1991-92 BUDGET





Thursday 27 June 1991

1991-92 Budget

Micheal McCracken

Afternoon sitting

Canadian Centre for Policy Alternatives



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)

Clerk: Decker, Todd


Anderson, Anne, Research Officer, Legislative Research Service

Rampersad, David, Research Officer, Legislative Research Service

The committee met at 1009 in committee room 1.

1991-92 BUDGET

The Chair: I would like to thank you for coming this morning. The format is for you to do your presentation and then whatever time is left between now and approximately 11 o'clock will be divided equally among the three parties. I have my stopwatch available to make sure everything is done equitably and fairly, so if you could begin please.

Mr Whitestone: Sure. Thank you very much for asking me to be here today. It was a hot walk up but I am glad to be here and, without going into a long autobiographical comment about myself, I have in the past worked for both Conservative and Liberal Prime Ministers in Ottawa and I think I do my very best to be objective and work by what I learned in a textbook. I am a professional economist, and I repeat I am doing my very best to be objective and without any prejudices. I have my own partisan biases. My comments will be divided into three sections: general observations and the philosophy expounded by the budget, a very brief analysis of parts of this budget, and finally, recommended alternatives. The budget's underlying philosophy: A common supposition inspired by John Maynard Keynes is that the government can reduce the severity of or perhaps eliminate economic cycles. Stressed is the importance of taxes and government spending, as governments have the power to stimulate or suppress economic activity as the need arises. Specifically, this theory urges that government spending be stepped up during recessions, even if an appreciable budget deficit happens to be among the consequences of such stimulative measures. A corollary to this notion is the danger of the so-called liquidity trap, which may develop when money is pumped into public hands but is saved and not spent. If savings pile up, the economy noses down on account of lacklustre spending. The Keynesian solution, as it has often been applied in postwar recessions, is to spend until business recovers. In this view, therefore, budgets do not always need to be near a balanced position. Deficits achieved through higher spending and, it should be noted, tax reductions -- which of course this budget does not really bring except in a minor way -- are seen as highly beneficial at times, usually during recessions or in the early stages of business recoveries. Conversely, budget deficits are inappropriate when the economy is running close to flat out. No matter what the Globe and Mail said, I fail to understand how anybody can laud this particular budget. I read very briefly the Conference Board of Canada comment, and it has lauded the budget deficit here for helping the recession, yet there is no comment about what happens in the out years. I fail to understand how anybody can not take that into consideration, which ought to be key no matter how much of a Keynesian you are. The intended result of such a policy is an economy that expands rather steadily, minimizing the economic cycle. Remember, 20 years ago they thought they could eliminate the economic cycle -- so be it. In practice, this idea of how the economy ought to work has failed. There are many explanations of why this theory has not worked. The essential difficulty is that today's economy has become so out of kilter that it is not able to readily set things right. Debts -- federal, provincial and even private debts -- are so great that they have swamped our credit markets. When interest payments on the debt become an ever-mounting item of expense in budgets -- federal, provincial and private -- any plan for a sharp rise in spending to spur economic growth may deter rather than encourage business activity. Let me briefly mention something here that I think ought to be key for anybody. When the gap widens between total debt and nominal GNP -- how much GNP is rising -- the financial sector absorbs so much cash flow from the economy that it incapacitates the system from creating the means to meet the interest payments. In other words, when the debt rises so much -- and right now the debt in North America is roughly 2.9 times GNP, right about the 1929 peak -- it incapacitates the system, because the need to meet interest payments is so onerous that the economy cannot expand enough even to meet the interest payments. That is why, even though it is hard to understand, deficits and debt really are in the long run deflationary, unless it goes through a wild Weimar Germany type of inflation, because the need to meet the interest payments cripples the economy. That is where we are now. So I cannot understand, when the problem is too much debt, why the solution is to create more debt. I think that is the problem. It is rather obvious that deficit spending ultimately entails inflation -- or as I pointed out, deflation -- unless you do something about it. Credit creation takes place, or if that does not occur, then the money demanded by the government sector takes away money or credit from the private sector. Furthermore, to the extent the resources utilized by government are less productive than resources utilized by the private sector -- and I think everybody would acknowledge without any bias that government spending really is less productive and efficient than in the private sector as a generalization, and we all know that government spending is much less efficient generally -- then a shift towards a larger public sector reduces the overall productivity of the economy. Now I recognize that there is the odd case where government spending can be efficient and private sector spending can be inefficient, but as a generalization I think nobody will deny what I have just mentioned. An increasingly disproportionate public sector, quite apart from its inflationary and non-productive consequences, carries with it the familiar but always important implications for individual liberty. The governmental bureaucracy -- and I used to be part of it, incidentally -- comes to have a momentum and power of its own. An increase in overall budget size is reflected in particular spending programs, each of which will quickly come to develop its own beneficiary constituency. To justify its continued existence, the particular bureaucracy of each spending program must increase the apparent need for its services. I used to be in the federal Privy Council Office 25 years ago, which you perhaps know is the apex of the federal government. When I was there, about 28 years ago, there were 65 people. There are now 1,000. Furthermore, some politicians enjoy spending public moneys that yield some demonstrable benefits to their constituents, but they do not enjoy imposing taxes on these same constituents. Perhaps a larger question is the failure of the average voter to condemn the politicians who behave irresponsibly. I think we are all derelict in not explaining this to the public. I think the duty of a politician -- I am a failed politician, so maybe I do not know -- is to use his or her platform to explain things that the average person can understand. Any politician is derelict who does not explain exactly the consequences of what he or she is doing. The philosophy supporting deficits is founded on the belief that economic growth is retarded by inadequate purchasing power and that consumer spending ought to be augmented by government spending. However, the historical record suggests, particularly in the last decade, that capital formation rather than consumption is a primary determinant of economic growth. Japan invests between 25% and 30% of its GNP in capital spending; we spend roughly 10% and the US less than that. What has lagged in recent years is not personal consumption or government spending but profits and investment. Second, sharply enlarged public works can be self-defeating in their effort to stimulate the economy. Public works usually are concentrated in capital projects: bridges, roads and things like that. Capital spending is like putting a half frozen man next to a red hot stove. Construction prices and wages -- and I repeat, public spending is usually focused on construction -- climb too fast, and that drives prices there beyond the capacity of additional potential buyers. All this has in the long run a depressing influence on economic activity. Ontario's 1991 budget: The rationalization for the $9.7-billion budget deficit, the jobs it will create, is covered by the above comments. I am going to come back to one phrase I repeated later on. Other aspects of Ontario's spending priorities are disturbing. The great bulk of new spending is for such things as pay equity and job equity, for improving the lot of those already employed. I do not quarrel with that as an objective. I think I try to have Christian compassion. Aside from the fact that these programs have a proven record of failure, it is unfortunate that outlays on social assistance exceed the spending for schools, colleges and universities. I think anybody would agree that the key to our ultimate success in the 21st century is education. Enhancing job protection is a worthwhile objective, but for the longer term, if we are going to compete in the global economy of the 21st century, we must have an educational system at least equal to the best anywhere else in the world. By the way, Ontario's decision to opt out of a national standards test implies that we have given up on that effort. Almost everywhere I have gone in the past month or so, people complain about that. I think the copout is very significant. I was at the Toronto Symphony last night and bumped into a teacher I know from Elora. He mentioned again how unfortunate he thought that was and what the implications of it were. Second, if we try to be the one jurisdiction that has more rigorous standards than our trading partners, how on earth are we going to compete, either in costs or attracting investments in entrepreneurial activity? Capital will simply flow to other areas that are more hospitable. I read that rather scathing comment of Conrad Black in the Financial Post a couple of days ago, but I think the point is that if we have standards that are much higher than anywhere else in the world, why would a person build a plant here rather than in Buffalo? The answer is clearly that he or she will not. The proposed manufacturing recovery program will provide grants to small and medium-sized manufacturers that are suffering from the business recession. The record of governments in picking winners has been abysmal. We all know what happened in Nova Scotia with Bricklin. Everywhere the record has been poor. Even with the best of intentions -- and the best of intentions do not always occur, because governments are subject to all kinds of pressure -- governments cannot substitute for the marketplace. Ask anyone in eastern Europe or the Soviet Union for confirmation of that.


Longer term, one must be concerned with some of the arithmetic inherent in the budget. The budget suggests that growth plus inflation to the years 1994-95 will add up to about 7% annually. Ontario estimates its tax take grows at about 90% of the nominal rate of the growth of the provincial economy -- 90% of 7%, which is roughly 6%. If this ratio continues, our tax revenues will fall short of the projected 10% spending increases. So our revenue will be rising at roughly 6.3% and our spending is rising at 10%. That means roughly we are going to have to find 4%. We are implicitly being told that taxes will have to be raised by about 4% of spending for the next several years -- the arithmetic says that -- a frightening thought and one that will further deter investment here. In this connection, the plan for imposing a minimum tax on corporations was reasserted. It was not imposed, but the suggestion was made. It is well known that corporations themselves do not pay taxes. It is wonderful that people say, "We should increase corporation taxes," but who ultimately pays corporation taxes? The answer is you and I, of course. Corporations simply pass on tax, like any other cost, to the consumer. Furthermore, the threat of such a tax or additional other levies, which is obviously implicit in that number, such as those suggested at one time or another by the Treasurer, such as a wealth tax, a speculation tax or inheritance taxes, obviously will ensure that entrepreneurs do not locate in Ontario. I work for a firm in downtown Toronto. I am not exaggerating to say that we average at least one call a day from people who want to move their funds out of Ontario. The same thing happened in Quebec, where actually I used to be, where the government thought it could act with impunity and it drove out entrepreneurial activity. The result of course is that Quebec has the highest unemployment, aside from Newfoundland, in the country. One may sympathize with the idea of a gas guzzler tax, even modified, on automobiles. However, by imposing that levy now, what will be the effect on car sales, which are now in such a deep slump? Will the major automobile companies, almost all of which are international in their operations, be likely to locate in the one province that taxes larger cars? The answer is obvious. All of us decry separatism and deplore the fractured state of our country. When Quebec goes it alone in its language law, we regret that move. Now, Ontario apart is pursuing economic policies that diverge from those in every other province and from the direction of the federal government as well. There was a graph that appeared recently in the Globe and Mail depicting the fiscal steps of the provinces of Canada. Every province except Ontario is restraining employment in the public sector and trying to retrench in order to achieve a better fiscal balance. The Bank of Canada has been compelled to tighten monetary policy in an effort to combat inflation. Also, in order to right the wrongs of the previous decades of profligacy, taxes have been raised, notably the GST. Now Ontario is moving in the opposite direction. In the long run, this will undermine the efforts of the other governments, both provincial ones and the federal government too. In the budget there is a table that reveals that a $670-million tax increase will result in the loss of only 4,000 jobs, a calculation that seems impossible to make. I do not know how you can figure that out. The same document states that $670 million in higher anti-recession spending will create 18,200 jobs, described as person-years of employment, a rather interesting bureaucratic term, or an average of $36,000 a job. In other words, the spending only cost $36,000 a job; the taxes presumably involved $167,000 a job. As a non-smoker, I am in agreement with the additional $210 million to be collected from cigarette smokers. It should be accompanied by a more determined effort to reduce cigarette smuggling, which according to the press is soaring. If you watch the news, apparently people are doing this all the time, waylaying trucks, breaking into stores and things like that. It is very disturbing that the Ontario Treasurer projects continuing deficits of about $7 billion to $8 billion at least until 1995. I find that, no matter what your objective point of view is, the hardest thing to understand. The rationalization of such big deficits in the out years simply does not exist, and from the very cursory examination I read in that Globe article today by the conference board, even it fails to understand that. I cannot understand any rationalization for it. I am going to come back to one thing at the end too. Recommended alternatives: It seems to be forgotten that governments do not create jobs. If so, it would be marvellous. You look at other countries throughout the world, leaving off eastern Europe, but in countries like Argentina, which used to have a somewhat democratic tradition, they have tried that and all it does eventually is lead to a falling GNP. It would be wonderful if governments could create jobs, but they cannot because all they are doing is using the resources that are there; they cannot create resources out of nothing. There are no incentives to invest in this budget. There is nothing in this budget that will stimulate profits. The word profits hardly ever appears in our lexicon of words and papers any more. First, there should be an ethic of restraint. Cutting back on excessive wage increases in the public sector should set a good example. I know Gordon Wilson of the Ontario Federation of Labour rather well, and he and I have talked a bit about what has happened to Algoma. And you can mention another example too which occurs to me. In the United States in the 1930s the coal miners numbered 670,000. John L. Lewis, who was head of the United Mine Workers for a long period of time, kept on demanding and getting excessive wage increases. What happens? There are now 67,000 coal miners, one tenth of what there were 50 years ago, because automation was more profitable. So excessive wage increases do not work. I am not a person who objects to higher minimum wages. I know the rationalization for it and I do not wring my hands about that because I know there is a reason for it. But excessive wage increases are counterproductive. Cutting back on excessive wage increases in the public sector would set a good example. In fact, let me mention something. Does anybody here know what the average wage is in Ontario Hydro, the average wage for everybody there? Anyway, it is $45,000 a year -- the average, which includes people who just do the most menial jobs to the people who are the engineers. Also, to finance a projected short-term job creation, we will need bigger deficits and therefore higher interest payments. That will add to the burdens on Ontario's budget and eventually increase taxes, which destroy jobs. I am going to repeat the same phrase I used before. When the gap widens between total debt and nominal GNP, the financial sector absorbs more cash flow from the economy, so much cash flow from the economy that it can no longer meet the interest payments or of course create jobs to keep the economy afloat. That is the key thing there. In the later years, therefore, obviously the budget deficit should be cut back. As a suggestion to help the north, the creation of an economic free zone should be considered. Rather than a subsidy, by that all taxes and regulations except those that affect the environment, health and safety, could be abolished. You know they have tried this even in places like China and it works like mad. If such a policy were pursued in, say, Elliot Lake, does anyone doubt that the local economy would pick up? The manufacturing sector could be given a limited tax holiday, with perhaps some forgiveness for Ontario's share of the capital gains tax it collects. I have thought about this for a while and people say, "You would have a fractured tax system in Canada." But for many years, as you probably know, every province did not have an inheritance tax, so there is no reason why Ontario could not forgive capital gains tax on, for example, people who start a manufacturing enterprise. It would lead to job creation here. The automobile industry could be given some sales relief if the tax on smaller cars were reduced. We had a similar plan on all cars in the 1970s in Ontario. Remember, I think for half a year they eliminated the sales tax on all cars, and it stimulated car sales a lot. Finally the health care budget needs to be placed under strict controls. Anybody who looks at the projections will know it is totally out of control. In fact, by the year 2000 it will absorb the entire current budget, so you have to do something about that. The way we pay doctors on a fee-for-service basis should be modified. Doctors should receive half their remuneration, as an idea, on the usual basis but the other half on a capitation basis for those enrolled. That would cut costs, provide an incentive for doctors to keep us well, provide better service and save money. Also we should change the use of hospitals. No longer should they be used for chronic care. Hospitals consume half our health budget, yet they should be used only for emergencies. Anyway, thank you very much for your attention. If I can answer any questions, I would be very pleased to do so.


The Chair: There are 30 minutes left. We will divide it into three and there will be ten minutes each, beginning with the Conservatives.

Mr Stockwell: Well, Mr Chairman, considering that Mr Whitestone is the person we brought in, I would be prepared to give up our time for the two other parties.

The Chair: Beginning with the Liberals, then.

Mr Kwinter: Mr Whitestone, I would like to just pursue a couple of your premises. When you talk about the Keynesian philosophy about going into a deficit position in recession and then paying it down in the out years, have you taken a look at where you think the economy is going, let's say over the next four years, and what the effect of this additional deficit of $7 billion to $8 billion -- which is just a projection, and my feeling is that it is going to be higher than that anyway -- have you given any thought to what that is going to do to the economy?

Mr Whitestone: One says sort of humorously that one should never make a forecast, particularly about the future. I usually treat long-term forecasting with a great deal of skepticism. I am not going to repeat for the third time the phrase I mentioned about the effect of debt, but I think we are going to have a very limited recovery at best. I do not see the legs on which an economic recovery can be sustained or very buoyant. Money supply growth has been very limited in both countries. Governments are limited, certainly in the US, which has the biggest effect on our economy. Both federal and state governments in the US are under a tremendous burden of huge deficits. Next year, 31 states are going to have a budget deficit of $32 billion. Most state constitutions require a balanced budget, so they are limited both fiscally and monetarily. Capital spending is going to lag because utilization rates are so low and it no longer pays, for all kinds of reasons, which I can go into at some other point, to expand a plant. Exports are diminishing because most countries are experiencing slower growth, so I think you are going to have, at best, a very sluggish growth. If the problem really has been -- and I have mentioned this repeatedly -- too much debt, adding to the debt here certainly is not going to alleviate the situation, I do not think, and I am not anti-Keynesian at all. I think that at certain points it has been all right. I think part of the problem -- and I was a Liberal, Mr Kwinter -- was that when the Liberals were in power, they did not do what Keynes suggested, which is to reduce taxes and curb spending. I was very much taken aback by it because it was really what was called for.

Mr Kwinter: Could I just make another comment? In your remarks you also referred to the fact that corporate taxes are not really a tax on the corporation; they are a tax on the consumer. I just want to share with committee members a remark that David McCamus, president of Xerox Canada, said to me one time when he came to visit me as the Minister of Industry, Trade and Technology. He was being critical not just of -- you were not even in power at the time -- he was being critical of government, and he said, "One of the things that government has to learn is that we do not pay tax; we collect tax." He said: "You put a tax on us, we charge it to our customers. Not only do we charge it to them, but we mark it up. We put it into our cost component as a tax and then we add our profit, and the only impact it has on us is that if it is so high that the end price makes us non-competitive, then we go somewhere else. But that is what you do to us. It isn't a hardship on us per se. It isn't as if you are saying to us, `We're taking the money out of our pocket and paying the tax.' We just pass it along." I think that is a very significant statement that all of us should consider because I had never really thought of it that way myself. I have to admit that. But when you think about it, that is what happens.

Mr Phillips: I would not mind having your comments on the capital fund proposal in the budget. The government's plan is to set up the fund and just pay the interest on the fund as, I personally think, a kind of a neat way of taking the deficit down. Have you examined the capital fund and do you have any thoughts on it?

Mr Whitestone: I write a newspaper column, Mr Phillips. John White was the Treasurer here, I guess, about 15 or 18 years ago, and he said he always liked that idea. I think the trouble with the idea is you really cannot delineate what is capital spending and what is ordinary spending. I mean, school spending; what is school? Is that a capital investment? Is hiring more teachers a capital investment? The problem is the whole line becomes so fuzzy you really cannot do it. The overall objection to it is that whether it is capital spending or ordinary spending, the net result is the deficits are higher and interest payments on the debt have to be met, so even if it is really for something you and I might consider beneficial, the old idea of a road so the farmer can bring his or her product to market more easily, in the long run the cost of that, the interest payments, have to be sustained. Even if you call it justified, and a lot of capital spending is, the problem right now is too much debt, so no matter what the reason for it is, having added to the debt burden is not a solution. I like the idea because it would mean we could forget it, but you cannot, for the reasons I mentioned.

Mr Phillips: Do we keep going for our 15 minutes? Is that it, or do you want to skip around?

The Chair: If you have no questions, I will move to the next and give you time at the end.

Mr Phillips: I have a question, but I prefer to keep the time.

Mr B. Ward: It is easier to keep tabs.

Mr Phillips: I would prefer not to set a precedent where the NDP goes last every time throughout the hearings.

Mr Sutherland: It will rotate, will it not, Mr Chair?

The Chair: Okay. If that is the case, then I will go to Mr Sutherland.

Mr Sutherland: Your presentation was interesting, although your comments about the coal miners did not seem to make a lot of sense to me. The fact that people just do not use as much coal is also one of the reasons. They have gone to more environmentally friendly methods, or what has appeared to be that. More effective and efficient methods is also one of the reasons we have such fewer numbers. Nowhere in your presentation did you say where you thought the budget should be. Should it be a balanced budget? Should there be a deficit? What level should that be at? You mentioned freezing civil servants' wage increases. I think the Treasurer said last week when he was here that if they had been frozen, that still would not have made a significant dent. We still would have been left with a deficit of probably $7.5 billion or $8 billion by doing that, so I would be interested in knowing where those cuts should come from besides that and where you think the deficit should be.

Mr Whitestone: Well, let's go back. I do not want to linger on the coal miners thing. I do not know the numbers, and I would not try bluffing, but I would think coal consumption is not down 90% in the last 50 years. The reason we have more efficient production is that it became more profitable to invest in machinery than in workers. For example, let's just mention something. I am old enough to remember when there used to be elevator operators. I do not think a new building built today has an elevator operator, because wage increases have been such that it pays to have automated elevators. So excessive wage increases in the long run entail the need for a more efficient means to utilize dollars. Where should the budget deficit be? I have no idea. All I know is that you have one that is higher than it has been, even adjusting for inflation, in any other recession. It is roughly triple what it was in the previous recession. I guess the recession is a little bit higher. The cost of living is up maybe 30% or 40% since 1982, so if you take $3 billion and add roughly even 50%, it would make it around $4.5 billion; I do not know, just as a rough rule of thumb. How would you cut back? Well, I could keep you here for ever. As you may know, I was economic adviser to Bob Nixon. The question always came up, and Bob and I talked about it. Where do you begin? You begin with government activities it should not be performing at all. Have any gone through Terminal 3? Terminal 3 is large and privately owned. There are all kinds of activities government should not be doing and it is involved in them. A very simple one, which I hope will be non-partisan: What does it cost to feed and keep an inmate in a prison today? I do not know, $40,000 or $50,000 a year? Does anybody doubt the private sector could not do that more efficiently? That should be an objective. Why could it not be done more efficiently?


Road construction should be handled differently than it is today. There should be tenders for all kinds of things. The health care budget is totally out of control. I think we have a marvellous health care system. My eldest son is a surgeon. I am very aware of it, but I think you have to change the way you spend money on health care. About four years ago I brought in somebody to Murray Elston, who was the Minister of Health in the early part of the government. Dorothy Hall and I had all kinds of proposals to Mr Elston on how the health care budget should be cut back, not that you want to reduce services, because nobody wants to do that, but the program is totally out of control. School budgets: When I was a candidate, I went around everywhere and pointed out how school spending is totally out of control. School buildings are not utilized all year round. You have too many administrators in the system. I could go on for ever, but I want to share roughly what I had in mind. I do not want to take too long to answer your question.

Mr Sutherland: I do not think anyone disagrees with you about the health care system. It has been clearly mentioned in the budget that the system has not been managed and that we all have a responsibility. I think all parties agree we have a responsibility to start managing the system. I want also just to ask you another question in terms of the generalization you made about the private sector being able to do things more efficiently in targeting resources. I guess my sense, though, is that in a recession the private sector has said it is not going to do it. So if the government does not do it, who is going to do it? In other words, the sense is that in this time the government can target the specific areas to jump-start certain parts of the economy to get it going. For example, the anti-recession spending in the infrastructure for capital will get the construction industry going, because that is the one that has been hardest hit; that type of thing, the ripple impact of doing that. Someone has to kick-start it. The private sector is not; so are you saying if it is not going to, government should not either?

Mr Whitestone: I mentioned the analogy of the half-frozen man, that public spending usually goes on the construction industry and it is like putting a half-frozen man in front of a red-hot stove. What you are really doing -- and I recognize the need for infrastructure, and this is rather textbook -- is letting wages in that particular sector get out of line. There is so much activity channelled there that if you and I want to build a house, we find that wages are out of line, and in the long run it is not productive. What should the government be doing? I do not think the answer has to be that. I am not anti-Keynesian at all, but the approach should be to encourage profits, to encourage people to move here. Look at what Hong Kong has done. If you had lower taxes here, if, for example, you reduced the capital gains tax on manufacturing activity -- let's say you and I started a manufacturing company, and this was the one province in Canada that did not have a capital gains tax on a manufacturing enterprise. Does anyone doubt that this would not encourage people to start here? I think it would. So rather than kick-start capital spending, which often, frankly, occurs at the wrong time -- it takes so long to get a project going, by the time you have it going, you are usually out of the recession. You know, you have to get an engineer, an architect and a planner to build a bridge, and all that does not happen by tomorrow. By the time you get it under way in a year and half, it usually, almost always, occurs after the recession is over.

Mr Sutherland: If I may just follow up, in this case, since you said recovery is going to be that much slower, then the $700-million anti-recession spending which is to be spent before the end of this capital year is a good way of doing it because it is being done while things are still going, or while the recession is still having a major impact.

Mr Whitestone: Yes. That part I would not object to, except the overall comment which I made. The problem is the overall size of the debt and the fact the debt is taking so much out of the economy that the economy cannot survive. Normally I would agree with you, but I think with the problem being debt, it is counterproductive right now.

Mr B. Ward: I do not think you answered Kimble's question, though, on where you feel the budget should be. During these tough times, should it have been a balanced budget?

Mr Whitestone: No, I thought I did indicate it.

Mr B. Ward: I did not quite hear you.

Mr Whitestone: I thought I said, just as a rough rule of thumb, adjusted for inflation, maybe $4.5 billion, I do not know.

Mr B. Ward: A $4.5 billion deficit.

Mr Whitestone: Yes. I think we made a mistake in the 1980s in not having surpluses built up which would have reduced the deficit. Then you could have more easily survived a budget deficit. I would not like a balanced budget right now. I think it would have been very difficult to achieve.

Mr B. Ward: You are an economist and I am assuming you have studied other countries' economies. Which one do you feel is the best role model at this time, recognizing Canada as a basket case because of the federal policies?

Mr Whitestone: I think we are a unique country, therefore I am not going to follow the scare tactics.

Mr B. Ward: Which one would you say?

Mr Whitestone: I would like to borrow from various countries. I know you would like me to say Sweden, but Sweden has become a basket case itself. I would like to borrow from a lot of countries. I like what Hong Kong and Singapore have done and, to some extent, Japan, which somehow has a directed economy. I think we are a unique country, therefore I would like to borrow from various countries.

Mr B. Ward: What about the American economy?

Mr Whitestone: No. I think the American economy is guilty of the same kind of surfeit of debt that we have had, and there are other things about the American economy I do not like -- its health care system, which is even more outrageous than ours. No, I think government spending is a much lower percentage of gross national product than ours, but I think there are other things which are missing there, their infrastructure --

Mr B. Ward: So you do not really have a favourite. You would rather take a look at the benefits of a number of economies.

Mr Whitestone: I like Switzerland and what it has done with education. It has done a marvellous job with education, but I think we are a unique country. Do you want to follow one country versus another? No. I like a lot of things about Switzerland, for example, which has such a unique educational system. I would like to borrow their educational system. I would like to borrow other countries' work ethic.

Mr B. Ward: Turning to education, as you mentioned, I think that is an important issue, and it seems to be with you because you have stressed a need for an educated workforce here in Ontario, and in Canada for that matter. There is no denying that. In Ontario, do you feel there should be cutbacks in education, there should be expenditures or there should be greater usage of existing resources? Somehow I think you will say the third one.

Mr Whitestone: No, not at all. For example, I read that in Wellington county they are building a new $5-million headquarters building. I would like somebody to get rid of those kinds of outlays, which I think are unnecessary with new kinds of telephones and communication. I think the dollar should be used much more efficiently.

Mr B. Ward: Greater use of the physical structures out there.

Mr Whitestone: Yes. That should be used more efficiently. I have talked to teachers -- and you can too; I am sure you have -- and you find that the administrative overlay is excessive. I think school boards really have not utilized personnel efficiently. I would like facilities to be used year-round. After all, the long summer holiday is a legacy of when we were an agricultural economy. Why on earth can a child not be going to school for 11 months of the year? Now teachers maybe need relief. For heaven's sake, I think I would eliminate some of the paperwork teachers are burdened by. I know they are, because I have talked to them, and I think we are not utilizing resources efficiently at all. Other countries spend less of the GNP than Canada does on education and have a better educational system. George Bush, who is not my favourite person by a long shot, mentions that point and I think it is a valid point. We spend a bigger share of GNP on education than a lot of other countries, but we do not utilize the resources efficiently. Look at what Switzerland does, and if you want, some day I will tell you about it. They spend much less and they have a much better educational system.

The Chair: Mr Ward, you have about three minutes left and then Ms Ward would like to have a question, and Mr Christopherson as well.

Mr B. Ward: Are we using up all our time? I will pass, then. I was going to talk about wages.

The Chair: There are about three minutes left.

Ms M. Ward: I thought we were rotating. No?

Mr Kwinter: We are rotating on how you are going to use up all the time. If you use up all the time, there is nothing to rotate.

Mr B. Ward: I will pass, then.

Ms M. Ward: I wanted to ask you about inflation and the GST. First, a quick question about inflation. Do you think it has really been a serious problem in the last couple of years?


Mr Whitestone: I am a bit sceptical on the actual numbers -- and I think anybody who goes shopping knows that numbers really do not totally reflect inflation -- because there are property taxes, school taxes. I think the basket of goods is not misrepresentative but I think inflation is more of a deep-seated problem than we recognize. When you have inflation with the kind of numbers we have today -- goodness gracious, in the 1970s Richard Nixon imposed wage and price controls when we were having 4% inflation, and we have more than that now -- I think it is a problem.

Ms M. Ward: You do think it is a problem and has been for a few years.

Mr Whitestone: Yes.

Ms M. Ward: The other question is basically about the GST and taxes in general. I gather from your comments you felt the GST was a good type of tax. Is that the right interpretation? I cannot recall exactly what you said.

Mr Whitestone: I do not think I said that.

Ms M. Ward: What is your feeling on the GST, and what type of tax do you feel is the most efficient and most fair?

Mr Whitestone: I do not like the GST as a tax right now because I think it is giving the federal government more resources, which it should not be having. Generally, I do not like regressive taxes.

Ms M. Ward: Do you not think the GST is a regressive tax?

Mr Whitestone: Yes. I do not like regressive taxes and I think the GST is that kind of tax. On the other hand, I like to stimulate capital investment and cut back a little bit on consumption, so I have a mixed opinion on it. I think the best solution -- if you are asking me my ideal solution, and if I were dictator of Ontario, which you are probably glad I am not -- the solution I would propose right now, if you did it selectively, would be to cut back on manufacturing, capital gains, taxes like that. That is what I would like to do. I have a mixed opinion on it. I would not have imposed the GST when they did.

Ms M. Ward: Is it simply a question of timing, though? Do you think it was the wrong time?

Mr Whitestone: It was the wrong time. I think it was a complicated tax that could have been simplified and I think the federal government reneged on its promise to cut back other taxes, which other countries have done when they imposed that kind of tax. If they had cut back on other taxes such as personal taxes when they imposed the GST I would have been much more willing to accept it. That was the original premise on which it was presented.

Ms M. Ward: Actually, in the paper this week it said that, for the mythical family of four, I think the increase in taxes since 1984 was about $1,500.

Mr Whitestone: Originally, Michael Wilson promised he would cut back on personal taxes. He did not even reduce the surtax on it. I find that part objectionable.

Mr Phillips: I think the government would say: "Well, you are overly worried about the deficit and the debt. The debt, as a percentage of revenue, never gets below 150%. The public debt interest as a percentage of revenue just creeps up slowly to 12.5%. Why be overly worried about that?" As you look at those numbers, what is your feeling on that?

Mr Whitestone: My own feeling is that the marketplace has a reaction, that no matter what you say, compared to historical record the cumulative effect of the debt we have now means that interest rates here -- I mean real interest rates -- are unbelievably high. If we have inflation at roughly 4% or 5% and you look at long-term rates -- what are mortgage rates now, 11% or 11.25%? -- you have real interest rates around 5% or 6% compared to the average we used to have, the historical average interest rate of 3%. The market is saying, "The cumulative effect of all the debt we have built up for the past 40 or 50 years is so worrisome that people want double the real rate of return that historically we have had." It is twice what it should be because the cumulative effect is so bad.

Mr Stockwell: I would like a little more discussion on the out years. The government has held up this Keynesian theory that deficit financing is the best way to fight a recession. You could almost buy the argument that you could run a $10-billion deficit in the first year if you were talking about a recession that is supposed to end in the next 12 months, which I think the government has said. In fact, I think we were supposed to be spinning out of the recession right now. I do not see it happening, but that is what their people said, that in the summer we would be spinning out. How then can the justification be made that we would have to run horrendous deficits -- and I classify them as horrendous deficits -- in the following three years? If we were really dealing with this theory that the government has put forward on Keynesian economics, should we not be looking at surpluses to pay down the deficit that we absorbed in the first year of their four-year plan?

Mr Whitestone: I looked it up quickly while you were talking. I said here on page 4: "It is very disturbing that the Ontario Treasurer projects continued deficits of about $7 billion to $8 billion at least until 1995. The rationalization for such big deficits in the out years simply does not exist." I think that is the thing to which I take the biggest exception. Your comment is one for which I find the least justification. There is none that I can find. If the economy expands, as the Treasurer implies, roughly 3% in a year or two from now, I cannot understand that and I think that is a part which I find indefensible.

Mr Stockwell: The other point I would like to examine is this: In the five years the Liberals were in power, they assumed $10 billion of new debt. It seems unbelievable to me that during that period of time the government could absorb $10 billion, and the government today has said that is one of the main reasons we are in this particular situation. They have often said, "If you people had managed the province better, more wisely, we would not have to absorb some $10 billion in deficit this year alone." What are your thoughts on that?

Mr Whitestone: Without being embarrassed, I think that in the five years of the Liberal government, they did things which may have been justified for social reasons, like eliminating OHIP premiums, but the lag effect is that, in part, it led to our problem. I think governments have always made mistakes. You can go back for 20 or 30 years federally too. I think it would have been better if we had had a balanced budget for some of the years when Ontario had the most prosperous interlude in its history. That would have been a far more appropriate economic policy. To some extent, that is the cause of the particular budget deficit we have today.

Mr Stockwell: Lastly, there has been some talk the government suggested that during the early 1980s when the Conservatives were in power it ran a deficit itself in fact. I believe there is a great difference between the early 1980s deficit the Conservatives ran and the early 1990s deficit the NDP is running. The difference I have pointed out was that in certain circumstances there were tax holidays offered -- in essence, incentives -- which caused the deficit, or helped cause some of the deficit in the early 1980s, as opposed to spending increases that have caused the deficit now in the early 1990s. Do you have any comment on how the two deficits were arrived at? If you were going to run a deficit, which would be more preferable in your opinion?

Mr Whitestone: I cannot remember the breakdown of the 1970s deficits, which were really basically more a percentage of Ontario gross national product, but I think I would much rather have one based on incentives. I mentioned briefly that Ontario removed the sales tax on cars in the 1970s for half a year; I think that is by far the preferable way of doing it than spending. The trouble with spending is that even with the best of intentions, it really is so diffuse and so often inappropriate that it does not work. It leads to log rolling and things like that. To answer your question, yes, I would much prefer incentives to spending because those incentives provide more opportunity for the marketplace to function.


Mr Stockwell: I put a lot of stock in the percentage of tax as a proportion of the GDP for the province in that number because I believe that is how much money you are sucking out of the economy, that you are not leaving in the economy to be reinvested or create wealth, jobs, etc. I have examined past budgets and the numbers, and in the early 1980s to mid-1980s, we were taking about 14%. We are now in excess of 16%. It seems to me that is going to be very telling for the private sector or for anyone who is interested in investing, knowing full well that you are taking literally billions of dollars more out of the economy some 10 years later in the projected budget they are talking about. It still leaves them with a reasonable amount of money spent on servicing the debt, or servicing the deficit. They are saying 18 cents or 14 cents as opposed to 11, etc. It does not seem that onerous, but when you examine how much more money they are sucking out of the economy, that is what I think the important number is. Could there be any credence given to that?

Mr Whitestone: I think that is right, Mr Stockwell. I think the other point, which I mentioned in my presentation too, is that if you look at what they talk about, spending increases and tax revenues, they are implying very strongly, are almost saying that they are going to have to increase taxes by 4% because if spending increases are 10%, revenue increases are going to increase 90% of 7%, which is 6.3%, so they are saying they are going to increase taxes 3.7% a year anyway on top of all that. I think that is worrisome. The thing has a snowball effect. Interest payments are added to the budget deficit, so year after year you are compounding the problem.

The Chair: Thank you, Mr Whitestone, for your presentation this morning.


The Chair: Our next presentation is by Michael McCracken, the president of Informetrica. Welcome back to the finance and economic affairs committee, Mr McCracken.

Mr McCracken: I was not going to say anything, but I guess I have to start. Given the challenge that has been set for you to explain to the public what is happening out there, it perhaps behooves you to have at least a starting point, some clarification of what economists think is happening, because presumably you are going to be trying to do that, so I may pick up on a few of the points of Mr Whitestone just to provide some clarification. Very quickly, though, just as a backdrop, let us see if we can accept a few facts. I will put them forward as facts and then you can query them. First, Ontario has been in a deep recession, one in which the unemployment rate has risen from an average of 5.1% in 1989 to 6.3% in 1990 and now appears headed towards 10% for this year. Real economic growth in the province has probably declined, both in 1990 and again in 1991, welfare rolls are up and bankruptcies are up. There is also some evidence at least that Ontario entered early and was in this recession, certainly in the manufacturing sector and perhaps in other parts of the economy, from September 1989 on with the rising unemployment rate starting at that time. The second thing we can perhaps agree on is what was done in the budget. Again, I am just trying to make sure we start with a base. The way I read the budget, there were a series of tax moves on the indirect tax side and personal income tax side, raising some $1 billion in additional revenue on a full year basis, some $670 million over the fiscal year at hand, perhaps offset, depending on how you do your arithmetic, with the parallel application of the provincial sales tax not taxing the goods and services tax, an amount estimated to have provided an implicit tax cut of some $470 million. There were also expenditure increases in a number of sectors: in particular, some $2 billion in discretionary actions, a number of those aimed at capital formation both in the highways area and special infrastructure areas. One can dispute the numbers, although I suspect you are talking about the numbers to the right of the decimal rather than the left, making up some gap that was created in part by federal government cutbacks on established programs financing of some $l.6 billion in 1990-91, and of course dealing with the earlier cutbacks of some $1.9 billion in earlier years. If you take this view, then you are left with a rough assessment of about $6.5 billion as a deficit that would have been there, let us say, for cyclical reasons, deteriorating from about $3 billion in the previous period. What could have been done? One option obviously -- one always considered, at least for a moment -- is to do nothing. That leaves you with roughly an $8-billion deficit. That leaves you with no momentum or optimism injected into the system and no increments or changes on the infrastructure side. You could take the levers and push them back in the other direction -- cutbacks to the deficit by tax increases, expenditure cuts, etc -- either to maintain the 1990-91 level, the roughly $3-billion deficit, or to take it back to zero or whatever numbers one wants to conjecture. The costs would be increased job loss and deeper recession. You could have done a third thing, which was to stimulate, and stimulate more than has been done, 2% to 3% of GDP, a real kickstart to the system rather than the modest stimulus that was put into the system. Again, one looks for the opportunities to do that. One looks also at the absorptive capacity of the system on infrastructure and makes a judgement. What you saw in the budget presumably was the net effect of all that. As we discuss this, I think it would be useful, when you are talking about the deficit or thinking about it, to put it in a slightly different way, which would be to presume for the moment that we have had one of these efficiency gains that are alleged to be out there in the operations of government, whether that be school boards somehow working better or doctors working harder or discovering or stumbling across that alleged roomful of civil servants who are doing nothing. Let's say that as a result of that you found $1 billion. You have discovered $1 billion of requirements you no longer have or, if you really want to play the mental game, the federal government relents and gives you back $1 billion on EPF or Canada Assistance plan. Now the question mark is what to do with that. Is the best thing you can think of at this point in time, with the economy in the state it is at, to reduce the deficit? Is that what you would do, essentially say: "We are not going to borrow $10 billion. We are going to borrow $9 billion"? Or would you say, "No, what I am going to do is cut taxes by $1 billion at this juncture, leaving the deficit unchanged"? Or would you raise expenditures by $1 billion and, if so, on what -- infrastructure, human capital formation or on other needs? In some sense, that might be a useful exercise to go through, because in fact that is the exercise you are doing at the margin each time. When you have a change in a revenue forecast, a new requirement that comes up, you ask the question, "Should I fund this new requirement immediately by taxes? Should I do so by debt?" and so on. Just as quick -- I would not call them corrections -- amplifications or redirections or additional observations on some of Mr Whitestone's points, he put forward a view that the Keynesian view of how the world works has failed. I suggest to you that is not true. It has been amply demonstrated, as recently as the oil price shock we all received in August and September, that if you take money out of people's pockets you do cause an economic slowdown which in the case of the United States tips it into a recession and in the case of Canada pushes us from a mild made-in-Canada recession to a rip-roaring recession where the betting now is on whether this will last as long and be as deep as the 1981-82 recession. I think if you want to look for failure, it would be the failure of some levels of government, under some circumstances, to use what they know appropriately; in other words, a failure to act, allowing unemployment rates to continue to rise to levels which were unheard of a decade ago, for reasons which still I find difficult to understand politically.


The second point is that there is much concern and hand-wringing about debt and debt ratios, usually with the federal debt ratio roughly 50% or some 40%, not the 15% or so of provincial GDP represented by the Ontario ratio, but nevertheless hand-wringing over that. Let me suggest to you that what you are observing with the high debt ratio is not the problem but rather a symptom of a difficulty and a symptom of the kind of policy setting you are operating under. It is arithmetic to show that changes in debt ratios essentially are dictated by two things: first, what kind of primary deficit you are running -- that is, what you are doing on your program of spending versus your revenues -- and, second, the difference between interest rates and the growth in the economy you are operating in. You can do that in terms of nominal interest rates and nominal growth or real interest rates and real growth -- it is the same thing. If real interest rates exceed real growth you have a problem. This applies not just to provincial governments, not just to federal governments, but to any debtor. The flip side of that is any asset holder who is getting a return in excess of the growth of the pie will find itself getting a larger and larger share of the asset side. The problem, then, must have something to do with the relationship between real interest rates and real growth. If you examine Canada's history -- in fact, for that matter, the history of most of the developed countries -- you come back with a variety of signals. One, though, in the postwar period is a period, from the mid-1940s to 1979-80, in which real interest rates were less than real growth. In that environment debt was not a problem in any jurisdiction, nor was it for corporations, nor was it for individuals. The reason for that is that you could grow your way out of a situation in which you had liabilities because your growth exceeded the servicing costs, if you will, on the debt. Since 1980, particularly in Canada, we have chosen a monetary policy that says: "No, we're going to run under a different set of rules. This set of rules is going to penalize the buildup of debt," and we have done so. Debt ratios have risen, starting in 1975 to 1980 because of a weak economy but post-1980 because of the debt ratio. That has got particularly bad in the last couple of years with the very high interest rates that are in place. The question mark is, what do you do down at this level where you do not control interest rates in this kind of environment? It boils down to where you think the world is going. The federal government, in its budget, is telling you real interest rates are coming down and debt ratios are stabilizing, certainly way below the levels in the 1990-91 period. It suggests, at least in this environment, that you may well be, with some caution obviously, less likely to be entering an explosive situation than you might have been a year or two ago in running up an increased debt; ie, your debt stability should not be jeopardized by the fact that you are running a deficit. I will not say any more on the inefficient government side, other than to simply point out in passing that presumably all of us in this room, regardless of political connection, are always interested in more efficient government. That we should take as a given. We should work always to improve it, but it seems to me to be a major red herring in discussions associated with the deficit or with the budget, unless one can point out particular or obvious items. On the public works side, in terms of infrastructure bidding up prices, you might want to check the facts on that, check with your public works department. Ask them what has been happening to bid prices on highway construction that they have been putting forward in the last several months. My information suggests that they are coming in below their budget, that they are able to do more real construction than they had anticipated and that there is no evidence of this great overheating of construction out there. In fact, it demonstrates that this may be a particularly opportune time to get more miles of highway for your dollar than is typically the case, which would suggest the timing on the additional highway construction may be particularly good. I will make very little comment about the notion that somehow our standards on things like pay equity or other issues should be dictated by the lowest of our trading partners. I note in the morning paper that Conrad Black wants to buy some assets in Australia. I say fine. Also, let me make one or two quick observations with regard to this notion that somehow we are concerned about these out-year budget numbers and beating our chests about it. It seems to me the Treasurer could have avoided causing you that upset by simply not publishing them. Would you have felt better? My response would be perhaps not. Alternatively, he could have put out some numbers that had some arbitrary tax increases built in. We could have assumed, for example, a retail tax increase of 1% or 2% per year in each of the next four years and that would have made the numbers look "better." Obviously, as the time rolled around for the next budgets, little matters could have been reconsidered and adjusted as necessary. You might laugh at that, but do not forget that is precisely what the federal government did with some of its increases in the federal sales tax. The Conservatives found, after castigating the Liberals in 1984 for the increase in the manufacturers' sales tax that was scheduled in October 1984, that when they came in it was sitting there like a little time bomb. Having criticized it substantially, they found it convenient to go ahead and continue with it at that juncture. But that was purposefully there to make the numbers different in the future. It would have been possible, through economic assumptions, to also make the numbers look a lot better than you see. That, it seems to me, is a third possibility. I suggest to you, at least from our analysis of the provincial economy, that this option was not taken either. If anything, I find the growth forecasts low for 1992, 1993 and 1994, on the presumption that we get some sort of an economic recovery under way. I think what you saw there was the best shot at the time. Yes, sure enough, with no policy change and with an economy that is moving back towards potential but making slow progress in getting back to where you were in 1988-89, there may well be some continued deficits as are portrayed there. Again, I am not clear that one should panic or, as some apparently are doing, leave Ontario as a result. In terms of this notion of a half-frozen man in front of a stove, I do not fully understand the analogy, but I guess what we are hearing is that rather than try to warm the person up we should just put him back in the deep freeze and leave him there. Those complete my formal, and perhaps informal, observations. Let me throw it open and try to answer any questions you wish to put to me.


Mr Christopherson: I want to thank Mike for his presentation. Even when he is not agreeing with us, I always enjoy his presentations and the way he puts things and the frankness he has. I would very much like to hear your thoughts, Mike, on something Mr Whitestone touched on, the separation of the capital and the operating budgets, which has had some attention, but probably not as much as it deserves. Mr Whitestone pointed out some of the difficulties he has with it. I would appreciate your point of view on that, please.

Mr McCracken: Businesses run on a capital budget. They do capitalize expenditures on things which last more than a year. There is a notion that somehow you cannot figure out what is capital and what is operating. This should not be a challenge for anyone. It is done every day by millions of people in business. It is arbitrary, and there is an incentive to do it in particular ways, given tax laws, but it can be done. What do you get for it? You get a somewhat different appreciation. You get an appreciation that these things you spend on today have a value that lasts longer than a year. How much longer? That depends on how long the thing you spent on lasts. That brings up the problem with this for government, that you cannot do capital budgeting without also doing depreciation accounting. If you do depreciation accounting, what you will observe -- at least at the federal level where we in fact do capital budgeting in the national accounts, and for that matter, at the provincial level, where it is done -- is that the depreciation allowance is about as much as the capital spending currently going on. So when you get it all done and you look at it, you kind of scratch your head and say, "Why did I do this?" It has not helped your presentation in the sense of what is going on all that much at the macro level. It does help you, though, in understanding, and saying, "Look, this dollar we are spending today has a different value than this dollar on current expenses today, because we will be getting some ongoing benefit from this capital item." I do not discourage you from doing it, but do not expect it to be any great panacea, or to provide you any fundamental change in the way the world works. If it makes it look more businesslike, if you can compare your investment, and if you can make some allowance in your mind for the need to keep investment and upgrade it, great, because we ought to be doing capital budgeting thinking about our infrastructure so we do not run it up and down like a yo-yo and say, "This year we will not spend anything on roads because we need to save and make it look better," or, "Maybe we can spend it all on roads this year." Having some capital plan in that area could be very useful. One final quick comment is that an additional thing you want to do -- and you can do this whether you do the accounting this way or not; it behooves governments, I think, and to some extent they do this -- to always think of having on the shelf capital plans you are able to do, and where you then make a judgement about whether to speed up or slow down these capital plans, based on the economic conditions. It is very good contra-cyclical policy to have a shelf on which you have some projects -- well thought through, designed, planning, costed out, benefit costs of these done on them, so you are doing them efficiently, ready to go. When you run into cyclical downturns your reaction time can be shortened in terms of when you do it, or if you are heading into an overheated economy where you will keep putting them on the shelf, but not try to build at the peak period of economic activity, exacerbating the difficulties. I am sorry to make that so long, but there were two or three different concepts there I wanted to get across.

Mr Christopherson: I appreciate that; thank you.

Mr Phillips: I was interested in your comment on the depreciation, because you probably do not agree with the capital fund as they plan to set it up, which is to just pay the interest and put everything off for years. You would argue then in favour -- because they say they need at least $5 billion a year to just keep the infrastructure rolling -- of some sort of accounting that showed that as a depreciation expense or something.

Mr McCracken: You would show your new capital investment as an increase in assets. You would then be making a judgement about the rate at which that depreciates, and that depreciation would be a current expenditure. If you are trying to see if you are in some sense balancing your operations a la corporate view, you would be looking for your operating expenses plus your depreciation to be in some sense covered by your revenue. But that does allow you in some periods to be increasing your capital more rapidly than your depreciation allowances, and in other periods you perhaps would be doing it less. The big advantage of the capital budgeting is that you simply recognize it as a multi-year exercise, and you also have people in government recognizing that, yes, this kind of an expenditure is multi-year and has some value over a number of years and is different than spending that dollar on a one-year basis. You do not have people doing silly things like leasing cars rather than buying them, because it has less effect on their budget.

Mr Phillips: You have looked at the capital fund, then?

Mr McCracken: I have not looked at the particular one in this program in detail, but in the national accounts of Canada, we essentially do separate current and capital and put in a depreciation allowance for the federal and provincial governments.

Mr Phillips: I would appreciate your comments on it.

Mr McCracken: Sure, I will be happy to take a look at it and respond.

Mr Kwinter: Mr McCracken, I would like to pursue the concept of the true Keynesian policy that in the downturn you prime the pump by providing capital projects on the assumption that when the economy rebounds, you can then pay down whatever deficits you have incurred in the recession years. In theory that seems to make sense, and for a while it was quite accepted as a basic economic concept that this is something you should do. How does that react when you have a situation where there is a basic restructuring going on? We have a situation with the systemic problems built in with globalization of trade, with the fact that companies that would normally be laying off people in recessions and hiring them back when the economy rebounds, are now saying: "We are shutting down. We are not coming back." How does that impact on the whole concept?

Mr McCracken: I think they are two separable issues. Let us look at the kind of investments you might want to make at the present time in a world that is restructuring. I think governments are certainly challenged to say, "Hey, in this kind of world, do we really want to do things the way we did in the past, or is there some spending we should be doing that will make us better able to cope with this restructured world?" One obvious area that comes up quite often is both education and training, that focusing in that area may have a payoff in one form or the other. Other comments come up sometimes in certain kinds of infrastructure that we may have, or need, that we have not developed adequately as in the past. The second question would then come up at this particular point in the cycle: Should we finance these additional expenditures by parallel tax increases, by cutting expenditure in other areas, or should we be prepared to postpone that financing or redirection of expenditures to a later date and, in a sense, deficit finance during the period? In some sense, that is the Keynesian issue of willingness to run a deficit. So that model or mental framework would apply, regardless of what the target was for your expenditures you were undertaking in the same way that you could say, "I have a set of expenditures I want to do over here for social equity." Again, the issue might well be one of, do I deficit finance those, do I put in place charges that will cover those today, or do I build up a fund before the fact and then trigger the spending later, which is what has been done on occasions in other countries in a sort of foreview of a Keynesian framework? Sweden, for example, for years had an investment fund which was built up in hot times and was, in a sense, disgorged during weak times, the purpose being in some sense to provide contra-cyclical policy. You can separate that from the quality or the kinds of expenditures that might be needed. There is nothing in the Keynesian world that says you can only raise welfare payments and in some other world over here you are spending on research and development. That is just not necessarily the case. There are sometimes differences in terms of the speed with which you can get something off the mark, and there is also a question of whether you can start and stop something. For example, in a restructuring program you may well not be making a commitment for one year but a long-term commitment if you are talking about doubling certain kinds of education or making a major commitment on training. You can still come back and say, "Okay, I am going to fund that eventually," or "I am going to fund it now." That is in some sense the question you are going to be making on your choice of deficit financing at this particular juncture, and presumably that is going to be done on the basis of some view of the macro economy or, in this case, the overall provincial economy and what you think you can do to help that along.


Mr Kwinter: In your remarks you felt there was probably a discretionary amount of about $2 billion in the budget. Everything else was in there because of the system.

Mr McCracken: Yes.

Mr Kwinter: In other remarks you made right after the budget was announced you felt that maybe they had not had a big enough deficit and should probably be spending more money. Where would you see those moneys being spent and at what level?

Mr McCracken: I appreciate the problem and how much more is always an issue. Certainly some more on the infrastructure side is warranted. One certainly comes away with a sense that the roads and bridges are ongoing requirements. There have been some identified shortfalls in the roads and highways system of Canada and a good hunk of that is in Ontario. A number of studies have been made identifying specific improvements that in fact could be made there. Those are the kinds of things where you have done some thinking ahead, you have the opportunity to move, and whether you build Highway 416 in 2000 versus 1995 or 1993 or 1992 seems to me an element of flexibility. That would certainly be an area where more could be done. In terms of pump priming, I guess a signal which might have been a useful one -- and again this was a bit contentious, no doubt, but it would not have disturbed me -- is to see a 1%-2% reduction in the retail sales tax put in place for a year, or for the balance of the year, as a message to have some confidence, get out there and spend. We both know, of course, that others had thought of that idea earlier and had suggested it and perhaps poisoned that well for a time, although perhaps there will be an opportunity -- let's hope not -- to do that later. That would have been a pure Keynesian stimulus to the system. It would have been a straightforward move but it would certainly have helped the sector which is under a lot of strain and would have gone some distance -- although it would have been better if the timing had been 1 January -- to sterilize the inflationary impact of the GST, a one-time inflationary shock by offsetting it with a one-time deflationary shock. Perhaps it would have kept the kind of damage that appears to have been done to consumer confidence in the first few months of 1991 from occurring, at least in Ontario. Again, even Ontario being large enough, it would have softened the blow for all of Canada and been a plus in that regard. There are a couple of areas where I think we could have spent another $1 billion at the margin that would have had some appropriate shocks and had the advantage of either bringing forward in time expenditures that will be required in any case, fitting the notion then that if you build the roads today you will not build them again tomorrow, or in the case of the retail sales tax change being reversable at some future date when the economic situation has changed; that would again fit with the notion of not making these things long-term, everlasting commitments.

Mr Kwinter: How much time do I have?

The Chair: You have about one minute.

Mr McCracken: I will be very brief on my response as well.

Mr Kwinter: I do not know if I can be very brief on my question; that is the problem. The concern I have is that I got the feeling the people at Treasury felt they were playing politician, or maybe the politicians were telling them to play politician. I got the feeling that as bad as the budget was going to be perceived, $10 billion was the magic number, that you did not dare go over 10 and kept it just under 10. It seems to me it was sort of artificially contrived, that if they truly wanted to deal with the problem they could have really expanded that number, and if they were not going to deal with it then they could have cut it back. It was just a matter of coming up with a number that they felt, as bad as it was going to be, would be a number they could live with. Do you have any comment on that?

Mr McCracken: We sometimes get hung up on numbers and put magic numbers -- $30 billion as the federal number at one stage; 66% approval rating in another environment; 10% unemployment rates -- as being the triggers. There is not a lot of difference, in fact there is exactly $1 billion difference, between $9 billion and $10 billion and $10 billion and $11 billion, but there may have been some desire on that. You will have to explore with them in greater depth. Certainly I think the Bay Street signal was that $10 billion was a tolerable number. I guess they later reversed themselves, although perhaps it is just the fact that somehow they thought you could have $10 billion in one year and nothing in the out years that created their desire to march on the hill here. I think, if anything, we are going to see those out years come down a bit and I think this year $9.7 billion may prove to have been a bit of a high estimate. It is still too early to tell, but there are at least finally a couple of little signals out there that suggest the US may be beginning to turn around and that we here may be starting to turn around. If that is the case, then I think the 3% decline that is projected in Ontario's gross domestic product for 1991, with a little luck, could be a little less than that. That will show up right on the revenue side and with some cuts on the expenditure side. We will see how it works out. But $10 billion is a good starting point. If it had been $11 billion or $12 billion, maybe they would have been more tolerant of my suggestions to go to hell and go to $14 billion once you have got into double digits, and maybe I would not have been so critical of them for not doing enough.

Mr Stockwell: A question from your beginning statement: You said the GDP in Ontario declined in 1990.

Mr McCracken: In real terms it is my suspicion that it has. This is not a fact we can check because real GDP for Ontario, the way I read it, GDP at factored cost, is not officially published. We get some other rough numbers about two or three years behind the times, but our estimate is minus one and I think the Treasurer's was about zero.

Mr Stockwell: This fact that you put out is really a suspicion.

Mr McCracken: It is our estimate based on what historical information is available. It is certainly confirmed by the growth of the unemployment rate, which is a measured number.

Mr Stockwell: You made a number of comments regarding the out years. You still did not tell me exactly how you are going to pay back this $35-billion debt that has been incurred. In your case it would have been considerably higher if they had done what you suggested. Clearly you cannot keep absorbing deficit after deficit after deficit and not feel it. Constantly, when I hear comments such as the ones you have been making, they totally avoid the payback periods. When is the payback period and how do you pay it back when you have all these needs you have begun servicing?


Mr McCracken: Most businesses and certainly many individuals find that they are never out of debt in their lifetime. They can pick up a mortgage at a young age on a house. They live in it for five years, move to another house and roll that mortgage over. They probably have a larger mortgage on the new house. This process continues in many cases for their entire lifetime, or at least up until some point when they retire, sell the house and walk away, paying down the debt at that stage.

Mr Stockwell: Do you believe that happens to most people?

Mr McCracken: I would say that would not be an unusual characteristic, that in a life cycle of an individual, debt would rise up through their 40s and 50s and they may begin to pay it down subsequently. If you look at that, the key issue a banker asks is not just what that debt is, but what is that debt relative to their capacity to service it? What does their income look like? I think it is at that stage one begins to look at debt-income ratios and for items with perpetual life, where the life cycle model does not follow, ie, governments, or corporations for that matter, one looks at what is that situation, what is that debt ratio? On that basis, the province did make a lot of progress in the last 10 years. The debt ratio, at least as in the budget, was some 17% or 18% back in 1982-83. It was down to 14.4% in 1989-90. That period of prosperity did lead to a lowering of the debt ratio. In this particular budget the plan, in the middle of a deep recession, is that it goes up to something like 18.3% as a percentage of GDP.

Mr Stockwell: You are just simply sucking more taxes out of the system to get your debt ratio down, because your debt is continuing to rise. Under your scenario it is going to more than double in four years. Therefore, you have to suck more money out of --

Mr McCracken: We will see, because I think GDP will in fact start rising rather than declining.

Mr Stockwell: You think the GDP is going to rise greater than what they have suggested, inflation and GDP, nearly 7%?

Mr McCracken: Oh, yes.

Mr Stockwell: But they are still 4% short every year, so they have to increase taxes by at least another four points every single year.

Mr McCracken: Not increase tax rates; what you have to have is your revenue go up. Certainly in a period in which the economy is growing, you will have a revenue improvement.

Mr Stockwell: You are wrong. That is assumed in the nearly 7% they have built into their budget. Assuming economic growth and inflation, they are still 4% short or they need $8 billion in new dollars in taxes over the next four years to maintain a $35-billion debt.

Mr McCracken: A $35-billion debt, but not a debt ratio of 18%. The denominator will be growing in current dollars on the order of, I would say, something in the 6%, 7%, 8% or 9% range, so if you did nothing and kept your deficit constant, then your deficit as a share of GDP would be falling. If you kept your debt growing by roughly 15% of the GDP, you would again find your debt ratio not changing.

Mr Stockwell: But according to their numbers, their ratio of debt, or the amount of money they are going to take out of the system to service their expenditures and deficit, is going to be over 16%. Accordingly, back in the early 1980s, it was 14%. So they are sucking more money out of the system. They are increasing their deficit, doubling their debt in four years --

Mr McCracken: Their deficit is down, I think, in the out years, at least in the forecasts I have seen here.

Mr Stockwell: Okay, $1 billion less, but --

Mr McCracken: That is, at least in my view, a fairly low growth rate in real terms for the Ontario economy.

Mr Stockwell: So you think the growth rate is going to be greater than 3.7%?

Mr McCracken: I think in the recovery period, if this recovery is --

Mr B. Ward: On a point of order, Mr Chair: I do not mean to interrupt, but should the discussion not go through the Chair?

Mr Stockwell: Through you, Mr Chairman, do you think it is going to be greater than 3.7%?

Mr McCracken: Yes, I think so.

Mr Stockwell: How much?

Mr McCracken: It depends which year you are interested in.

Mr Stockwell: Any year.

Mr McCracken: Any recovery, I would say, 5% per year in 1992, 1993, 1994 would not be outlandish. That would not be atypical. In the last economic cycle, real economic activity grew much more rapidly than that in the first three years after the recession.

Mr Stockwell: The most prosperous times this province has ever known.

Mr McCracken: Why should you not have it again?

Mr Stockwell: You cannot see any reason why we would not have those kinds of prosperous times again? You cannot see anything?

Mr McCracken: We still have an auto industry. We have one with 50% more capacity than we had then. We still have the smarts.

Mr Stockwell: You do not see the exodus of business?

Mr McCracken: No.

Mr Stockwell: You do not?

Mr McCracken: I think no. I think if he is getting one call a day --

Mr Stockwell: That is one business. That is one company.

Mr McCracken: No, I think that is not your problem. The problem is that we have about 15,000 businesses going under in this country. About 5,000 of those will be in Ontario this year because of bankruptcy, because of poor economic conditions. I would be much more concerned about that number than I would be by those who are making noises about moving.

Mr Stockwell: The other point I would like to ask is that you do not really think it is that important then to worry about retiring the deficit that you have incurred.

Mr McCracken: No, I do not think so. I think you can grow out of it.

Mr Stockwell: Do you not think you eventually end up like the federal government, having so much debt, $400 billion, that you cannot manage it?

Mr McCracken: They are managing it. What is the problem from their viewpoint?

Mr Stockwell: You think they are an economically --

Mr McCracken: They are running a $30-billion deficit and you are worried about $10 billion.

Mr Stockwell: It is $400 billion in debt; $30-billion deficit. You think that is being managed today? You think that is a healthy --

Mr McCracken: I do not think it is healthy, but I think the efforts to --

Mr Stockwell: If it is not healthy, why --

Mr McCracken: I would not pay it down by $5 billion at this juncture.

Mr Stockwell: If it is not healthy, then why would you recommend we follow that model?

Mr McCracken: I am not recommending you follow that model. You are not in the same situation they are. The health of their particular deficit, or the debt if you will, is a symptom of the situation we are in.

Mr Stockwell: But by incurring more debt, to the tune that you are suggesting, would only lead to a situation where you would be in the same position of deficit financing and having so much debt and spending so much to service it that you would not have money to spend on the things government should be spending it on. In fact, by recommending your approach, it seems the only end to that would be to be in the exact same position the federal government is in.

Mr McCracken: Let me suggest the alternative to you. The alternative at this particular point to the federal government, and for that matter the provincial government, increasing its debt is to impose, through higher taxes or lower expenditures, burdens on corporations, unincorporated businesses and individuals in this country. They will discharge that additional burden you place on them how? They will in many cases do so by themselves picking up additional debt. If you think it is better to push the burden on to people and on to corporations in a period of economic conditions like this, I do not. I think in terms of capacity to take on debt at this particular juncture, the federal and provincial governments are relatively well-suited. We would all love to have a situation where that was not necessary, but debt ratios, you heard earlier, are high and have been growing. In Canada at the moment they are very high for the corporate sector and they are very high for the individual sector. Do we really want to go in and raise those and cut their incomes and make their debt ratios go up so that we can look a little better at this juncture? I do not think so.

Mr Stockwell: The question, though, is the out years. Maybe you can make that argument during the recessionary times, and some people would buy into it. I do not buy into $10 billion, but some people may buy into it. But the question was the out years. Obviously there is not a recession. You have to retire the deficit. If you do not retire the deficit in those out years, when do you retire the deficit?

Mr McCracken: I think there may well be opportunities to do something in the out years. Understand that the forecast, at least as I read it, in this particular document is what we would call -- this is the implications of current policies continued out over the next four years with a view of how the economy is going to unfold. That does not mean that in subsequent budgets, if the conditions are different than they have indicated here, they cannot move to reduce deficits or to make other adjustments to policy.

Mr Stockwell: With all due respect, you have reduced the deficit position of this government, or recommended there, by roughly $1 billion dollars over the next four years. They are going to incur $35 billion of new debt. You are suggesting -- and those are not recessionary times -- through economic reconfiguration, or reforecasting, they can go from an $8-billion deficit to some surplus position so they can retire the debt that they incurred this year.

Mr McCracken: I did not say they would be in a surplus position at the end of the four years, nor did I say they would necessarily make that choice. Keep in mind that you have trashed the economy, or it has been trashed, in 1990 and 1991. The gap has opened up between where we want to be and where we are today by a fairly large magnitude. If you take 3% as an approximate number for what the economy should do in terms of growth to stand still, in 1990, whether it be minus one, zero or 0.5, you essentially opened up a 3% gap. This year it looks like you will open up a 6% gap. That is roughly a 9% or 10% gap that we have in output from where we should be. If we close that gap over the next four years, then we may well be in a position to run a surplus. That would imply a growth of about 2.5 points above 3%, or roughly 5.5% real growth per year for four years in a row. If the gap were closed at the end of that four years, I suggest to you that the revenue position of this government and the expenditure reductions possible in that environment would give it much more flexibility on its deficits than what you see in these forecasts. I think, on the other hand, that they are not inappropriate in saying: "We don't know if that's going to happen. Here is a shot at what they may be." I would rather have them be, in that sense, balanced rather than coming with a hard program of a recovery twofold potential over the next four years, particularly in an environment where they do not control the pace of that entirely. This is not just a provincial government challenge to get the economy back to full employment.


Mr Stockwell: Just a quick comment. With all due respect, unless there are major changes to this budget policy this government has put forward, if you honestly believe it is going to be in a surplus position in four years that is nothing but a pipe dream.

Mr Hansen: I have to say, Mr McCracken, I viewed your comments before in February in the standing committee on finance and economic affairs, and a lot of your predictions are coming that way. If Mr Stockwell does not agree, I think I still have to sort of --

Mr Stockwell: Like no tax increase, eh, Ronnie?

Mr Hansen: There is one thing I like, a very simple one, and I think we have not got the message out or we have not asked the right question. How did this particular budget influence you personally this year and the next four years, plus how did it influence your business this year and the next four years, taking that I know your company does not smoke and your company does not drink? Personally you could possibly do that, but maybe the 1.7 cents gas tax would affect you personally and would affect your business also. Could you comment on how you take a look at it personally and company-wise in the next four years?

Mr McCracken: I must say that as a company operating in Ontario we have not seen many measures in this particular budget that influence us one way or the other. By and large it has left us unaffected. We already feel we operate under the principles of pay and employment equity, so we did not see any new incursions in our management requirements in that area. We were somewhat concerned about the impacts that may be there from additional requirements imposed on boards of directors, but many of these obligations, of course, exist today on boards of directors. It is not clear to us that that is the end of the world. Of course, again there have been some changes in that area that certainly seem not unreasonable, as well as some changes at the federal level. By and large we see little effect on our operating. What positive effect there may be is simply going to be one in which there is a little bit more optimism. If we were in the consumer business in Ontario I think we would be very pleased to see something that might get the consumer moving in this province relative to some of the others. In our rack-up of the provincial budgets, certainly one signal that comes through is that in Ontario there is at least a move towards stimulus, which is unusual among the other regions. The only regions we found that did not move to impose additional restraint on the economy were the Yukon and Northwest Territories, quasi-federal jurisdictions. So in that sense we were positive and happy to see it at this particular juncture.

Mr Hansen: I have another question. Mr Whitestone had stated that with the increase in wages we have seen the elevator operator disappear. I, at a point, say that this has to do with research and development the government has put into companies to come up with more efficient equipment and ways of operating. So sometimes when we wind up as a government putting money into research and development what we do is find out that some of the lower-paid jobs disappear and become technical jobs where it takes someone from Otis to come in and repair this elevator where you just press the button. I worked in the auto industry, and I believe in 1950 it cost $400 to assemble a car. In 1966 it came down to $159 but wages increased all the way along so the technical part changed. It became more automated. My feeling is that we talk about wages and that to become more competitive we keep cutting wages, but I think we do put money into research and development and that we actually expand in Canada with a more high-technology workforce. Do you agree on that?

Mr McCracken: Certainly our objective in Canada is not to employ more people at low wages. I am not interested in being part of a country that feels it should aspire to become Mexico, Taiwan or China. If we, however, want to have high incomes and high wages, the key to that is high productivity, and the key to high productivity is working smarter with a good education, good human capital, and modern equipment. That is what we look for in our employment. The notion that somehow someone machiavellian is looking around trying to figure out how to get rid of elevator operators is a bit strange. I still recall the story of Bell in the United States in the 1940s and early 1950s. Recognizing that with the growth that was occurring already in the phone system they would within about a 10-year period have to employ every woman between the ages of 16 and 65 as a telephone operator, they concluded it might not be the best strategy. It certainly caused them to put lots of investment into finding things like a dial telephone. It also, of course, meant that the growth was much more rapid than they anticipated because that technology allowed the price of it to decline both in absolute and relative terms. Are we better or worse off as a result of that? I would suggest to you that we are a lot better off. We have not required a less productive way of communicating. We have substituted a more productive way. We have freed resources that can be employed in a better fashion in other parts of our system. So that is what it is all about. It is not that we should be sorry to see the elevator operators go. We ought to take some joy in that. The only job left, I guess, with its ups and downs is politics.

Mr Hansen: It depends on what floor you are getting off at.

Mr Sutherland: We have heard a lot about a lack of business confidence in the economy and the budget as a signal of giving less confidence for them to remain here, and as a result of free trade and other things their ability to move funds and assets a little more easily to other locations. I would like to know what your opinion is about large business and small business in terms of having confidence in the economy and how you would advise the government to (a) either counter that lack of confidence or (b) instil the confidence.

Mr McCracken: Business confidence is fairly ephemeral. It is also poorly measured, incidentally. The numbers came out in early May, but they were indicators for late March and early April of two surveys on business confidence, one by the Conference Board of Canada and one by Statistics Canada, done within a few weeks of each other. One came out and said, "Business confidence is still bad, worse, declining." The other one said, "Business confidence up; things are rosy." These happened to hit my desk roughly the same day, so I tried to figure it out. I said, "What's going on here?" It turns out that the one that was up and rosy tended to be of some larger companies, a fairly small number of them -- about 100. They were given a rather general question like, "Do you think things will be better in the next six months than in the last six months?" The one that was down was over 1,000 firms that had been sampled, and the issue was, were they going to be producing more in the next three months than in the last three months. They were pessimistic on that, particularly when you adjusted for the seasonal patterns that exist, which was done in that second case. The signals are mixed. But even if we had a consistent signal, there is a question mark about one's capacity to manipulate business confidence by government actions, and in particular whether one can go out and say nice things or do nice things in a way that will result in some surge in confidence. In both the consumer and business case we have found a fairly high correlation between the economic performance that is actually taking place out there and confidence. To the extent that the budget results in the Ontario economy doing better than it otherwise would, you will see some effect on business confidence in a positive way and on consumer confidence. If, on the other hand, other governments or world circumstances continue to push us down, then, hey, business confidence is not going to respond. Just a final comment. The business confidence is not a hard number. It is not like the bottom line in the corporate-profits sense. What you are interested in is what they do, on the investment side in particular. We are going to get a reading of that which is taking place right now. It will be reported probably in July. That will be our first reading from last December on investment intentions. I would look to that to get a guide at least for what business is thinking. It will give you some sense of what they were saying they were going to do in 1991, and now this is a second kick at the can they are given. Let's keep our eye on that. That is really what matters in some sense.

The Chair: I am afraid we will have to draw this to a conclusion because the bells are ringing and I know some members would like to go to the House to vote.

Mr McCracken: Do you have Ron Hawkins out front as well, Jim, or is that over now?

The Chair: I would like to thank you again for coming and sharing with us your experiences and your knowledge. I guess we will probably see you in the future as well.

Mr McCracken: My pleasure.

The Chair: This committee is adjourned until 3:45 this afternoon. The committee recessed at 1203.


The committee resumed at 1637.

The Chair: I am at the will of the committee as to whether to begin or not, although we do not yet have a quorum. As we all know, the proceedings in the House are rather unusual this afternoon and all the members of the committee are not yet present.

Mr B. Ward: Why don't we get started and perhaps more committee members will attend.


The Chair: Perhaps we can start with Mr Cameron rather than delay him any further. Mr Cameron, will you be brief or will you be quite lengthy in your presentation?

Mr Cameron: I can be either brief or lengthy, depending upon your desire.

The Chair: I think we should hear from Mr Cameron, and if we find it necessary, then perhaps he could attend again on another date to give his presentation to the full committee.

Mr Cameron: My name is Duncan Cameron and I am the president of the Canadian Centre for Policy Alternatives, which is based in Ottawa. I am proud to say we are the only economic research group in Canada that does not receive its core funding from either business or government. We are very clearly in a sector which we call the popular sector. We work largely with volunteers and have a budget of about $200,000 a year. I am also a professor of political science at the University of Ottawa, an institution which I think the people of Ontario can be justly proud of for its bilingual character. Of course, I would be pleased to answer any questions in French. It is always an honour to appear before a parliamentary or a legislative committee. This is the first time I have had the honour of appearing in Ontario and I would just like to say that for me there is no greater honour, really, than being asked to give my views to the elected representatives. I want to make some brief comments which would touch on three subjects: the budget process, which I think is a very important one; the economic impact of the budget; and the financial impact of the budget. I have a few provocative comments to make in conclusion. I began my career in the Department of Finance in Ottawa. It occurred to me when I arrived, and there were only about 90 officials, that the people who prepared the budget had a very great responsibility. They had to, in a sense, decide on the level of taxation and decide on the level of spending. It seemed like it was much more responsibility than I, for instance, would have wanted to assume. But as I gained a bit of experience, it became clear to me that in fact there was a set of tax laws in place and that money did go in and continue to come in, regardless of what you said in the budget, and that money did continue to go out under statutory regulations, regardless of what the spending intentions of the government were. I think there is a sense in which what we are seeing in the budget process in Ontario is that the automatic stabilizers put in place by previous governments have kicked in, that the Ontario government is facing the recession of the Ontario economy and that as a result of that the welfare expenditures have gone up and the unemployment insurance expenditures have gone up and all of the automatic stabilizers at the federal and provincial levels have begun to increase. The decision the Treasurer made in his budget was simply one to allow that process to occur; in other words, to not attempt to reduce expenditures, to lay off people, to cut back on programs. The budget process in this case I would describe largely as one that is passive. That is to say, it is going with the natural trend of the economy, which is down, and allowing the programs that have been built in to compensate for that to go up. I simply say I applaud the Treasurer for keeping his sang-froid, not panicking in the face of the deficit number. This is a time for moderation and this is a moderate budget and I think the Treasurer acted moderately. In that process, there was either -- I suppose there are two ways of interpreting it -- $1.5 billion or $670 million in additional spending, which I think was certainly called for at this time, given the extent of the recession. I think many people who look at this budget would in fact argue that if the government has erred in one direction, it is by not spending more, it is in not going beyond the $10-billion mark. Economically, any additional expenditure would have been welcome in the economy. With respect to the budget process, I certainly want to applaud the distinction that is now being made between capital expenditures and operating expenditures. I think this is an incredibly important distinction and I think the media should begin to talk about a $5-billion deficit in terms of the operating deficit of the government. When economists measure deficits and surpluses they have a number of different measures they can use. We have what we call the primary balance, the basic balance. If you look at the federal government, for instance, it has a primary balance of about $13 billion in surplus. That is to say, it is taking in, in revenues $13 billion more than it is spending. In Ontario we have a primary deficit because the amount of interest charges is less than the overall deficit of $10 billion. But there are a number of different ways of calculating the deficit. You can look at the national accounts basis. It is another way of getting the economic impact of the deficit. So when people begin to fix on the figure of $9.7 billion and play with this and start to describe this as being the state of the finances of Ontario, they are really simplifying what is a much more complicated matter than people are often led to believe. The distinction between operating expenditures and capital expenditures is crucial and this is something I certainly welcome in the process. I would like now to turn to the economic impact of the budget itself. The Treasurer of Ontario, the Prime Minister and the Finance Minister of Canada, anybody looking at the economic situation in our province or in the country really has one call to make: Is the economy going up and is there strength in the economy or is the economy going down and is there weakness in the economy? The Treasurer made a call that the economy had suffered greatly and was likely to continue to suffer. I do not think there was any other call that could be made. The depth and extent of the recession is perhaps simply not widely appreciated outside Ontario. To me the significant figure is that between February 1990 and February 1991 there were job losses of about 264,000 in Ontario. That is a tremendous amount of waste. I think when you look at the economic impact of this budget you are going to say the economic impact is probably positive in the sense that it is going to maintain existing jobs and perhaps create additional jobs; the Treasurer is talking about 77,000. It would be absolutely foolish to think that anything other than expansion was the way to go. Only economic illiterates would argue the contrary. To argue that the government should have been attempting to reduce its expenditures and reduce its stimulus in the economy is really to argue that at time of great need the government should immobilize resources when there are already many resources immobile in the economy. If you think of the rule of thumb that when the unemployment rate is reduced by 1% you get anyplace between 2% to 4% economic growth, to argue that the government should have reduced employment, as other provinces have done, by laying off and firing civil servants is to argue that you want the Ontario economy to contract further, you want its revenues to fall further and you want its automatic stabilizer expenditures on welfare and so on to go up. There is simply no economic argument for anything but stimulus in the current situation. It is very important that this message be well understood. With regard to the economic impact, if we look at the economy and we ask what can we expect from the economy as a result of this budget, what we have to say to ourselves is that there are only a certain number of limited sources of economic growth. The first is exports. I have been to the United States recently. I met with some of the leading American economists and none of them I spoke to believed there is going to be an upsurge in demand in the United States for steel or for automobiles from Ontario. The people with whom I spoke believe the American recovery will occur, and it may in fact be already occurring at 1 July, but it will be very weak and very transitory. So for Ontario to wait for exports, particularly with the dollar where it is, would have been a big mistake. The second source of economic growth is of course consumer spending. While we have had a decline in interest rates of about five percentage points in nominal terms and there has been some return of consumers to the housing market and indeed to the automobile market, in times of falling interest rates consumers tend to attempt to pay down debt. They do not necessarily go out and begin to spend. I have not seen any indication that there is a surge of consumer spending, so I think it would have been a mistake for the Ontario government to try to rely on consumer spending. What about business investment? It is a very clear rule of thumb that if consumers are not spending, businesses do not invest. If you look at the capacity utilization rates in the various industrial sectors which are important to Ontario, you do not see high levels of capacity utilization, so most businesses can produce more without investing more. I do not think we could have relied on private investment, which leaves us with only really two sources of economic growth -- government spending and government investment. I have been dismayed by the federal government policy of privatizing crown corporations and taking away major instruments of capital investment and control over capital investment. I argue strongly that there should be a much greater emphasis made on capital investment in Canada as a whole. Ontario, as one of the wealthier provinces -- the wealthiest province -- with the strongest credit rating should of course take the lead in that. I am pleased to see there is significant capital investment planned.


By and large, without the economic impact of the Ontario budget, not only would the Ontario economy be much worse off in six months or a year, but indeed the entire Canadian economy would be worse off. The economic impact of this cannot be anything but positive. Let's hope the economic outlook in six months is better than it is now. I would like to talk about what has really been the focus of much of the opposition to this budget, which is of course its financial impact. Ontario has an important debt load if you consider the debt structure of Ontario Hydro to be part of government finances, which I do not. I take Ontario Hydro to be a stand-alone operation, with an autonomous board of directors, which borrows for capital investment but in fact is able to retire that through its operations, largely through its commercial market practices. If you consider only the debt of the government of Ontario, it is virtually debt free. This is an incredible situation. Think for a minute of the assets of the government of Ontario. If we began to list the value of all the provincial parks, all the roads, all the schools, all the hospitals, all the items the Ontario government has in fact created and which are there and from which we benefit every day -- if we listed those assets and then we put against it the debts, the Ontario taxpayers would be a net owner of a tremendous amount of assets. I suggest to this committee it might be useful to attempt to establish a list of assets of the government of Ontario against which it undertakes future borrowings. The significant figure for financial markets when they assess the debt of a government is what is the percentage of current expenditures which is going to retire existing debt. The forecast in Ontario is that Ontario would be paying 11 cents to 13 cents on every dollar in debt serving costs which, as was pointed out by no less an authority than the C. D. Howe Institute this week, is the lowest of any of the provinces in Canada. So Ontario is best placed of any of the provinces to undertake to do debt financing. The interesting thing I find is that if you were to read the Globe and Mail or the Financial Post, or listen to the CBC national news or read any of the major media, you would hear there has been tremendous opposition on Bay Street to the NDP budget because it is a deficit budget. I bet if you were to go into the offices of Wood Gundy, ScotiaMcLeod Inc or any of the major investment dealers, they would be sitting around figuring out how they can get their hands on some of this Ontario government debt so they can sell it to their customers. If we think of public debt issues in Ontario as a result of this budget to be in the $5-billion to $6-billion range going into private hands, and we think of the average charge or service fee charged by the investment bank community, they are looking at 0.5% of that in new business. So I think the biggest winner out of this budget is probably the Bay Street financial community. The other winners are going to be the people who buy this debt and hold it because it is very solid, it is very secure, it is going to be easily marketable and it is going to bear a reasonable rate of return. So from the point of view of financial instruments, the government of Ontario bonds are going to be very attractive. They are very easy to sell and they will stimulate activity on Bay Street to a great degree. I have heard it said that the real problem with the Ontario budget is not so much that there is a deficit; it is that the deficit is going to further contract the short supply of available funds out there and this will inevitably push up interest rates. Because of higher interest rates, this is going to either push up inflation or it is going to further impede our economic recovery. I would just like to state on the record that this is total nonsense. The level of interest rates in this country are primarily set by the monetary policy of the Bank of Canada acting at its treasury auction on Thursdays, where it sends a signal to the market, and through its practice of moving deposits in and out of the banking system. Any money market trader knows the Bank of Canada is the price leader in an oligopoly pricing system. It sets the interest rates. If you believe in the demand-and-supply theory of credit, as opposed to the price leader theory of credit, I think you just have to look at the fact that credit has been contracting so fast that the money supply in Canada was in negative growth last year. There is a lot of ability to raise money without having any impact at all on interest rates. This argument is simply a spurious argument. What I conclude, then, is that the Ontario budget will have no impact on existing interest rates; it will provide some stimulus to the financial sector of the economy, and it will provide a safe haven for the savings of Ontario citizens by providing them with a fair rate of return on financial resources. The deficit figure being bandied about is some kind of notion of debt which we are carrying around on our shoulders, and is simply misplaced unless it is set against the assets that exist in Ontario which are, in a virtually debt-free province, a major benefit. In conclusion, I would like to deal with some of the criticisms that have been made of the budget and to try to deal with the question why we have had so much opposition to this budget. To a certain extent, of course, opposition to any government policy is part of our political process. This room is structured to allow for debate between the government and opposition so that the issues are aired, the people hear both sides of the story and they are allowed, in a democracy, to make up their own minds. So there is much criticism that is naturally of a partisan nature. There is a more severe issue at play here. It really has two parts. I do not believe there is a general view in the business community in Ontario as to how to deal with the NDP government. There is not a single voice of business in Ontario as there is, for instance, in Canada in the Business Council on National Issues. There is a sense in which the business community has decided to attempt to limit the activities of the NDP government by a campaign of intimidation. That is something the government will have to deal with as part of our political life. I suppose, to some extent, it is fair ball, and people just have to deal with it. But there is another type of opposition that has emerged, which has been generated from Ottawa, where I live, by the federal government and which, I think, is more dangerous and deserves more public airing than it has received at present. There is a view put out that the government of Canada's attempts to manage the economy have been thwarted not just by the NDP budget this time, but by the Peterson government that preceded it, and that the people of southern Ontario, in some sense, have been working against the interests of the rest of the nation by their government's refusing to go along with the direction that was set by the federal government. I think we saw in the last election an attempt to discredit the government of Ontario around the free trade issue. We are seeing, in this period, an attempt by the Prime Minister himself to discredit the Premier of Ontario in the context of the constitutional negotiations. It is very clear to me that if there is to be a constitutional settlement, Ontario has to be a part of it and Ontario, in some sense, has a veto over those constitutional negotiations. I think there is a general attempt fostered in Ottawa to try to discredit the NDP government so that it will not act independently in the constitutional negotiations, so that it will feel it is beleaguered, under attack and cannot take a position of strength within those negotiations. 1700 I just throw that out for your consideration, because when we look at economics and we look at the Ontario economy and the misery and hardship that has been created by the policies of the federal government through its misguided monetary policy: interest rates 5% to 6% short-term above the United States because of manipulation by the Bank of Canada; through the introduction of a regressive sales tax, the goods and services tax, at a time when we were going into a recession, against the advice and counsel of the majority of Canadians to proceed with that tax; through the decision to proceed with the free trade agreement, which has produced an even greater calamity than those of us who anticipated calamity would have expected. To be in this situation by putting forward a series of economic policies which have not only created a recession in Canada but have made it more difficult to get out of a recession, to do this in the face of all good economic reasoning, to me says that the government can only do this because of widespread economic illiteracy. The real task facing the government on budgetary matters is to be able to explain to people, without having to go through the intermediaries of the press, who are likely to be hostile, and the media, who are likely to be unsympathetic, to be able to explain directly to the population what the issues at stake are. In the 1930s we tried the policies of restraint in the midst of economic decline and they did not work. So something was adapted which was called in the United States the Roosevelt revolution. The Roosevelt revolution was followed in the United States by something called the Reagan revolution, and the Reagan revolution is neo-conservative policies. They have been tried in Canada and they failed, and they should be rejected. I guess what I and other citizens are looking for is something we might call the Rae renewal. I would hope that this budget would lead to economic renewal by its major stimulus, but I would also hope that the Ontario government would be working to put in place economic levers which would allow it, first of all, to deal with the economic restructuring that is taking place. This province desperately needs an industrial renewal board which hears a public statement from every company that wishes to close down about why it is doing so, which does an audit of the environmental damage that company may or may not have done, and which allows for other interested parties to comment on the reasons why the company is closing down. I think as well that the Ontario government needs a public sector investment bank so that it can go into towns. We see in our economy today -- and the Canadian economy is basically 600 single-industry communities or towns -- situations all too frequently, in southern Ontario particularly but also in northern Ontario, where a single employer closes down. In order to protect the interests of the private shareholders in that company, a financial decision is made to close it down, and the consequences are that the roads, the hospitals, the schools, and the personal property of all the people who live in that community are adversely affected. The social costs far outweigh any of the financial benefits to the shareholders of that company. Without some kind of public-sector investment banking facility which is publicly owned and can go in and make deals to renew economic activity, to bring together municipalities, unions, the provincial government and the Ontario Development Corp, to make interest-free loans of an equity nature to new ventures, it is going to be very difficult to deal with this kind of economic situation. Finally I would just like to say that if this renewal is going to happen we need the type of fiscal policies that we have seen in this budget. We are going to need an economic lever like a public-sector investment bank and we are going to need a public debate about plant closures, but we are also going to need an overall look at the pension funds and the whole range of social investments that have been made in the province. This committee in particular will certainly have its hands full in investigating this sort of question, but there are a number of different financial instruments which are in the public sector and in Ontario. In the past the government has benefited, for instance, from being able to borrow directly from the Ontario teachers' pension funds. I understand changes to the legislation have been made so that it can no longer do that. The issues of pension fund investments and protecting the interests of those who will eventually benefit from those pensions, but also protecting the interests of the entire province of Ontario, are going to be important issues in the next two or three years. I thank you very much for an opportunity to make my comments.

The Chair: Should we proceed with some questions from the government or --

Mr Christopherson: I would rather do the questions at the same time as the opposition so that it is all being dealt with at one shot, since I understand Mr Cameron has been good enough to try to make himself available when we are in Ottawa.

The Chair: All right. That sounds fair enough. Thank you for your comments, Mr Cameron.

Mr Cameron: It is a pleasure. I am also in Toronto on a regular basis so I would be pleased to appear in Toronto on another occasion as well. Thank you.

The Chair: Thanks very much. Perhaps we should also hear from Mr de Bever under the same set of circumstances. What is the will of the committee?

Mr Sutherland: I am a little more reluctant to do that since it was the official opposition party that had put forward this witness. I think I would be a little more hesitant in terms of how we should approach this one. I do understand that Mr de Bever lives here in Toronto and therefore his accessibility to the committee may be a little easier than Mr Cameron's, although we now find out he does come here on a regular basis. I would be reluctant to move forward, on the basis that he is their presenter.

The Chair: Perhaps I should explain, Mr de Bever, what is happening here. We have an unusual set of circumstances taking place in the House which has caused the three members of the Liberal Party to be present in the House for what will unfold in the next little while. They have chosen to be there as opposed to being here. The debate is really over whether we should go ahead and hear your presentation now with just the members of the government party being present or whether we should extend our apologies to you and invite you to come back at a future date. If you have any preferences on that, I think we would like to hear those.

Mr de Bever: I will be unavailable between the 7th and the 21st.

The Chair: Our first day of hearings will be 29 July. Perhaps we could put you on the list for that day. Is that the will of the committee members present?

Mr Christopherson: No problem.

The Chair: Again, I would like to apologize on behalf of the committee and do extend an invitation for you to return on the 29th. We have your written brief that I trust we can keep and peruse.

Mr de Bever: Sure.

The Chair: Okay. Thank you very much. This last item of business is about the Ontario budget hearings advertisement. We have to send out some advertisements. Interjections.

The Chair: We do not have a schedule.

Mr Sutherland: We do not have a finalized schedule because we are still finalizing a couple of locations for meeting, which I would like to have the subcommittee do very quickly.

Mr Jamison: What do you need for the advertising?

The Chair: Just a motion. There are two suggested possibilities.

Mr Jamison: Why do we not empower the subcommittee to do that?

The Chair: All right.

Mr Christopherson: Mr Chair, will you ensure that as soon as the schedule is locked in it is sent out to all our offices, preferably our constituency offices?

The Chair: Yes, as early as we can. The committee adjourned at 1709.