturbed. I am not talking specifically about the gas guzzling tax, but that is a good example. The feeling was that we could not really talk to them about it beforehand because of budget secrecy. I think that is sort of an absurd statement. It seems to me that a responsible Treasurer and a responsible government would try to anticipate the impact any of their measures was going to have on any sector of the economy and would meet with those people and certainly canvass the options.

I agree that the final and ultimate decision is yours and that it should be made in secret, but there is nothing to prevent anybody from discussing what some of the options are to get their input as to what would happen if proposals A or B were advanced. Do you have any comments on that?

Hon Mr Laughren: Yes, and I happen to agree with you that the process is absurd. I find it bizarre too. I do not mind confessing that to you. There is even a comment in the budget about trying to change the process. I have asked this committee. As a matter of fact, I wrote to the committee and asked it to think about ways of changing it. You might argue that I could have done this without writing to the committee and without asking for input from this committee on how to do it. Technically you are right; we could have done that.

There is not a history of that and I am not blaming previous governments. When finance ministers or treasurers consult, if they are too specific they get in deep trouble. There has been evidence of that at the federal level when they did get too specific in talking about a tax measure or whatever. Naturally finance ministers and treasurers are very jumpy in talking about tax measures and I understand that, but I do not disagree with you that there is a better way to do it and that is why it is in the budget itself that we want to make the process more open.


I was in New York talking to the people who sell and buy our bonds, and so forth. I then went to Washington to talk about budgeting process down there. I wish we had more time because this very idea of how to make it more open and more consultative before the fact as opposed to after the fact -- I do not disagree with the thrust of Mr Kwinter's remarks. They have it much more open there, apparently. I am still not an expert on their system, but they were saying, "For heaven's sake, don't do what we do."

They get brokered to death and have difficulty accomplishing what they set out to do with a tax measure, for example. It has reached the point now, they tell me -- they had a copy of the President's initial budget, which is this thick and which they say has no relevance to reality or to where they know they are going to end up. I hope there is room for us somewhere between this cloak of secrecy we have and a process that is so open it does not go anywhere. I really hope this committee will be of assistance, because we are quite serious about that. I do not like the system either.

Mr Christopherson: I think it is good that we as the government representatives are the last to ask questions and make comments, because that will underscore the point that so far nobody has offered up anything that talks about alternatives and choices. That is the whole idea of a party system and of what these hearings ought to be, to offer up to the people not just the bashing of the deficit, but talk about what was done that generated the deficit and what the implications are. Rightly so, but there is an obligation on the part of the opposition parties to say what they would do differently and be specific and then we can all talk about the implications of those.

That will mean we have an opportunity in this province to have what we have not had yet, a fair and open democratic debate on what should be happening with the budget for the province of Ontario for the coming year. Mr Chair, I would hope that the opposition parties will take seriously what we see as that part of their obligation, to provide specifically what they would do differently and, in terms of expenditures, what they think should be taken out. Then we can talk about the implications of that and say why we believe the right steps were taken.

That leads me to the question, and I think it is something that is not talked about enough --

Mr Turnbull: On a point of order, Mr Chairman: I think we have to correct the record, in the sense that in the pre-budget consultations with this committee there were specific recommendations made by the Conservative Party and they have been ignored.

The Chair: Sorry, it is not a point of order.

Mr Turnbull: It may not be a point of order, but it is true.

The Chair: Excuse me, Mr Turnbull; you have had ample time.

Mr Turnbull: No, I did not have ample time.

The Chair: Continue.

Mr Christopherson: Thank you, Mr Chair. I would like to ask the Treasurer a question regarding the operating budget that will be reduced in coming years and balanced in the years the budget projects. I would like to ask it in concert with what he believes the budget is doing that will lay the groundwork both for the recovery of the economy from the recession, and also how that ties in to the ability to reduce and eventually balance the operating budget.

Hon Mr Laughren: Mr Christopherson is quite correct in that we are serious about that. To me, the investment that is in the budget in capital and in education, if I had to pick two areas, because everybody tells us -- I was reading about an economist in the United States who was saying you could take and duplicate every manufacturing process there is anywhere in the world except for one component, namely, the quality of labour engaged in it. That you could not duplicate, but you could duplicate all of the process. Therein lie our opportunities, in making sure we invest in our infrastructure. By that I mean not just education and training, but also our roads and our sewer and water systems. I think that is terribly important.

We talk about training in the budget as well. We think that training is not well done in this country as a whole. I am not pointing fingers in this regard. I do not think that collectively, as governments and the private sector, we ever have a handle on training. We are going to try. When we talk about partnerships we often bring in training as an example, where we need the federal government -- and I think we will get co-operation there -- and the private sector -- and I think we will get co-operation there -- organized labour and ourselves as a provincial government.

Those are the kinds of things we think we need to invest in that will have us well placed as the recovery occurs. We cannot despair about this recession. We have to be optimistic and invest in the province and encourage others to do the same. That is why I think we are one of the most attractive places in the world. There have been two studies done recently that indicate Ontario is either number two or number three. There were two different studies done as a quality-of-life place. We are right up there and I think we have to maintain that.

I do not want to make an anti-American speech by any stretch of the imagination, but when I go south of the border and see the problems in their cities -- in New York City they have a population of almost 10 million, almost the population of Ontario. They were talking about spending $300 million a year on capital in a city that size. How can you maintain your infrastructure? They cannot have a deficit in New York City and neither can the state. They are not allowed to by law. That has caused them a lot of anguish. I have started a rambling answer.

Mr Jamison: I have a question that really concerns the cost of carrying the debt. I know some people here today have made references to the cost of carrying the debt, for example, compared to the federal debt. I wonder if beyond that you could explain the current federal cutbacks that have impacted your ability to lessen the deficit. What kinds of makeup and history, etc, are there?

Hon Mr Laughren: In my head I just sort of use 10% as an easy number when I am thinking about the cost of carrying the debt. The cost of a $9.7-billion deficit is about $1 billion, in very round numbers, I hasten to add. That is sort of the ballpark figure I think in when I am thinking about the deficit.

You asked about our problems with the federal government. I know they have problems too with their debt and their deficit, very serious problems. Their cost of carrying their debt is 34 cents of every revenue dollar. That is unacceptably high. Ours is 11.6 cents, getting up to 12.3 cents I think, so that is a big difference, but I hasten to add that we do not want to get there.

I understand the federal government's concern, but I have never understood how transferring the public debt from one jurisdiction to another solves the problem for Canada. I think fair-minded people would admit that when they offload on us, that is what they are doing. If they were to continue with their transfers, their debt would be higher and ours would be lower. There is nothing magical about that. They have really hurt us. If you go back to the 1980s to the base of transfer payments, if you ever added them up cumulatively the impact of the restrictions on transfer payments to the province -- I think they are around $7 billion, $8 billion, $9 billion. They are extremely high. Even this year it is about $1.5 billion. That has really hurt us, and I do not see it getting any better. I wish it would. I would like to be more optimistic in that regard, but I have no reason to believe they are going to make improvements in that regard.

They have just announced, by the way -- I was not very happy -- they are going to have consultation on the whole issue of transfer payments. It is going to be part of this constitutional review group for the fall and they are going to put transfer payments into that mix. At the same time, they extend the freeze on the transfer payments to us. It is a weird kind of way to say they are going to have us open to some of the process, all within the framework of a freeze. To me, that is not --


Mr Sterling: How many tax points did we steal over --

Interjection: It is our time, Norm.

Mr B. Ward: A quick question on the issue of taxation. There was a decision made by yourself, after consultation, that corporate income taxes would not be increased. Perhaps you could expand on the rationale, because that was one avenue where perhaps the deficit could have been reduced by increasing revenue.

Hon Mr Laughren: Mr Ward, you raise a good point. We did not touch broadly the provincial income tax. We increased the surcharge at the top and we increased the tax credit at the bottom for low-income earners, but we did not increase the rate, the 53% rate on federal tax payable. We did not touch that. We did not increase the corporate income tax, that base, although we did increase the capital tax, from 0.8% to 1%, as I recall.


Hon Mr Laughren: For banks, right.

What we thought was that it is a serious recession and to increase those taxes at this time would not have been appropriate; it is as simple as that. The combination of not increasing that tax, not imposing Ontario's retail sales tax on top of the GST, for those reasons we did not want to do it but to leave that money out there in the economy. And of course the corporate tax, I think it really would have been outrageous, quite frankly, to have increased the corporation tax in a year when corporate profits tax coming to us was down by over $1 billion. That is a huge drop, so to have increased the rate of corporate income tax I think really would have been completely inappropriate. Those are the reasons we did what we did. I suppose you could argue that we could have reduced the deficit if we had increased those taxes, and I think that is true, but it would have been, I think, the wrong thing to do right in the middle of the recession.

The Chair: Mr Hansen, you have the last question.

Mr Hansen: It is more of a statement, maybe. The Mike Harris task force has I think misled a lot of people with fax machines. It is not the ordinary person out there who has a fax machine, and I think with this committee travelling around the province we will get the true feeling out there. At least in my riding, the municipality of Pelham was very pleased to have a balanced budget this year.

But people out there are saying: "I pay provincial and I pay federal tax. Why are the feds stopping that money coming down to educate my children?" And parents want cash for new Niagara schools. What do I tell these people? Do I say that the feds are not giving us any money, that we have to go deeper into debt? We are the closest partners to the municipalities, but our partner in Ottawa has to also be a partner with the municipalities and the province. I am glad Mr Harris saw to it that we get around the province to explain exactly what is going on and why their dollars from the federal government are not flowing down to the municipal level. I have not heard what I have heard here at Queen's Park. It is different out on the road, and I think they are going to be very surprised when we come back with a report.

Another thing I would like to say too is that in our pre-budget consultation, in the end, when I read through that book in a lot of areas, we have covered those particular areas. So it is an open process and we have listened.

Hon Mr Laughren: Could I make one comment, because Mr Hansen has raised a point I did not dwell on in my comments. We use words like "federal transfer payments," and I am not too sure people relate to those kinds of words very much. Where they have held back from transferring what we think we have a right to are what they call the established programs financing, which helps pay for health care and post-secondary education, and on the Canada assistance plan, which helps us pay for welfare costs, social assistance costs. Those are the areas where we have been hit hardest by the failure of the federal government to live up to its obligations. So it is not just something called transfer payments, it is post-secondary education, it is health care and it is social assistance. Thank you for raising that.

Thank you, Mr Chairman, for this opportunity.

The Chair: Thank you, Treasurer, for coming and giving us this overview of the budget. We appreciate the time you spend with us.

Mr Sterling: Mr Chair, just on a point of procedure: Before the Treasurer goes, are we going to have an opportunity to question him during the hearings? Are you going to be available?

Hon Mr Laughren: Never again.

Mr Sterling: He says, "Never again." I can understand his reluctance, but --

Hon Mr Laughren: No, no, I am only kidding.

The Chair: These issues will be decided by the subcommittee if we should invite him back again. There are other expert witnesses and the procedure has been outlined by discussion from the party whips.

Mr Sterling: He says he is not opposed to that. That is fine.

The Chair: Hearing the bells, I think this meeting is adjourned until 3:30.

The committee recessed at 1206.


The committee resumed at 1556.


The Chair: Mr Davies, deputy minister, welcome to the standing committee on finance and economic affairs.

Mr Davies: Thank you very much, Mr Chairman. We are at the pleasure of the committee as to how you would like us to proceed. We have prepared a package of 13 slides that are intended to provide highlights from the budget.

I was going to propose that I have several of my associates from the Ministry of Treasury and Economics go over the individual sections of the slide material. It really breaks into four sections, and this parallels the construction of the budget itself. The first pages are on the economic outlook, then the fiscal outlook, then the tax initiatives incorporated in the budget and the financing of the deficit part of the budget. We are prepared to go through that either with interjections or without; we look to your guidance on how to proceed.

Mr Sterling: I would rather go section by section.

The Chair: That is probably a fair way of doing it. Since we are all going to be here a little while this afternoon, I think everybody will have a fair opportunity to ask the questions they feel are important, so why do we not do it that way?

Mr Davies: That is fine. I would suggest then that we begin with the Ontario economic outlook section, and I would ask Qaid Silk, who is the director of the economic forecasting branch to walk you through the three pages. Then, as I understand it, we pause and pursue questions on that, if desired, or continue on.

Mr Silk: Thank you, Bryan. I am going to take you through the first three slides. This talks about the short-term economic forecast that was presented in the budget, and then the medium-term forecast.

The first slide, basically, is the 1990-91 forecast. As you can see, at the time of the budget, we said we would have a decline in real output of 3.3% for the calendar year as a whole. We would lose about 184,000 jobs. The unemployment rate would average 10% and inflation would average 5.6%.

We have also given you the range of other people's forecasts at the time the budget was presented. You can see that, by and large, for real growth and employment loss, for example, we were at the high end of that range. We were slightly more pessimistic than most. Similarly for the unemployment rate. For inflation we were at the mid-point.

Essentially, our forecast was that we were in the middle of a recession. Hopefully, the economy would recover by the third quarter of 1991. We would get some modest job gains in the second half of the year. The unemployment rate, none the less, would remain high throughout the year, despite the fact that there was job growth. The inflation rate would average 5.6%, but a significant portion of that increase -- 1.5 percentage points to be precise -- would be because of the GST being introduced on 1 January. That was our budget forecast.

The next slide talks about developments since then. What we have seen are quite early signs of recovery. We have had employment hit bottom in February, and since then we have had three consecutive months of job creation -- 34,000 jobs being created in the province as a whole, in all sectors, since February. We have had, of course, reasonable strength in home sales, both resale and new homes. We have interest rates continuing to fall in the last two months, a decline that started about the fall of last year and has just continued. We have had auto sales picking up. Manufacturing shipments were up in May; the numbers just came out this week, and they were up 2.2%, the highest in the past two years and, of course, industrial production in the US, a major market for us, was also up in May. So things appear to be looking up. Consequently, our view is that, yes, we had anticipated the recovery beginning in the second half of 1991, and we think our budget forecast is still on track. That is a view consistent with most other forecasters, who expected the recovery to begin about the same time.

Given the turnaround in employment, we think it is possible that our job-loss figure of 184,000 for the year as a whole may be an overestimate. We may get less job loss than that and, similarly, our inflation of 5.6% may be slightly higher, given what we have actually seen in the first five months of the year. But at this point we do not think we need to shade it yet.

Essentially, the third slide looks at growth in the medium term, and what we have in different boxes is the picture for 1990-94. In the first box we have the real growth. As you know, we had a recession, a 1991 decline, and over the next three years we have seen steady growth over the medium term. On the job front, we are expecting average annual creation of more than 100,000 jobs over those three years, and the unemployment rate to come steadily down but unfortunately remain high even at the end of this horizon, at 7.8%. As for inflation, there is the 1991 spike -- due to GST -- of 1.5%, but once that GST has been absorbed, we expect the inflation rate to remain below 4% throughout the next three years.

That is our budget forecast review of how we think it has shaped up in the medium term.

Mr Christopherson: Qaid chose 1994 as the low point in the first half of the decade. Why is that?

Mr Silk: After a recession a recovery normally tends to have momentum, so an economy tends to pick up some speed. Now, we do not think it will be as buoyant as coming out of the 1981-82 recession, so that even in 1992 and 1993 we do not think we will get the 5%, 6% growth rates that we saw in the early 1980s; but normally that is what happens: An economy, having plunged, tends to pick up speed coming out and then gets back to what you might think of as a normal trend growth rate of 3% to 3.5%. So it is going towards this trend.

Mr Christopherson: Is that then a levelling off point in 1994 or, if you were going to later years, would you continue to see a decline? I know that as you get into later years it is very hard to predict with any kind of accuracy, and I respect that. I would just appreciate your best shot or even an explanation of what the usual kind of contemporary thinking is on that question.

Mr Silk: Without some policy changes, we would expect that the potential of the Ontario economy to grow is around 3% to 3.5%. Essentially, after a strong recovery phase, the long-term expansion might be around that rate. Now, it is possible through significant policy initiatives to alter that for the better, but that would be roughly the tendency, to go back towards that rate.

Mr Sterling: I was wondering, in terms of the employment picture looking a little bit better now, and the 34,000 rise in Ontario employment since February, are we gaining or losing in the manufacturing area? Do you have that broken down at all?

Mr Davies: Maybe I could introduce John Hoicka of our office on economic policy. John is one of our experts in this area.

Mr Hoicka: February was the low point for manufacturing. If I remember correctly, it was 851,000 or 853,000 employed. As of the most recent numbers, May, that had jumped up to 899,000.

Mr Sterling: So it has gone up?

Mr Hoicka: It has gone up, but that 853,000 was the lowest point in the decade. In comparison it was about 870,000 at the low point in the 1981-82 recession.

Mr Sterling: Quite a dip.

Mr Hoicka: It was quite a dip, so it is hard to interpret how big that recovery is at this point.

Mr Sterling: In terms of what forecasters and economists do, I think everyone would agree with one part which the Treasurer talked about: that we want high value added jobs in our country. That is the only way you eventually get to a higher standard of living. Of course, that is why I am very much a proponent of free trade and a world economy. I believe that is the way you get to the high value added jobs, by being competitive; you have to earn them.

Do you keep any kind of overall income statistics that will indicate when these jobs are coming back and whether they are high- or low-value jobs?

Mr Hoicka: We would not have any reasonable data on such a short-term basis. There is information on average hours worked and pay per hour, but we would not follow them on a month-by-month basis simply because, as you get into the two-digit industry figures, subcategories become quite variable, and it is quite easy to misunderstand or falsely think something is happening when it is not happening. Over the past decade there has not been essentially any increase in manufacturing wages as an average. Obviously that would vary somewhat in real terms, and it would vary by industry. It is something we will be starting to look at, I think, when we have another couple of months of data and we are quite certain there is an up trend. Then we will start to look at which industries are coming back. But at this moment, even those numbers would be quite variable.

Mr Sterling: Is there any way to collect that kind of information and plot it? I think it is extremely important for us to really understand whether or not we are improving our economy.

Mr Hoicka: The data are certainly available for manufacturing as a whole. The extent to which they are available for the subindustries I have to recheck. I think they are there. I think there is a delay. It is not a problem of getting the data; the problem is that it bounces around, and it is hard to determine whether that is a random bounce or whether it is part of a trend. That is certainly available, with some degree of lag. It may be available, for example, to March. I doubt that it would be available after March.


Mr Sterling: I was interested more in the long term, in looking back two or three years from now and saying, have we really created jobs that have value added or not, or are we continuing on the same plateau as before in relative importance of those jobs?

Mr Silk: As John pointed out, the budget talks about real wages and total manufacturing. The data are produced by Statistics Canada, and we can definitely produce them right now for you. As you point out, we will definitely monitor this over the next few years to see where those jobs are and what kind of incomes are being generated by those jobs, and yes, we will get a picture over time.

The Chair: If you can collect that information, could you pass it along to the committee?

Mr Silk: Of course.

The Chair: Thank you. Mr Kwinter.

Mr Kwinter: Mr Chairman, I apologize for being late. Could you tell me, are you covering page 3 as well?

The Chair: Yes.

Mr Kwinter: I guess I will address this to the deputy. I am curious as to the methodology of your projections of real growth. For 1991 you show negative growth, minus 3.3%, and you are projecting that in 1992 there will be real growth of 3.4%. Does that mean the economy is going to grow by 6.7% this year?

Mr Silk: In 1992?

Mr Kwinter: In 1992.

Mr Silk: No. What we are saying is that after having dropped 3.3% in 1991, the next year will see 3.4% growth.

Mr Kwinter: It will be like 0.1% over this year?

Mr Silk: Over that two-year period we will have made up most of the ground we lost, yes -- all the ground we lost.

Mr Kwinter: I think that is fairly significant, because when people talk about the growth of the economy -- and I said this in a speech last week -- we were lucky to be in power at a time when the economy was in real growth, showing growth as high as 4% and 5%. I think this is one of the big problems we have when we talk about recovery. We are going through a very severe economic downturn, and we have been for the last year and a half. The projection of 3.4% gives the impression that there is going to be incredible growth, it is going to be booming. What in fact you are saying is that after this terrible time that we have just gone through, in 1992 we can expect the economy to grow by 0.1%. If you are wrong, it could be no growth at all, when you are using that narrow a margin.

Mr Silk: If I may explain it perhaps in a different way: In 1990 we started at a certain level; in 1991 we fell a certain amount; by 1992 we have come back to where we were in 1990. Okay? It is like a saucer. Over that two-year period we lost some ground, and we think we will make it up.

That is quite dramatic when you look at employment, for example. We think we will lose 184,000 jobs in 1991. As I was explaining earlier, it is possible that we will lose less, because the recent data suggest slightly more momentum and more growth than we had thought.

In any case, suppose we lose about 180,000 jobs in 1991. Unfortunately, in 1992 the economy will not create 180,000 jobs; it will create well below that, so by 1992 the level will be below the level of 1990. Having lost ground there, unfortunately, we will not make it up. On the output side, we think we will have just barely made it up. You are right, we could be wrong. Our estimates could be out, our forecasts could be out, and we may not make it up. There is a margin of error. It is a deep recession and it takes some time to recover that ground.

Mr Davies: I would just reinforce one of the lines that Qaid used, because I always find that graphically it makes it come home to me. It is a saucer-shaped graph when you plot the gross domestic product on the one axis and the time horizontally. You start up here, you go down and then you start coming back.

Mr Kwinter: As I say, I am not being critical. I am just pointing out that for someone who is not used to looking at these graphs, this could give a distorted picture, because it could look as if the economy is going to grow by 6.7%, taken from a low of 3.3% to a high of 3.4% in one year. What I am saying is, if you had shown it in that saucer-shaped graph, it would give a more accurate picture of what was really happening. That is the only point I was making.

The Chair: One of the indicators is durable goods and machine tools. I am just curious if we have any information on how well we are doing with that indicator in the economy.

Mr Davies: Just give us a second, we might have some data with us.

Mr Silk: We do not have data for Ontario for the first quarter of 1991, but we know that for Canada as a whole, consumer durable spending, spending on automobiles, appliances and so on, fell 27% at annual rates. Basically, as the Treasurer pointed out in his remarks, in the first quarter we continue to see the Canadian economy decline at 4.6% at annual rates. A lot of the weakness was because consumer spending on durables was very weak. It dropped dramatically.

On machinery and equipment, which is the other thing you were mentioning, at least for Canada, spending rose in the first quarter by 4.7% at annual rates. There is some strength there, modest but none the less some growth.

We do not have Ontario numbers. We will not have them for another two or three weeks.

Mr Phillips: Earlier this morning with the Treasurer I indicated that what concerns me most is what you call the medium-term fiscal plan. I think the world understands deficits --


Mr Phillips: I am sorry, I thought you were dealing with Ontario's economic outlook.

The Chair: We are up to page 3.

Mr Phillips: Okay, sorry. I thought you were dealing with the whole section.

Can I go back on employment just for moment? It is a neat way of saying employment is up, but I think unemployment is up more than employment. Ontario has dropped from number one ranking in the nation in unemployment a year ago; now I think we are number five. We are behind all the western provinces. In the unemployment rate, we used to be the best and now we are fifth in a period of 12 months. I think unemployment has gone up again. There were 497,000 people unemployed in April; there are 509,000 unemployed in May in Ontario.

Galbraith and the government feel this is the right budget. How come the other provinces seem to be doing better on employment than we are? Why are we slipping?

Mr Davies: I will start off on that and then let those more familiar with --

Mr Sterling: I can answer that. Maybe I will have a crack at answering that.

Mr Phillips: I want to hear the experts, though.

Mr Davies: I have never encountered so many people eager to answer questions.

Mr Sterling: I would like to answer a Liberal.

Mr Phillips: Maybe I can answer my own question. I think I have the answer right here.

Mr Davies: Not to overstate the obvious, with the nature of the Ontario economy, with our high propensity for manufacturing and our dependence on markets, particularly the United States, we have much more vulnerability to downturns in that economy, just from the structure of our economy.

I will let Qaid elaborate and correct me if I am wrong and add other points.


Mr Silk: Exactly. We are a very interest-rate-sensitive economy and a very export-oriented economy, so when our major market, the United States, takes a downturn, we just go along; we are interest-rate-sensitive, so housing is extremely adversely affected, and the exchange rate as well.

All those three things affect us much more than the prairie provinces, which have lower unemployment rates. That does not mean they do not go through business cycles. They go through cycles too, but their cycles are generated differently. Theirs is very resource-based, so when resource markets take a downturn, that is when they are affected.

Sometimes in fact it happens the other way. When resource markets are doing badly, when prices are down, for example, for oil, it is actually good for us but it is bad for the resource-rich economies. We are not necessarily all synchronized in that sense throughout the country.

Mr Kwinter: I do not know which one is the expert on monetary and fiscal policy, but whoever it is, if he could respond.

One of the common givens is that the reason our dollar is so high is that our interest rates are high and the government is artificially keeping the interest rates high to dampen inflation, yet in the last month or so we have seen interest rates drop dramatically, and the dollar still stays high. If anything, it reached new highs. Can anyone explain why that is?

Mr Davies: I am going to let Qaid take a run at that.

Mr Silk: I wish I knew the full answer myself. It is a mystery, because we know, for example, if you go back through history the United States through the mid-1980s had an enormous current account deficit, and yet its dollar kept growing in strength. Then at some point the dollar just could not stay that high and it fell. It fell quite sharply. In a sense, if you look at the factors that affect our dollar, you are right: It should be the interest rate spread between our Canadian interest rates and American interest rates, it should be the performance of our trade balances, and all those do not appear to be good enough or strong enough to keep the dollar high.

One explanation is that for quite some time, basically both Canadians and people abroad have believed that Mr Crow is not only serious about his inflation targets but is likely to achieve them over the medium term. Our forecast actually suggests that we do not think he will get there, but none the less inflation will be low. In any case, a lot of people believe he is an inflation fighter, an anti-inflation man. Low-inflation countries tend to be strong currency countries.

At this point, to some extent it is the anticipation that inflation will come down. In some observers' minds that means we continue to have this high dollar, despite the fact that our interest rates are falling. The spread has fallen quite dramatically from 500 basis points to something under 300 basis points now. It has fallen, yes, and it is a bit of a mystery to us.

There are two camps. Some people believe the hard currency story and think the exchange rate will remain high; but there are enough other people, including ourselves, who think the dollar will fall. We think at present it will fall to 84 cents by the end of the year because you cannot keep it up without the support of the interest rate spread. We could be wrong. We most likely will be wrong, but there are enough other people who believe that, yes, the dollar is too high and it should come down. Once you let that interest rate spread narrow, there is no support for it, there is nothing holding it up.

Mr Davies: I would just add that it is counter-intuitive that the dollar is staying where it is with interest rates coming down. The only other observation in addition to those Qaid has made is that monetary conditions around the world are relative to one another, and traders looking at our dollar and at other dollars weigh our strength relative to others, and for one reason or another, it is holding up there.

Mr Kwinter: As impartial observers, would you confirm or deny that the only control the government has is on interest rates, that Crow can arbitrarily say, "This is what the interest rate is going to be," because he can set the bank rate; but the value of the dollar is a function of that plus other things that are really beyond the government's control? They cannot arbitrarily set the value of the dollar. The market sets the value of the dollar. I just want a comment on that.

Mr Davies: Certainly there is a series of factors that influence people's confidence in a currency, interest rates being one factor; just general impressions of where a country is heading.

Mr Kwinter: What I am trying to find out is, is it possible for the central government or the central bank to artificially keep the value of the dollar high by supports?

Mr Silk: Yes. It is possible for a central bank to maintain the value of the exchange rate. It would do that by influencing interest rates. You are quite right that Mr Crow does not, at least publicly, claim that is his objective. He claims his public objective is to reduce inflation, whatever the value of the dollar that results from that.

As the deputy points out, a lot of things influence the value of the dollar. One of the things that influence it is the credibility of the monetary authorities. Some observers are now coming to the view that one of the reasons the dollar is remaining high despite the narrowing of the interest rate spread is the credibility of Mr Crow as an anti-inflation fighter. His actions do affect the value of the dollar indirectly.

Central banks can directly target the exchange rate. They can say they want the exchange rate to be X, even in a free market, and set interest rates to influence and directly affect the value.

Mr Sterling: Therefore, our real trouble in Canada is that Mr Crow has too much credibility. Is that it?

The Chair: Can we move on to the next section now?

Mr Davies: I am going to ask Tony Salerno, who is the director of the fiscal planning policy branch, to take us through the next three slides. This summarizes the fiscal portion of the budget document.

Mr Salerno: On page 4 we have a summary of the 1991-92 fiscal plan. The revenues are forecast at $43 billion. I might indicate that this is the first time revenues are actually declining year over year. There is about a 1% decline. Expenditures are projected at $52.7 billion, giving a consolidated deficit of $9.7 billion.

In the total expenditure of $52.7 billion there is a capital budget of $4.3 billion, of which over $600 million is the anti-recession program the Treasurer spoke of this morning. Deducting that from the consolidated deficit gives the operating deficit of $5.4 billion.

Down below we have a few measures of fiscal indicators, as we call them. You will see that the consolidated deficit is 3.4% of the GDP, the gross domestic product. As a proportion of revenue, the consolidated deficit is 22.6%. The public debt interest, or PDI, which is part of the total expenditure, is forecast at $5 billion. PDI, the debt service charges, as a proportion of the revenues are 11.6%.

So far we have only two months of actual revenue inflows, and I can report that to date they are pretty well on budget. There are a few, such as retail sales tax, that are marginally higher, and corporation tax is slightly lower.


On the next page is the medium-term fiscal plan the Treasurer spoke of this morning. By the way, this is the first time Ontario has presented a medium-term fiscal plan in the budget. In the past we have seen what have been referred to as medium-term fiscal projections in the grey book. But I think the fiscal plan is an indication of the government's intention a little more than the fiscal projections that were presented in the past in the grey book.

As the Treasurer indicated this morning, the medium-term projection in the plan of the government is to reduce the deficit and ultimately achieve a balanced operating position by the year 1997. This is, by the way, six years after the recession, which is consistent with the experience after the 1981-82 recession.

We have here the consolidated deficit. There is a typo here. The first column, of course, is 1991-92, the second column 1992-93. From 1992-93 to 1994-95, the deficit is projected to decline from the 1991-92 level of $9.7 billion to $7.8 billion by 1994-95.

Capital expenditure, I may add, is one of the fastest growing components in this projection, but again, these are variable numbers. This is just a projection. The real commitment, as the Treasurer indicated this morning, is to the consolidated deficit targets.

With the capital expenditures presented here, the operating deficit declines from $5.4 billion in 1991-92 to $3 billion in 1994-95.

Looking at the fiscal indicators below, we have the deficit to GDP declining from 3.4% in 1991-92 to 2.2% in 1994-95. Essentially, all the fiscal indicators are trending downwards, except PDI is increasing modestly between 1992-93 and 1993-94 and it is stabilizing at the 12.3% level in 1994-95.

On the next page we reiterate what the Treasurer indicated this morning, again an indication of how the government intends to achieve these targets.

One of the things the Treasurer indicated, and second reading is today, is the establishment of a Treasury Board. The emphasis in the new Treasury Board will be to exercise greater budgetary controls and undertake a program review exercise.

In terms of indications of how the spending will be brought under control, again the Treasurer indicated this morning the recent success in negotiating the physicians' settlement, which essentially brings down the rate of growth in payments to physicians from an average of 12% plus over the last number of years to 7% this year and 6% over the next two years.

As well, the budget indicated intentions to modify the current policy for reimbursing other-country health care costs and plans to implement tighter controls in the drug benefit plan. These are projected to yield savings of $260 million in the current fiscal year and over $570 million by 1993-94.

Again, as I indicated in the previous slide, the budget also placed greater emphasis on capital spending and made a distinction between the capital and operating funds.

Mr Davies: That is the end of that section on the fiscal outlook.

Mr Kwinter: I do not want to turn this thing into a standing committee on estimates report, but I am just trying to get a handle on how valid are your projections as to revenue and expenditures.

One of the things that sticks out in my mind, and I would like a comment on it because I used to have responsibility for it, is the LCBO. We have a situation where the trend line in alcohol sales is down and has been for the last several years. We have a new 5% tax imposed. We have cross-border shopping. We have a situation where it would seem to me that by all indications, given all those factors, revenues should be down rather than up, yet you are showing revenues up $15 million over last year. Again, I do not want to get into it line by line --

Mr Davies: I am sorry, Mr Kwinter; showing revenues up over the year just passed?

Mr Kwinter: I am not looking at this document, I am looking at the budget itself, on page 60. You show LCBO profits of $650 million last year, or the interim estimate of $650 million, and current plans --

Mr Davies: Look at them to grow to $665 million in the coming year.

Mr Kwinter: Yes. Given, as I say, the cross-border shopping, the 5% increase in tax -- and there is a direct correlation: The higher the tax, the farther down sales keep going, and the trend line on sales of alcoholic beverages is down fairly dramatically.

Mr Davies: The pattern of LCBO profits to which Mr Kwinter refers has been reasonably flat over recent years. This table shows $640 million last year, estimated $650 million -- I do not know if we have the final numbers in yet -- and the forecast at $665 million. I just observe that is pretty flat overall.

This budget we are analysing here today had a tax change in it affecting the LCBO which we are presuming is not going to cause so much of a decline in consumption that it would wipe out the benefits of that tax change. The tax move on the LCBO profits, which is a volume levy increase of five cents, is forecast to generate $45 million in 1991-92. So on the tax side we expect to be up $45 million, but on the overall revenues we expect to be up only $15 million. The difference reflects all those other variables you are pointing out, that consumption is dropping.

Mr Kwinter: You feel this is a fairly small-c conservative estimate of what revenues you can expect?

Mr Davies: We work very closely with the people at the liquor control board who give us these numbers to work from and it is part of their business, hopefully, to know their business.


Mr Phillips: As I said earlier this morning, if I can crank myself back up, the median term for the fiscal plan is really interesting to me. How much in new taxes do you need in each of these three years to hit these revenue numbers? What are your assumptions on new taxes each year to hit the revenue numbers?

Mr Davies: As the Treasurer indicated this morning, he has not determined his budgets or the government's budgets for those years yet. The revenue growth as reflected in these numbers averages 9.8% per year for the 1991 through the 1994-95 period. I point out that in the 1984-90 period, it averaged around 10.5% or about 0.7% higher. As the Treasurer pointed out this morning, the revenue projections reflect a combination of growth in the economy and new, as yet undefined, tax moves.

Mr Phillips: In the budget, you say on page 50 that revenues grow at 90% of the gross domestic product, so you can calculate the whole thing. I said one other time to the Treasurer that it requires, in 1994-95, $5-billion worth of new taxes to hit those revenue numbers, and I think he agreed with that. I just want to make sure I am not off base, that if you take 90% of the gross domestic product you would need about $5 billion of new taxes to hit the revenue numbers.

Mr Salerno: That is correct.

Mr Phillips: The second thing that is really interesting to me is the capital fund. It is a neat political thing to do, but I am going to have some real questions about it as we go along.

In your Ontario capital fund in the budget, you say, "It has become clear that parts of our aging infrastructure require significant infusions of new investment to ensure that the people of Ontario will be well served in the future." Therefore -- it is on page 55 -- capital is going to go from $4.3 billion to $4.6 billion to $5 billion to $5.5 billion, and I presume will continue at that level, the $5.5-billion or $6-billion-a-year level.

Mr Davies: We have gone out to 1994-95. To be honest, I would have to check with Tony to see if we had projected beyond 1994-95 in capital.

Mr Salerno: We have. The projections, as you go three and four years down the road, become more hazy, of course. These again are only projections, one set of numbers that will yield the deficit numbers you see there. The Treasurer indicated earlier this morning as well that the capital fund is one of the fastest-growing components in this plan.

Mr Phillips: I must say I view the capital fund as a device to try and hide the real debt, but I realize this is all going to be revealed. I do not know why you do not just build in, as the private sector would, an annual depreciation.

Mr Salerno: There is provision for depreciation built in that enters the operating numbers. The assumed depreciation is a straight line, 5% in other words, amortized over 20 years.

Mr Phillips: But that is on the new capital. Why would you not build in a depreciation of the --

Mr Salerno: Oh, you mean of the stock?

Mr Phillips: I mean the prior $6 billion a year. If you were a business, you would be showing on your operating costs some figure that represents the depreciation cost of replacing your --

Mr Salerno: In fact, in terms of accounting, the old capital essentially has been depreciated, because it is carried on our books at $1, I believe.

Mr Kwinter: Yes, but you do not pay any taxes.

Mr Phillips: I do not think you will get away with the capital fund the way it is in here. That will be at the public debate. Someone said it is like buying a new house. I do not think it is like buying a new house, it is like constantly repairing your infrastructure. What you are going to show in the operating are just the carrying costs on the new capital fund. I think the public will say, "Listen, as far as we're concerned, you're spending that capital every year." And the debt has gone up, I guess, to another $5 billion a year.

On managing health care funds, I have a disagreement with your numbers on two fronts. The numbers I have seen from the Ontario Medical Association say the savings are not 5% a year, they are 1% a year. I wonder if you have been able to reconcile the difference. I asked the minister that recently in the House, but there is quite a difference of opinion on the interpretation of the agreement.

Mr Davies: This is 5% versus -- sorry.

Mr Phillips: You are saying, "Instead of 12%, it will be 7%."

Mr Davies: That is right. That is our 1991-92 estimate.

Mr Phillips: Yes, the OMA would say, "Instead of 12%, it might be 11%." There is a 1% saving, not a 5% saving.

Mr Davies: We are taking the average over the last 10 years; it has averaged 12%. Under the plan that has been put in place, we are expecting the growth to be 7% and those are the numbers we are working from and assuming.

Mr Phillips: Yes, but the OMA in its interpretation of the agreement says it is not a 5% saving, it is 1%.

Mr Davies: I am not sure. I was just asking Tony. I guess we would have to ask the Ontario Medical Association because I do not how it does its calculations. I know how we have done ours.

Mr Phillips: I have asked the Minister of Health this question in the House. As I said to the Treasurer this morning, the determination of that budget will be in the hands of an arbitrator now for the whole budget and I am not sure the government is managing that any longer. I think it is the arbitrator who will make that decision, is it not?

Mr Davies: I guess there is always a point of debate as to an arbitrator's role and function, how it will be exercised. You were asking this morning whether there were any particular, I think the term was "fettering clauses" in it.

Mr Phillips: Yes, fettering.

Mr Davies: There was a supplement to the Ontario budget, it looks the same as the budget, about managing health care funding.

Mr Phillips: I have read it very carefully.

Mr Davies: There is a passage in there I would just read for the benefit of the other members.

"In determining any fee increase the board" -- this is the arbitration board -- " will consider `fair and reasonable compensation for physicians in light of the prevailing economic conditions in the province and the overall state of the provincial economy.' This would include an examination of the cost of physician practice, the level and method of physician remuneration in other provinces, changes in real per capita income in the province, the Ontario CPI, Ontario GDP and other economic indicators."

Mr Phillips: Again, I am sorry, I have asked some lawyers on this and the OMA's interpretation. This is what it would call completely unfettered arbitration, that the government's ability to pay cannot enter into it, the government's debt cannot enter into it, the government's fiscal problems cannot enter into it. I am just saying there is a fundamental difference of opinion on the interpretation. Maybe only time will tell, but in my opinion, that document you just held up there has a very different interpretation of the agreement. Maybe only time will tell. But as I said to the minister, it is in the best interests to clarify it earlier rather than later because you would hate for some ill will to creep in.

Mr Salerno: I would add that we should not underestimate the impact of capping the utilization, which is part of the agreement.

Mr Phillips: But you have not, I am sorry, and that will be determined by the arbitrator.


Mr Sterling: I have to go up to the House to debate on another bill and I would like to ask a few questions. You can answer them now or provide me with answers later. Have you broken down your capital expenditures into what is for reconstructing schools and reconstructing sewers and reconstructing roads, and what is brand-new construction? Is there any distinction between the two kinds of capital expenditures?

Mr Salerno: Not with an aggregate in Treasury as we do it, no. Obviously we could. It would be a big job to do it over time, but the ministries would have some breakdown of what is major repair and what is a completely new school.

Mr Sterling: So from now on you are going to depreciate at 5% the capital you put in. You are not going to go back, say, 10 years and depreciate what was put out then by 5%, are you?

Mr Salerno: No.

Mr Sterling: So it is very advantageous, at the front end of the system, to work it this way. Could you provide me with the total amount of foreign debt we have in Ontario, both by yourself, Hydro and any other agencies basically receiving their funding from the government?

Mr Davies: Is that the portion of debt issued by Ontario Hydro, the government of Ontario or any of its subsidiary agencies held in foreign hands?

Mr Sterling: Yes.

Mr Davies: We can attempt to do that. I am not sure if we have the full breakout, but I think we can undertake to get that.

Mr Sterling: Okay, I would appreciate that very much and I want to know what effect it would have if the dollar fell in value.

Mr Davies: Remember, our borrowings are in Canadian dollars. That is why I wanted to distinguish.

Mr Sterling: They are always in Canadian dollars?

Mr Davies: I guess 1974 was the last time we borrowed and did not convert. Ontario Hydro has a certain exposure to US dollars. For the first time periods, we will borrow in foreign currency and then convert when the time is opportune to Canadian dollars. Overall, at least right now, the composition of our borrowing is essentially in Canadian dollars, and I would have to ask how much of Ontario Hydro's is in non-Canadian. It is a relatively small percentage.

Interjection: I think it is about 25%.

Mr Davies: It is 25%? It is higher than I thought. That would be in US dollars.

Mr Sterling: I would like to know the total amount. It sounds like a good move by a former government.

The Chair: We move to the next section, then.

Mr Davies: Certainly. I will ask yet another member of the Treasury staff, Don Black, who is assistant director in the taxation policy branch, to highlight the tax initiatives in the budget. I would observe that there is a summary of revenue changes and then we have added a couple of slides on personal income tax moves, because they were among the moves of some interest in the budget, but obviously we are here to attempt to answer questions on any of the revenue charges.

Mr Black: I would point out before I begin that I have a more complete package which expands on that table on page 7. It gives a little more detail, as I go through the two areas I picked out to describe briefly, so I will hand those out as soon as I am finished.

On page 7, the summary of the revenue changes table is exactly as you would expect. It goes through the dozen or so tax changes that were in the budget. The difference between the 1991-92 total number and the full year number is quite simple. In 1991-92, some of the tax changes do not start until later in the year and there are a couple of tax changes phased in. For instance, the gas tax has two tax increases, one in April and one next January, so that is the difference between those two.

I would also point out that when I make this more complete package available, there is also an interprovincial comparison table at the very end which might be helpful in figuring out where Ontario stands in terms of its tax rates compared to the other provinces.

Flipping to page 8, I picked just a couple to talk briefly about, the personal income tax and the gasoline taxes, primarily because those are the ones that seem to have caught attention thus far.

On the personal income tax, I will briefly describe the two changes the budget contained. The first is a surtax rate increase change. The change is from 10% to 14%. Simply put, that means that for anybody with Ontario income tax payable over $10,000, what used to be a surtax rate of 10% becomes 14%. It affects roughly 165,000 people in the province and it only affects people who make over $84,000, so it is confined to the upper end of the income scale. To give an example of the impact of these changes, for this year the effect of the surtax change on somebody making $100,000 is about $50. For somebody making $200,000, the effect of the change is about $355. On a full-year basis you would double those amounts. So it is not a dramatic change. Although the rate looks like a fairly large increase, the relative amounts are small.

After this change, and this will be pointed out on the interprovincial table, I would note that the Ontario effective tax rate on income is still the third-lowest in Canada. This surtax change nets $60 million this year and $90 million on a full-year basis.

Flipping to page 9, the second change I would briefly touch on is the change to the Ontario tax reduction program. That is a tax cut program that has two elements involved. One is a basic amount and it is confined to the low end of the income scale. There is a basic tax cut and there is an additional tax cut for families with children or disabled dependents.

It is the second component, the tax cut for disabled dependents and children, that has been enriched in this budget. Until this year, it was $200 per child or per dependent disabled person; it is now $350. As pointed out in the middle of the slide, that benefits about 115,000 people and represents about 240,000 children and disabled dependents. The cost to the province is only $5 million this year, but on a full-year basis, in the amount people will receive when they fill out their tax returns, it is $50 million.

In total, this tax reduction program benefits about 700,000 people.

On page 10, the next tax change, and the one that seems to have generated the most calls post-budget and the most correspondence post-budget thus far, is the change to gasoline and diesel fuel tax rates as announced in the budget. For all of those rates appearing on the top half of the page -- the gasoline tax by 3.4 cents, aviation fuel, diesel fuel and railway diesel fuel -- the number at the end of each line, for instance, the 14.7 cents for gasoline, represents the fully phased-in tax change as of 1 January 1991. There will be two increases in each of those; for instance, on the gasoline, 1.7 cents on 30 April and 1.7 cents again 1 January. It is the same for each of those, so the final number there represents the fully phased-in amount.

I would point out, as again will be shown on the interprovincial table, that Ontario is towards the upper end of gasoline taxes with this most recent change but still well below Quebec and Newfoundland. Quebec, for instance, has a tax rate of almost 16.5 cents on gasoline. So it is towards the upper end. The other significant feature of this tax change is that in terms of the full-year tax increase, this gasoline tax change represents almost half of the total. On a full year it is about $500 million.

I see Bryan is handing out the more complete packages, if anybody wishes to flip through them. That completes that part of the presentation. I do not know if you want to spend any more time on any of the other tax changes, but we would welcome questions.


Mr Sutherland: You will have to excuse me; I do not have that much understanding of the personal income tax system. The increase in the surtax rate -- that is after any other deductions they made, and the final amount of taxable income is the $84,000; is that correct?

Mr Black: That is the gross income amount. That is the minimum amount of gross income a person would have.

Mr Sutherland: Okay, so not net.

Mr Davies: Before any deductions.

Mr Black: The minimum amount a person would have before going into the surtax range is $84,000 in gross income.

The Chair: On that, if he has a $15,000 RRSP, is that before or after? With the federal RRSP, would that effectively mean he would have to make $100,000 a year before he would pay the surtax?

Mr Black: Yes, that is right, he would.

Mr Davies: Yes, $99,000, to be right to the dollar.

Mr Phillips: I am not sure whether this is the right place to ask this, but the Treasurer has made quite a bit of comment about the federal government cutting back dramatically on transfer payments and what not. What per cent of our revenue do we get from the federal government in transfer payments, and has there been any quid pro quo in terms of the federal government giving up directly tax points on the personal income tax in return for any reduction in transfer payments? Is there anything that happened there that we should be aware of?

Mr Davies: To address your first question, there is a pie diagram on page 74 of the budget that attempts to show the budget revenue for 1991-92. You will see that federal government payments show up as a grand total of about 12%.

Mr Phillips: About 12% comes from the federal government?

Mr Davies: I ask Harriet De Koven, who understands these matters in detail, to clarify that answer. But on a cash basis, it would be 12 cents.

Ms De Koven: Yes, it is 12 cents or 12% on a cash basis, but we also receive from the federal government tax points under the established programs financing, which would be an addition of approximately 6%. They appear as part of our tax revenue under personal and corporate income tax.

Mr Phillips: I know it is fashionable to blame the feds for all our problems, but what is the best way to look at what we have been getting from the federal government: 12% in direct grants and then another 6% in tax points it has directed we receive that revenue on?

Ms De Koven: In 1977, when the established programs financing came into being, the federal government ceded tax room to the provinces. The perspective of the provinces is that that tax room now belongs to the provinces and does not represent a federal contribution any longer. It also does not appear on the federal books as an expenditure. It is a revenue forgone to them.

Mr Davies: Essentially what happened is they just carved up the tax territory.

Mr Phillips: This is personal income tax, is it?

Mr Davies: Personal income tax.

Mr Phillips: That is the one that has been growing dramatically, is it not? Is that not the one where the money seems to keep flowing in?

Ms De Koven: They ceded 13.5 personal income tax points and one corporate income tax point. You are correct that the value of the tax points has been growing relatively more quickly than the established programs financing entitlement. EPF is the program in respect of post-secondary education and health care. Particularly now that EPF has been frozen by the federal government, the tax portion picks up a greater proportion. The cash portion, which is the residual, gets smaller and smaller and in fact will disappear, we estimate, some time after the year 2000.

Mr Phillips: I just seem to remember last year $1 billion, $900 million, of personal income tax coming in at the end of the year. Was that sort of a surprise?

Mr Davies: Yes, a lot of that was in respect to prior years.

Mr Phillips: What is that worth to the province in terms of revenue, six points?

Ms De Koven: Six per cent.

Mr Phillips: So we pick up six percentage points -- or is that 6% of our total revenue?

Ms De Koven: It is about 6%. We cannot calculate it on the same basis because it is a share of basic federal tax and we do not know until some time after the year in which we are entitled to it exactly how much we have. But it should be about 6% of our total revenue.

Mr Phillips: How much do we blame the feds? Can they say to us, "Well, wait a minute, don't get too angry because transfer payments are only 12% and we gave you these tax points where you are picking up all this money on the personal tax side"?

Mr Davies: That would be an interesting characterization on their part, because I think if one went back to 1976 when the negotiations were going on -- I was not there so I could be wrong -- as I understand it, the essence of the deal was, "We will start giving you cash payments, and recognizing that those cash payments aren't as big as you want them to be, we are going to get out of a certain amount of income tax room" -- which was that many points at that time -- "and leave that for you." So that was part of the initial deal, setting relatively low dollars. I do not know if that is a fair characterization.

Mr Salerno: What is relevant here is that what the federal government is doing is reducing the total entitlements. The sum of that money comes from the value of the tax points. Consequently, it is really quite irrelevant because it is the total entitlement that is made up of the value of the tax points. Whatever those tax points might be, they deduct that and then they give you the balance in the form of cash.

You pointed to a prior-year adjustment in respect to the personal income tax. Let's say they pay us more in respect to that prior year. The value of those tax points increases. Consequently, they take some cash back in respect to that same year. I know it sounds a little complex, but what really happens, and what they have done over the last two years, has been, in the case of the EPF, they essentially flat-lined the entitlement. Because the personal income tax points in respect to that entitlement keep growing, the cash transfer will diminish. What is important is the latest action they have done in terms of freezing or reducing the growth in that entitlement. So the tax points are really not an issue. They are not important; they are only important in determining the residual.

Ms De Koven: If I could just add to that, under the original arrangement our payments for health care and post-secondary education were to have grown at the same rate as growth in gross national product. What has happened now is that there is to be no growth at all; the formula has been successively altered over the years from the original arrangement. So what Tony has said is exactly right. Under the entitlement that we now get, which is completely flat-lined, the value of the tax keeps going up, and because the total is being held constant, the cash keeps going down.

Mr Phillips: I am not advocating this but just asking what the facts are. What is in the Ontario taxpayers' best interest? Is it that the national cash payments to all provinces be restored, or are we better to just raise the money ourselves locally?

My point is that we will argue with the federal government that it should reinstate some substantial growth in health and education. I gather Ontario is a fairly significant contributor to that fund for other provinces. I am not advocating this, I am just interested in the answer, but which is in the Ontario taxpayers' best interest?

Mr Davies: I am not sure how one defines their best interest. What would cost the least amount of tax dollars? If one looks at it from that perspective, historically Ontario taxpayers have been a net contributor to Confederation. Money from Ontario gets redistributed to other provinces. If there were not other provinces to whom moneys flowed from Ontario through the federal government, obviously there would be less taxes drawn out of Ontario.


Mr Christopherson: I am pleased and interested that Mr Phillips would raise this particular issue because I had discussions recently with a local Hamilton MP, who happens to be a good Liberal, who was concerned about the fact that this was the answer he was getting constantly from the federal government when he asked about the issue of transfer payments, because that is an important issue to our community as it is to every other one. So I found it very enlightening to listen to the questions and the answers.

I would like to pursue one answer I heard. There was a statement that the federal government does not show the tax-point transfers as a tax expenditure.

Ms De Koven: It does not appear as a program expenditure. It has no bearing on their deficit except to the extent that it is a forgone revenue.

Mr Christopherson: Is there anything else that is similar, other than the tax points that have been given, in terms of the relationship between the feds and the provinces? Is there any other kind of arrangement that has been set in place and does not show as a tax expenditure or as a net gain for the province?

Ms De Koven: I am not aware of anything in the case of Ontario. But in the case of Quebec, there are a number of additional tax points. Under the established programs financing, they have an additional, I think, eight tax points. They have an additional five tax points under the Canada assistance plan that the other provinces have not and an additional, I think, three tax points for a youth allowance program that is now defunct in other provinces. There is nothing in Ontario that I am aware of. Tony?

Mr Salerno: No.

Mr Christopherson: What I would like to do is just ask the question straightforwardly from a little different perspective. How correct is it, in your opinion, to say the provinces do not have the right to squawk about the reduction in transfer payments because these point transfers took place?

Ms De Koven: I was going to reiterate what Tony had said previously, that the tax transfer is only part of what we get under the entitlement. As the tax transfer increases, it displaces the cash portion. What is really relevant is that they have held down the total amount of money being provided in respect of health care and post-secondary education. Whether we are getting it in tax or cash is not that pertinent. It is the total that has now been flat-lined. On a cash basis -- by that I mean cash flow -- we got approximately $70 million additional this year over last year under the established programs financing. I think our expenditures for health and post-secondary education went up about $1.6 billion more. I would have to check the numbers, but the amount we got from the federal government in addition to what we had last year was about $70 million. Our expenditures for those purposes went up about $1.6 billion.

Mr Christopherson: Thank you. I think that adequately expands on the issue for the purposes needed.

Mr Kwinter: Briefly, without getting involved in the politics, Bryan, I would like you to respond to this. The gas guzzler tax: Last year it was $45 million, this year it is $90 million, so the revenues have doubled. And when I and others in the House questioned the Treasurer he maintained that it was environment driven, it had nothing to do really with revenues. It was a byproduct of the environmental initiative.

I am a little concerned about some of the statements he made yesterday. I was not in the House but I read some of the reports and he is indicating that, yes, we are re-examining our position on the gas guzzler tax, but we have to make sure that whatever adjustments we make, the revenue remains the same. Which leads me to believe that in fact it is revenue driven and they are using the environment as an excuse to get that revenue. Do you have any comments? Without getting political, obviously.

Mr Davies: I read some press reports this morning, too, and I guess the press reports I read emphasize the commitment to ensuring that their environmental objectives were still being met. Quite frankly, in any tax move there is a combination of features that are desirable. One is to achieve public policy objectives and one is to raise revenue. I cannot comment on whether the Treasurer of Ontario said he wanted to ensure that revenues were the same, because I did not read that and I was not watching the House or in the House to hear him yesterday.

I did want to pick up on one of the numbers you cited, though, of the gas tax proceeds in prior years, because it did not ring true in my memory. Don, maybe you could just clarify that?

Mr Black: The numbers we have in our hands suggest that up until the budget change, the tax on fuel-inefficient vehicles would raise about $7 million.

Mr Kwinter: On page 28 of the budget it shows revenue on fuel-inefficient vehicles in 1991-92 $30 million and full year $45 million.

Mr Black: Yes. Those are the increments over the $7 million. So for this year it would be $7 million plus the $30 million and on a full-year basis it would be $7 million plus the $45 million.

Mr Kwinter: But on page 4 of this document, the bottom line, it says 1991-92 $45 million, full year $90 million.

Mr Black: That could be a typo and if it is, I apologize.

Mr Kwinter: Page 4 of this one. There are two documents.

Mr Black: That is the fuel taxes. That is the diesel tax fuel.

Mr Davies: That is not the so-called gas guzzler.

Mr Black: Yes, that is the diesel fuel. The relevant page for the tax on fuel-inefficient vehicles is under the retail sales tax on page 6.

The Chair: Should we move on to the next section?

Mr Davies: Fine. The final section in the overview presentation is the section on financing or how the borrowing requirements are being covered off. I would ask Sandra Tychsen, director of the finance policy branch in Treasury, to guide you through those pages, which are 11, 12 and 13.


Mrs Tychsen: To discuss the borrowing requirements, I will first describe the composition of the borrowing requirements, then the sources of funds we have available to fund the borrowing requirements, then the decisions we have made to date in funding the requirements, and finally discuss the credit rating and its relationship to Ontario's borrowing costs.

For the 1991-92 budget year, that is the year ending 31 March 1992, our total financing requirements or borrowing requirements for the province are composed of the deficit at $9.7 billion, maturing debt for the year of $639 million, giving us total borrowing requirements of $10.365 billion. Of that financing requirement for this budget year, we have borrowed up until this point $4.169 billion. That leaves us with $6.196 billion to finance over the remainder of this budget year.

To finance the budget requirements we have available to us a variety of sources of funds. First, the public bond market, in addition the short-term floating rate Treasury bill market. The bonds and T-bill market constitute the public sources of funds. In addition to that, we have non-public sources of finance, which include Canada pension plan; the Province of Ontario Savings Office funds, which we are required to borrow by legislation; some other small deposit and trust accounts, which include some small pension, which I believe includes the legislative pension fund; and liquid reserves, the reserve funds we have for meeting the cash requirements of the province.

I will describe now, given that sort of menu of choice for financing the deficit, what choices we have made to date for this budget year. This is page 12, which is the funding decisions for this budget year to date. Again, this begins for the 1991-92 budget year.

Our borrowing to date for funding the budget requirements consists of $2.6 billion. In your handout it says $2,575 million in public market bonds. These have included issues in our Canadian bond market, in the Euro-Canadian market, which of course is also in Canadian dollars, and in the US market, called the Yankee bond market. The average term to maturity of our bond financings is 5.6 years and the weighted average yield, or our average borrowing cost for all of those issues, is 10.14%.

In addition to public bond issues, we have borrowed $800 million through the provincial Treasury bill market. I would note that most of those Treasury bills, which are short-term borrowing, have been converted, via a financial technique called an interest rate swap, into fixed-rate or longer-term bonds of 5, 7 and 10 years. In addition, we have borrowed approximately $800 million from the CPP and have borrowed a small amount -- it is a little too early to say exactly how much, but it is done on a sort of month-by-month basis -- from non-public sources of funds, including the Province of Ontario Savings Office, other deposit funds, pensions and trust accounts and also our liquid reserves.

We began our borrowing at the beginning of the fiscal year; the funding decisions I have just described include those borrowings for this 1991-92 fiscal year. I would also note that since the budget itself has come out, we have completed two bond issues: a $500-million Canadian bond issue on 11 June and a $500-million Euro-Canadian issue on 17 June.

Mr Kwinter: Are they both in Canadian dollars?

Mr Davies: They are both denominated in Canadian dollars.

Mr Kwinter: I remembered I saw some press reports that they were going to be a little slower than normal. I just wondered. They are all subscribed, though, are they?

Mr Davies: Yes. This is Leslie Thompson, who is the director of the capital markets branch.

Ms Thompson: Yes, indeed, they have been. They are fully sold.

Mr Stockwell: I read the same press report. They did go slower than expected?

Ms Thompson: No, not at all. I do not think you can say that when the Canadian domestic issue traded at a premium within 15 minutes of launch that is a slow issue. That is pretty fast, and the Euro-Canadian broke syndicate within an hour and a half of launch. Two to three days is normal in Europe, so I think those were exaggerated reports.

Mr B. Ward: Fifteen minutes, is that --

Ms Thompson: Within 15 minutes of when it started to trade, the bidding was at a premium on it. We had not broken syndicate yet and it was already at a premium in domestic.

Mrs Tychsen: I turn now to page 13, Ontario's credit rating. Following our regular annual meetings with the credit rating agencies, the credit rating agencies reported and have changed Ontario's credit rating. I should note there are four different rating agencies. In our handout we have provided you with the ratings that are most significant in terms of financial markets. These are first the AA2 rating given to us by Moody's and the AA-plus rating by Standard and Poor's. In addition to that, we are rated by the two Canadian bond rating agencies, Canadian Bond Rating Service, which has given us a AA-plus rating and Dominion Bond Rating Service, which is AA-low. With these current credit ratings, Ontario has the highest rating among the provinces. We share that with British Columbia.

I would like to note that it is important, in understanding the borrowing cost Ontario faces, that they are determined principally by the overall level of interest rates. In Canada we would look at the interest rates or what we call the yield curve set by Canada's bonds. These interest rates, as my colleague Qaid Silk has described, as you are well aware, are a federal policy of monetary policy and of general economic forces.

So the main determinant of our borrowing is the overall Canadian level of interest rates. In addition to that, another component of our borrowing cost is the spread, the additional amount anybody besides the federal government pays to borrow in the bond market, and we call that Ontario's spread or the spread over Canada. The overall level of interest rates plus the premium any borrower who is not a sovereign borrower would pay -- the spread -- is our borrowing cost. It is interest rates plus spread that give us our total borrowing cost.

I note that our borrowing costs, like any bond issue, would change minute to minute. My colleague Leslie Thompson is in constant and direct contact with financial markets. To tell you exactly what our borrowing costs would be at this minute would require assessing what is happening to interest rates at the federal level, understanding the various different spreads we would face for bond issues of different terms all the way from one year up to 40 years, as well as variations among different markets, what it would cost us to borrow in the Yankee or US market, what it would cost us to borrow in the Euro-Canadian market, the Canadian dollar, what it would cost in a domestic market; the complications go on from there.

While credit ratings are certainly a factor in determining borrowing costs, they are not among the major factors determining borrowing costs. In addition to that, there is a fairly uncertain and complex relationship between ratings and borrowing costs. Therefore, while there are general relationships, it is very difficult to match up any particular rating with a particular borrowing cost.

Lenders and financial markets do look at a variety of factors in addition to credit ratings and they also try to anticipate when rating changes will occur. You could have a change in your borrowing costs anticipating a change that does not come. You could have a rating change or a change in your borrowing cost anticipating some other factor. At any one point in time it would be very hard for us to say our spread narrowed because we were expecting a positive rating change; our spread narrowed because they look at the Canadian currency positively. There are very many factors.

I note that rating changes are a factor, that prior to the rating changes our spread, its component of our borrowing costs, did increase somewhat. It would be very hard to say exactly by how much.

Mrs Tychsen: We were saying five basis points, or 0.05%. That may be a bit high. Rating agencies made their decision and the rating changes were publicly announced. Our borrowing costs have stabilized. Again, it would be difficult to give a precise answer to what exact impact ratings have had on the borrowing costs. I just wanted to set out the requirements, the choices we have in meeting those requirements, the decisions we have made to date and the determinants of our borrowing costs. That completes my presentation.


Mr Sutherland: I was just wondering if you could provide us with some sense of how much importance you put on the credit rating. Different people think the credit rating is the be-all and end-all of your financial shape and your ability versus other factors. I guess I also want some sense of what our surrounding neighbours have. What is the credit rating for the American government? Is it a triple A1? What about the surrounding states like New York and Michigan?

Mrs Tychsen: Most sovereign governments -- the US, Canada, the UK, France -- have triple A ratings by both of the majors, Standard and Poor's and Moody's. There are a very few exceptions. Italy has a slightly lower one.

We keep track of the credit ratings of all the other Canadian provinces and US jurisdictions as well as some other entities. There are some triple A states but very few of those. I could give you a sheet we have which sets out the ratings of the American states if you are interested.

Mr Stockwell: You are saying five basis points? How much premium would, say, Massachusetts have to pay on its borrowing in basis points?

Mrs Tychsen: As a result of a ratings change?

Mr Stockwell: With their rating right now being as lousy as it is, how much does it affect their borrowing percentagewise?

Mrs Tychsen: Again, because so many different factors affect borrowing costs, they would have the same difficulty we have in attributing any particular amount to that ratings change. We could go out and ask some point estimate but it would be fairly rough.

I should note that we are in the very top ratings tier. For the change from a triple A to a triple A-plus it is very hard to find an effect.

Mr Stockwell: That is why I asked.

Mrs Tychsen: Once you get down to a lower rating, to a situation where you might actually be at a rating where for example a large pension fund might have difficulty buying your bonds because it might be considered a slightly risky proposition, there could probably be larger impacts. We can investigate what information there is in terms of Massachusetts.

Mr Davies: Just to elaborate on that, undoubtedly the higher the credit rating the easier it is to market your bonds, and usually the easier it is to market your bonds the lower the cost to your market. It becomes very difficult to market bonds when your rating goes very low. It is the availability issue that becomes the driving force to the cost.

Mr Stockwell: I was going to make the very point you just made. It is sounding as if you are downplaying the credit rating drop and I think that is a mistake. Clearly any credit rating drop is not a healthy situation. We would be like Massachusetts if we really did not care. But to measure it, in a sense you really cannot tell something like a full point more or anything like that.

Mrs Tychsen: I would note the access. Certainly in terms of access to different markets, in terms of the particular rating change we have just experienced, it would not be significant. It would be very difficult to list exactly what --

Mr Stockwell: The question asked is what it is costing us, how much more it is costing us with the drop in our credit rating. You are saying, "We cannot answer that." Or are you saying nothing?

Mrs Tychsen: We cannot be specific. It is very difficult to be specific. We have given some rough estimates, for example, but I would note that when we looked and when we tried to track several years ago -- and there we had a longer period to track, the ratings change in 1985 -- and tried to isolate the impact of the ratings change, unfortunately overall interest rates were dropping at the same time, just as they are now, which makes it difficult to isolate.

Mr Stockwell: I understand. It is very difficult, I agree. So I cannot be sure of any numbers that I hear thrown out by the government?

Mrs Tychsen: We gave our best estimate and used, I believe, a study that had been done in the US a number of years ago; but most analysts will tell you that it is difficult.

Mr Stockwell: I appreciate that. On page 13 I went down to the third bullet, "Changes in borrowing costs generally do not follow immediately on any rating change and already have been factored into Ontario's borrowing costs." How did you do that?

Mr Davies: I think that is referring to the fact that the market had already discounted our fiscal situation. It had already been pricing our bonds as if we had a rating lower than --

Mr Stockwell: So the market did it, rather than you people? I assume you are saying that was before the budget came about or before you went out looking for money.

Mr Davies: Yes.

Mrs Tychsen: You might have to distinguish a couple of different factors at play there. One is that the rating is the result of a determination by the rating agencies that takes into account many different factors and different weightings by the different agencies. For example, the different rating agencies obviously have assessed Ontario's credit rating slightly differently. We have a slightly different rating in terms of levels from Moody's and Standard and Poor's. One is AA-plus, which is slightly above the Moody's of AA2. Therefore the financial markets, even in anticipation, have to decide an outcome which would not be clear.

Mr Stockwell: I understand. So it was not your department that said: "Gee, Floyd's coming with a budget. We're going to have higher costs incurred due to interest rates because we're going to have a higher deficit, so we'd better assume that we're going to have a drop in our credit rating." You did not assume that?

Mr Davies: You mean in terms of figuring out what our estimated borrowing costs were?

Mr Stockwell: Yes.

Mr Davies: No. Again, the big factor affecting our borrowing cost is interest rate and our interest rate forecasts. That is the real driver.

The Chair: On the issue of floating bonds in the marketplace, is not the bottom line really whether people are going to buy our bonds and at what rate of interest they are going to do it? For me anyway the bottom-line question is, are our bonds going into the market and being purchased at a lower interest rate than some other bonds because they see our market as a safer market for buying bonds?

Mrs Tychsen: When you say "other bonds" could you clarify what you mean?

The Chair: Other provinces, other states, other countries put bonds into the market; they are obviously all out there at the same time. If people are purchasing Ontario bonds at, say, 9.96% interest and they are passing up 10.5% on some other country's bonds, obviously there is a reason for that.

Mrs Tychsen: There is a weighing between risk and return. Most portfolios would buy certain amounts of bonds that would be AA and above. That is usually where the cutoff is.

The Chair: So the question is, how are our bonds doing in that market? If they are being sold in 15 minutes, it seems rather quick.

Mr Davies: Yes. If one uses the benchmark of how much more that is than the government of Canada has to pay for a bond of comparable term, a five-year bond. I do not know how high Newfoundland would be now, but it would be 90 or something like that?

Mrs Tychsen: No, probably over 100.

Mr Davies: They would have to pay over one percentage point more than the government of Canada would for a similar bond. Our five-year bonds are trading over Canada's now about --

Mrs Tychsen: Sixty-two in the domestic market today.

Mr Davies: -- about 62 and Quebec would be about 85. I do not know if that helps you. You can see that the lesser one's credit, the higher interest rate is demanded.

Mrs Tychsen: There are other factors that weigh in there too, in that they want some kind of diversification of a portfolio. In other words, nobody would load up entirely with one particular bond. They want to diversify.

The Chair: Thank you. Are there any other questions for the Deputy Treasurer and staff?

Mr Christopherson: Other than to thank them for their sterling performance, once again.

The Chair: I was just about to do that. I would like to thank you, on behalf of the committee, for spending this afternoon with us. I guess the projection that we could do it in an hour was just a little out; it always takes a little longer when people start to ask questions. Thank you for coming, and if in the future you have any further information along the lines of the questions that have been asked here, if you could pass that along to the committee, we would be appreciative of it.

Mr Davies: We will certainly do that. We will try to keep track of a series of outstanding issues and we will get back through the committee to the members.

The Chair: Thank you very much.

Our last order of business is to firm up a subcommittee meeting for Monday. At what time and place?

Mr Kwinter: I do not know the time because I do not know what commitments I have, but generally Monday is fine. Todd, maybe you can call my office and find a time that is convenient to everybody.

Mr Sutherland: Ten or 12 is good for me.

The Chair: This committee is adjourned until 10 o'clock next Thursday.

The committee adjourned at 1742.