Thursday 9 May 1991

Cross-border shopping

Ministry of Agriculture and Food

Ernst and Young

Afternoon sitting

Budget process

Honourable Floyd Laughren



Chair: Wiseman, Jim (Durham West NDP)

Vice-Chair: Hansen, Ron (Lincoln NDP)

Christopherson, David (Hamilton Centre 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)

Sutherland, Kimble (Oxford NDP)

Ward, Brad (Brantford NDP)

Ward, Margery (Don Mills NDP)

Substitution: Harrington, Margaret H. (Niagara Falls NDP) for Mr Christopherson

Clerk: Decker, Todd


Anderson, Anne, Research Officer, Legislative Research Service

Rampersad, David, Research Officer, Legislative Research Service

The committee met at 1014 in committee room 1.


The Chair: We have a quorum. Now we can begin.


The Chair: The first presentation is from the Ministry of Agriculture and Food: Bob Seguin, executive director, policy and programs, and Laurinda Lang, policy adviser, policy analysis branch. Welcome. Thank you for coming.

Mr Seguin: We have provided to you a copy of the presentation. What I thought we would do is quickly go through it and then allow for questions and answers, which I think would be more in the committee's desire to do.

We have also provided for you a copy of the legislation under which supply management in Ontario operates -- the Milk Act and the Farm Products Marketing Act in Ontario -- and a copy of a study that was released by the federal government on Tuesday on the impact of cross-border shopping in northern Ontario, particularly on dairy products. We received it late Tuesday afternoon and we thought the committee might wish to have a copy of it sooner rather than later.

On behalf of the ministry, I am pleased to be here to give some of our concerns on cross-border shopping, some of the work that we are doing now and also discuss supply management in Ontario.

If you look at the first page, there are a number of studies. I believe the committee is probably well aware of some of the results of the studies about the impact of cross-border shopping. The study that you have in front of you from Agriculture Canada on cross-border milk purchases was done in 1989-90. It has unfortunately been delayed in getting reviewed. It was just released this last week. In 1989 over 8% of fresh milk and 1% of the cheese was imported by cross-border shopping. This was an issue identified by the milk farmers in Ontario, and it was not until the study was done that we realized the extent of the impact of cross-border shopping.

In March 1990 they looked at the prices between northern Ontario and the jurisdiction just south of it, and the differences in milk prices are there, the estimates of impact on a gallon-of-milk or pound-of-cheese basis and the numbers of shoppers importing milk through cross-border purchases.

I should also indicate, as the last item says, that Agriculture Canada is now undertaking a number of studies on border points throughout southern Ontario to examine the cross-border impact.

Agriculture Canada has also undertaken a study in April 1991 on Canadian and United States cities, looking at the impact and price differential on grocery products. As you can see, the preliminary results indicate that prices are higher in Canada by about 10%. The disparity seems to be greatest for Ontario, and of course the items that probably you are interested in, supply management products, are high. There are also condiments which are high and non-food items, which in the parlance of the retail trade would be health and beauty aids. These are higher in Canada than in the United States. The expectation is that later this month Agriculture Canada will release the report.

On our own efforts in the ministry staff, Laurinda and colleagues have visited the Niagara area, spoken to local retailers and the people involved on this issue down in the Niagara area. They have taken a look at grocery product prices in both St Catharines and Niagara Falls, New York. They have worked with our sister ministry, Industry, Trade and Technology, on cross-border shopping -- this has been ongoing for about two years -- and the monitoring of the federal government at work, both the previous studies and ongoing efforts, and working with the industry to look at cross-border shopping and what we can or cannot do.

On the issue of supply management, you should be aware that farm cash receipts total about $5.6 billion as of 1989. The items there under supply management total almost $2 billion. Supply management in Ontario is a significant industry for the farm sector. It is a system that has been in place in Ontario for the milk industry since 1965-66. It is an orderly marketing system. It benefits producers, processors and consumers in terms of stable supply of product at a reasonable price. There are national systems in place. Our legislation is tied to the federal legislation in dairy, poultry and eggs, and the fundamental elements are production controls, a sense of fair returns to the producers and border control so that we can maintain the system in Ontario and in Canada.

Just quickly on production controls, both provincial and federal legislation allows for these plans to be put in place, both on a provincial basis and on a national basis. On the national basis, it allows for the border controls.

Production is based on domestic market requirements, our best estimates of that. Provincial shares are allocated on a historical basis. That has been the subject of some concern with a number of provinces in the last several years, given the shifts in domestic market, but we are working on that. Each provincial board is responsible for regulating and administrating the producers in that province. Production is limited and producers are penalized if they exceed production quotas, so the system plays fair by all parties.

There are cost reduction formulas. These are updated on a fairly regular basis, particularly with the milk industry. There are different pricing systems. The poultry industry is not homogeneous. There are different pricing systems, and different from dairy as well. The dairy industry does get some extra benefits. They do get the federal government to purchase any extra skimmed milk powder or extra butter and the federal government does provide a $6.03-a-hectolitre subsidy, which has been in place since the late 1960s and has not changed, essentially, since then. Therefore, the real benefit of that subsidy has declined over time, and the original context for that subsidy was to reduce the price of dairy products in Canada for consumers.


Border controls are the ones that probably raise the most public concern. Imports of such products that affect the dairy industry and poultry industry are subject to border controls under the Canadian Dairy Commission Act. Certain dairy products are defined and they are limited and under the import control measures of the federal government. A certain number of poultry products are also limited. These import controls are legal under GATT article XI.

Under the GATT negotiations that are now under way, Canada is seeking to strengthen and clarify article XI such that we are not always subject to panel disputes by other nations over what is really a dairy product or what is a poultry product, what can be controlled and what cannot. The minister's view is that he supports the Canadian point here, that it should be strengthened and clarified. That is a view he expressed when he attended, on behalf of Ontario and the Ontario farm industry, the GATT negotiations in Brussels late last year. We will continue our efforts to see what we can do with the federal government to make sure that point is maintained. It is a point that is also stressed by the dairy and poultry producers throughout Canada.

Dairy policies in the European Community and the United States are not similar to ours. We do have a different system. The European Community over the last several years has adopted a modified supply management system for its dairy industry, partially reduced the impact of the dairy surpluses on its own budget. The US operates a more open-ended support program. They are willing to purchase extra product and they have import controls. Both the European Community and the United States allow fewer imports into their jurisdictions than we do into ours.

The next page, and I will not go into detail, provides just a very quick synopsis between the US dairy system and how it operates and the Canadian dairy system. Basically, the US Treasury will subsidize the industry by taking extra product off the market and then reselling it back at some later date when the market's prices have risen. The Canadian industry allows such stabilization to occur through consumer prices with the exception of dairy, which has a direct subsidy component.

If you turn to the next page, you will get -- the chart reads from bottom to top on the newer years -- what the Commodity Credit Corp of the United States pays net on outlays to support the dairy industry. As you can see, as late as 1986-87 the United States government was spending a considerable amount of money to support the dairy sector in the US. In the last two years it has been reduced, partially because the milk surpluses that existed in the mid-1980s declined somewhat. However, the current US Congress is now debating whether they should have a special dairy support program because the prices for dairy farms in the United States have dropped so low. It is the centre of discussion in both the House of Representatives and the Senate.

I believe one of the concerns the committee has probably raised is looking at alternatives to supply management, what options there are and what other things are being done to make the system maybe a little more flexible. The federal government in 1989, under the former minister, Mr Mazankowski, and with the consent of all of the agriculture ministers across Canada, undertook a federal agriculture policy review, and two of the key areas they looked at were dairy policy and poultry policy. Two task forces were created with both producer and processor members on both and government representatives from the federal level.

The poultry task force report is released and is under discussion by the industry. The dairy task force report is soon to be released, and we anticipate it will be released probably in late May or early June. It is anticipated that when the ministers of agriculture meet in Alberta later in July, both reports will be under discussion to see what steps can be taken.

You should be aware that in the dairy industry the ministry worked with both the processors and producers to pull together a response on dairy. We have made presentations, both written and oral. You all have that page of what the groups were. The key points at that time, and it was in light of what the GATT negotiations were doing as of late fall last year, were: maintaining the essential elements of supply management; accepting that policy and administrative changes could be made with consensus within the supply management system that exists; and that the federal government reaffirm its support, which it did throughout the fall and at the Brussels meetings.

The poultry task force received about 171 oral and written submissions. We made two submissions as a ministry, as you can see, for increased product availability and greater flexibility and again to support article XI. We also co-operated with the Ontario Egg Producers' Marketing Board on a special two-price proposal to increase the flexibility within the system.

The next page would have the recommendations of the poultry task force, basically twofold; one is operational changes and the other is more structural. The chairman from Quebec indicated that she had consensus of all members of the task force for these recommendations and a number of the changes would improve both the flexibility of the supply management system and its ability to accommodate the differential changes both to processors and producers. It is now under discussion by various boards, the agencies and the governments. The ministry itself is assessing its position on the poultry task force report.

As some of the members of the committee may be aware, tobacco is under a special supply management system. There is no national system for supply management for tobacco, but the Tobacco Board of Ontario does operate a special supply policy. The tariffs on tobacco are being eliminated. We are under a declining demand situation for a number of reasons. Increasing taxation on tobacco is a concern to the tobacco industry and it is one that all governments are involved in. There is some concern about the growth in smuggling of tobacco and the impact that has on both tobacco consumption for the Canadian industry and on budgets. Cross-border shopping is also being encouraged because of the differential in prices. On the significant adjustments in the tobacco industry since the mid-1980s, we have been involved with the tobacco industry and with the federal government in looking at tobacco adjustment programs, and we are involved now in re-examining which programs and which policies we will pursue in the future to assist the industry as it makes its adjustments.

Final comments: It is a concern to the industry and to the ministry about cross-border shopping and its impact. We should note that from our point of view the supply management system in Ontario and in Canada has worked well. There are certain difficulties, certain things that always could be improved, but there is no need for dramatic change. There are national efforts with producers and processors, and in some cases the consumer groups involved, to make those changes and to bring them forward. Ministers of agriculture, both federally and provincially across Canada, will be looking at these issues in July at their meeting in Alberta.

So with that, Mr Chairman, I will take questions if you wish.

Mr Kwinter: I want to ask some questions and make some comments. I feel kind of relieved to be not in the government and to be able to address this, because every time I addressed it when I was in the government I risked the wrath of the agricultural industry falling on my head. The mere mention that I was even going to address supply management brought threats of circling Queen's Park with tractors. It is sort of a holy icon --


Mr Kwinter: It is true. But one of the problems we have is that there are conflicting interests. There are the farmers who have a legitimate concern about their ability to earn a livelihood and then there are the consumers. It is exactly the basic issue that we have with cross-border shopping.

I would like to question you when you say supply management is "an orderly marketing system that benefits producers, processors and consumers." Obviously it is not benefiting consumers because milk, which is under supply management, happens to be one of the biggest items. I think in your study you say that 85% of the cross-border shoppers imported milk when they went to Sault Ste Marie, Michigan, so obviously it is not benefiting the consumer. It may be benefiting them in the sense that they get security of supply, but they do not get security of price, and that is the problem.


When you talk about it and you say, "You have a cow which may even be the brother of the same cow that is on one side of the border, and the other cow was on -- "

Mr Phillips: Better make that "sister."

Mr Kwinter: Sister, okay. Well, in order to get the sisters, you have to have a brother in there too.

What I am saying is that you will have these cows on both sides of the border producing the same kind of milk, and yet there is this huge discrepancy. You cannot say, "Well, it is because of the importing, it is because of mass production" or anything else. Milking machines are virtually the same. Labour is virtually the same when you are self-employed as a farmer. The big difference has got to be the difference in whether it is supply management or the system that is used in the United States. That has to be the major factor on a product that is so time and price sensitive. It is not that it is mass produced and that someone can go and build it cheaper somewhere else; it is that kind of product.

Again, there are conflicting things. A consumer wears many hats. He wears the hat of not only being a consumer but he has also got to be employable and employed in all of these things, and you have to protect that. When it comes right down to price, I would submit that one of the major factors is supply management and what it does to artificially keep the price where it is, whereas in a so-called free market system, it would reach a competitive level. I am not saying it is good or it is bad, because there is no question that supply management has a lot of good in it, but it certainly is the factor, so we have to deal with that.

Mr Seguin: The industry is well aware that there is need for some changes. That is why they are involved in these national task forces, at both the producer and the processor levels. Within Ontario the Farm Products Marketing Commission, which supervises all the boards, is involved with bringing processors and consumer representatives together, bringing together the conflicting needs and demands on the system, while trying to still maintain a fair return policy for farmers.

But I guess to say that the systems are equal in comparison is forgetting about the fact that the US farm policy is not identical to ours, and the way it subsidizes and assists the dairy industry is not identical to ours. The US system allows excess dairy production to be bought off the market temporarily, thereby raising prices to some sort of level without the impact felt by the producers and the impact felt on prices.

It is also that the US dairy industry has substantial import protection, far more than we have, and it is not willing to give that up, even though the Canadian government and the Canadian milk industry and poultry industry are willing to give up some of that import protection to allow for a little bit better balance and greater security.

It is a different system, and to say that all the problems are based on supply management is not quite correct. The United States government is subsidizing its dairy sector, so it does not have to go through some of the adjustments and some of the demands on the consumer marketplace that our system would go through.

The fact that there are some price differences is acknowledged by the industry. It is just, how are we going to work around them, at what points is the pressure being felt and what can be done on those points of pressure? It is not an easy issue. Simply changing the milk price in Sault Ste Marie, for example, for this study -- what about the impact on milk producers in the Sault Ste Marie area and the surrounding area? What would be the benefit to the consumers? There is no assurance that the milk price decline would be passed on to the consumers. So it is not quite a simple issue and we are working on it, but to look at it and say that the two systems should be directly comparable, they are not.

Mr Kwinter: Just so there will be no misunderstanding, I am not saying they should be comparable; I am just saying it is a fact of life. There is obviously a huge discrepancy in the price of milk, and it has to do, as I say, not with the actual cost of the product; it is what happens to it after it leaves the farm gate that really determines a lot of the things that affect the price of milk.

The other thing I would like to comment on and correct is that you talked about Canada seeking to clarify article XI, and you stated that this was presented at the GATT meeting in Brussels. I just want to correct you. I raised this question in the House. I was told by the Minister of Industry, Trade and Technology that they were delighted with what they had done, they were happy with article XI, they got everything that they wanted to, when in fact it was not even discussed. It never came up. They never got to it, so this is going to have to happen in later rounds. So what happens with article XI? We will have to wait.

The other thing I wanted to ask you about really crystallizes in my mind the problem that we have with these conflicting interests. When you talk about tobacco, where it says, "Tobacco: A Special Case," you say at the very bottom of the page that the industry's "big issue is the decline in consumer demand for tobacco," which begs the question if, as with any other commodity, you would say, "We've got to give them support, we've got to advertise and we've got to promote it, because we've got to get people smoking more so that the tobacco industry will really thrive."

As I say, it really crystallizes the problem in that you have the needs and aspirations of one sector of the economy which is growing the stuff; you then have the needs and aspirations of another sector of the economy, like the doctors who are trying to cure these people who have got all these afflictions as a result of smoking; and then you have the Treasurer who sees cigarettes as a cash cow, because who could possibly complain about putting a higher tax on these terrible things, cigarettes, that are doing all these terrible things to these individuals. That is the problem, in that, as I say, you have conflicting interests. How do you deal with the tobacco industry? How do you deal with the fact that there is a declining consumer demand?

Mr Seguin: As we deal with the dairy sector and a number of other sectors, both supply management and not supply management, look at what are the causes, what other adjustments can be made and try to bring the industry groups together. This is an effort undertaken by the minister, in his direction to the Ontario Farm Products Marketing Commission, to try to bring these sometimes conflicting, sometimes joint interests together to better see what is in the best interests of the industry over the longer term.

In the case of dairy, there are a lot of pressures. The demand for butterfat is on the decline. The need is to get the dairy industry to acknowledge that and move beyond dependence on butterfat, into lighter products, into other products where the butterfat content is reduced and consumers would be more accepting.

Mr Kwinter: What do you do with the tobacco industry? Right now, estimates are that in Ontario alone 10,000 people a year are dying due to tobacco-related deaths. If that were AIDS or any other thing, they would be storming the streets. People would be saying, "My God, we have this horrible epidemic." Then we have the Ministry of Agriculture and Food saying, "We've got to do something to deal with this tobacco thing." You are really in a conflict situation, because on the one hand your responsibility is to make sure that these farmers are viable and can continue to grow their tobacco and find some kind of a market for it and on the other hand you have got the Ministry of Health doing whatever it can to put these guys out of business. How do you reconcile these different conflicts? How do we deal with this?

Mr Seguin: We work with the industry on all sides and we work with the Ministry of Health and the federal government on what are the long-term directions for that industry, what are the things that can be done with that land resource and with the farmers and their skills in other enterprises and if there are any alternative markets or market opportunities for tobacco, or alternative uses for tobacco. It is a long-term problem and it will take a long-term solution.

Mr Kwinter: I have just one last question. This really gets to the reason why I was asking that question. The problem that you have is that we have people who smoke. Many of the smokers are unhappy that they smoke, but they smoke. They may have tried many, many times and they cannot get rid of it. If you were to take what I, and some other people, consider might be a good solution -- others would say it was draconian -- let's say that you were to say to farmers in Ontario, "You cannot grow tobacco. We're putting it in the same classification as marijuana. That's it, it's illegal," and the bordering jurisdiction did not do it -- ie, the state of New York or the whole of the United States -- then all you are really doing is exacerbating this problem, because cigarettes, tobacco, alcohol, gasoline and milk have been triggered as the attractions in this cross-border shopping.

That is the problem we are faced with in this committee: that you can address all of these things in an Ontario context, but unfortunately we are not in isolation. We have all of these things happening with our neighbours to the south and you are dealing with people who, for whatever reason, want to satisfy their particular needs and wants. How do you deal with that? Mind you, if you give us that answer, we can fold up this committee.


Mr Seguin: I guess I share your concerns, Mr Kwinter, of what the longer-term directions are and what can be done, but again we are working with the industry and with the federal government, and the need for a national solution on this one commodity is known. That is why we have worked in the past with the federal government and will continue to do so in the future, looking at what can be done both provincially and nationally so that we do not get into the situation you described, and so that the longer term program is both effective and fair to the producers who are going to be most impacted by any changes here. It is not a simple solution, but it is a longer-term one.

Mr Sutherland: I want to come back to the cross-border milk purchases in northern Ontario, and the federal study; just a couple of comments talking about not only milk but the 25% extra for cheddar cheese. I just want to state for the record that if they are buying the fine products of Oxford county, like Tavistock cheese, then it is well worth the extra premium they would be paying for it because I do not believe there is a superior product anywhere. But that is my bias.

I wanted to ask about the homo milk. It says 13%-51% compared to 20%. In my experience from when I worked a little while in a grocery store, and from going into others, when you get to the four-litre size anyway, retailers here usually have the same price for both homo and 2% milk. Is that not the case across the border and why we have this large discrepancy, the 13%-51% difference for milk?

Mr Seguin: Yes, and it also may reflect the different points of purchase. Convenience stores sometimes charge more than the major retailers, depending on the product. You have to get into the details of the federal study.

Mr Sutherland: Sure. I would also like to come back to a couple of the issues Mr Kwinter was discussing in terms of the American dairy system versus ours. It is my understanding too that the way the American system is set up, we are certainly getting rid of a lot of the family farms in terms of dairy operations and going to larger, almost what you may want to call corporate-style farms where one operation could be milking 1,000 or more cows a day.

I was wondering if you could comment. Is the support system the way they have it in the States encouraging this type of activity, which in a sense is increasing, telling them that the only way they are going to make any money is to go larger, but also increasing the supply and therefore undermining milk prices in the States? Is that correct or am I off base on that?

Mr Seguin: Basically you are correct. Because of the size of the industry the changes are, let's say, longer than what we are seeing here. The US Midwest milk industry, the Wisconsin and Minnesota industry, is much like Ontario: smaller operations, let's say less than 100 head of cattle. Operations in California or in the deep South would represent more of the corporate farming perspective: large dairy farms milking 24 hours a day.

In the United States under their milk order system, which is something like our milk marketing boards but with not quite the same authority, pricing can be different in different parts of the United States; the prices in California have been made attractive to increase milk production in California at the expense of some of the producers in the Midwest and Northeast. This has been raised with Congress and they are now examining what can be done with the national floor pricing system to try to restore the balance and maintain the family farm system that the milk industry has historically been based upon. It is difficult because the interests of these larger farms in California and the deep South do exist and they probably will not change very much no matter what the system is; but they are expanding at the expense of the smaller operations who, with the present milk prices in the United States, which are quite low, are finding it very difficult to survive. That is why now we have this longer-term approach to change the milk pricing base in the United States. They are also looking at a special dairy support program within Congress. To date, the leaders of this initiative have not been successful, but they are still pressing. Something has to be done to restore the balance in the industry in the United States.

Mr Sutherland: Just one other question. You mentioned that some of the marketing boards are working with the processors, that they realize there has to be some more flexibility and they are looking at other options, but you did not elaborate upon any of those options. Are you able to elaborate at this time on some of the ways they are looking at making them more flexible?

Mr Seguin: There is a host of them. Some of them have been worked on for quite a long time. Given the conflicting interests of both the producers and processors it is not likely they will ever come to quick decisions. Within the dairy industry, they are looking at a component pricing system that will allow milk to be priced on the best uses of that component of milk: the protein, butterfat, other solids in milk. In the poultry system, they are looking at different ways of allocating supply such that it better meets market demand and still provides a fair return to producers without great distortions in the marketplace.

As Mr Kwinter has pointed out, though, there are conflicting demands even within one side or another. Even within the processing community there is not always unanimous opinion about how the system should change, and within the producer system it takes time to make so many modifications, but they are working on it.

The ministry has encouraged the establishment of advisory groups to advise the boards on overall industry concerns. The milk industry has had such a group for years. It is nothing new for them. Each time they meet, maybe some of the issues are not as extreme as some groups would like to see them, but they do meet and they do try to get some resolution. The chicken groups in particular have met in the last year and a half to resolve the long-standing issues in their industry. It has not always been successful, but they are still pulling together at it.

So there are a number of options. The ones in the chicken industry are coming to the fore in the near future, and I am not in a position, because I am not involved on the issue, to really give you the variety of options they are looking at. But they are certainly looking at a wide number of changes. Again, the national task force, which had producer and processor reps, is looking at a number of changes that would, over time, make some substantive differences in the flexibility of our national agencies.

Mr Phillips: I just sort of wring my hands over this whole thing because I think our farm communities are under a real attack and almost everything seems to be working against them. The trend towards fresh puts us at a disadvantage because we only have fresh for a limited time and then the stuff comes in from the US. I understand that most of the beef industry is gone or leaving, or with boxed beef. I think the free trade agreement said the food producers were going to be the first hit, and I suspect that is happening. Based on what I hear from here, the way we subsidize our farm community is different from the US. It works again against us here and favours cross-border shopping. So I just cannot find much good news in all this sort of stuff.

I just have one question, I guess one minor question. The price comparison you did -- what did that indicate?

Ms Lang: The one that our staff did?

Mr Phillips: Yes.

Ms Lang: Much the same type of thing. We did a very quick study, but again, certain commodities tended to be cheaper in the United States and some here. Again, the supply-managed ones tended to be more expensive in the States. We also found that another big draw was that beer was a lot cheaper in the States and that it was available in the grocery stores and was about half the price of here, not taking into consideration exchange.

But other than that there was also, within brands, such a wide range within the grocery stores that sometimes it was hard to -- you know, with the quick study we did, we went down and back in a day kind of thing -- it was not as if all products here were more expensive than all brands of the same product in the States.

Mr Phillips: I was mildly surprised at the 10% difference that the federal study showed. My impression was that it was higher. Did you find 10%?

Ms Lang: I am not sure we have percentages. The thing you might note about that was that it said 10% on average for Canada and it indicated that the disparity was greatest for Ontario, but they could not give me the figures. They just have not got that far in the report yet.

Mr Phillips: I guess when we get it in May it will help us. But this is May.

Ms Lang: Yes.

Mr Seguin: Later May.

Mr Phillips: Later May. Mr Chairman, the supplymanaged commodities showing here at $5.6 billion --

Mr Seguin: That is all commodities. The supplymanagement are the ones that are noted.

Mr Phillips: Is Ontario a net exporter or importer of food?

Mr Seguin: It is a net importer. That is partially because we are also a major point of entry for any products coming into Canada.

Mr Phillips: That would surprise a lot of people.

Mr Seguin: We are also a major exporter, but on balance we are a net importer.

Mr Phillips: I realize that. That is my impression. Has it grown as a percentage?

Mr Seguin: It has been fairly stable over the last couple of years. There has been about a $1-billion difference between our exports and imports.


Mr Phillips: Over like a 10-year period, were we at one time a net exporter?

Mr Seguin: No. We have been a net importer for about a decade, but let's say the imports have grown over that decade.

Mr Phillips: I gather dairy is relatively well protected against importation. As we look down the road at these various commodities, what commodities are not well protected against the importation?

Mr Seguin: Under GATT, article XI provides protection only for those products that are on supply management and controlled domestically. Essentially, only those products that are on supply management, dairy and poultry products, would be under direct import controls. The exception is the wheat products because of the Canadian Wheat Board. Through the free trade agreement, that is now being opened up over time. Almost any other product would have had tariff protection and under the free trade agreement that tariff protection is being reduced. There are certain legal differences between the two jurisdictions. It does not quickly ease border access, but most other products would have, let's say, more open borders and there is no strict border control.

Mr Phillips, you did mention the beef sector. The beef sector is unregulated, yet it is probably under even greater pressure than almost any other because of American imports. Some of the American imports are due to the feed grain policy in the United States and the differential processing capacity of the United States versus that of Canada. Certain adjustments are occurring outside of the supply management sector.

Mr Phillips: I know your mind is on supply management, but I am just talking generically about food. I appreciate that.

Mr Hansen: Mr Sutherland asked part of the question there. I was in Pennsylvania -- not shopping but visiting -- this Easter and was told that some of the herds are increasing in size because of the sales of milk at border towns. The one instance was that the small farm there and a few other farms around were bought up and now there are 600 head running on that farm. A corporation owns it. There is a farmer in boots out there milking; but he is no longer an owner of the farm, just a worker. Is this an indication in the border areas, around 100 miles from the border, that the farms are increasing in size?

Mr Seguin: I cannot respond to that directly. It is a known trend in the United States to increase the size, but it is even more predominant in the deep South and California. It may occur more recently, but at least none of the information we have would suggest that this is an increasing trend. Certainly the pressure is on in the US dairy system to always expand in order to improve the returns of the farmers.

The returns of the farmers between two jurisdictions are quite different. Farmers in Canada can make a better return on the same size of herd than the ones in the United States and still survive. That puts increasing pressure on US industries either to diversify or to integrate and become that much larger, which goes back to my point to your colleague, that the US Congress is now trying to see if it can readdress that situation through other changes. They do not have this kind of corporate concentration and its increasing trend to just have larger and larger herds, which also has an environmental impact. Definitely in the areas around Washington and Maryland, when we have met with US officials it has been raised to us that the waste management from dairy herds in particular has caused environmental problems. Yet how do you resolve that? Going to larger herds is not always the best solution. In California it has also been a major concern.

Mr Hansen: What it sounded like was that they were targeting Canada or Ontario as the new expanded area to be selling milk.

Mr Seguin: I cannot say if this discussion is a corporate or even a national policy, but it does seem they are under the most pressure of all the provinces.

Mr Jamison: I have been listening to Monte's concerns and yours over the tobacco end of things. I think most of your remarks were pretty well right on, but it did not really tell the whole picture. There is a significant difference between prices of a product, the end product, in the United States and Canada. It has caused quite a smuggling problem at this point, to my understanding.

Just as an example, one vanload of cigarettes at this point is worth $1.5 million, and that is probably underestimated. That indicates the level. Any government that I have ever seen has always recognized very clearly the health implications of smoking and has taken steps in trying to combat the use of tobacco products in the end result. I think the problem with the ministry at this point is twofold: how do you do that in a controlled manner where the industry is gradually downscaled, and what effects do we create by doing that on the people who invest their whole livelihood in that particular end.

It is quite a significant problem because, when you have two jurisdictions that are closely related, and a wide difference in pricing on a particular product, that happens. But having said that, it is clear that all governments have taken that course. Certainly, the growers are the people at the other end who are most heavily affected and so on.

I do not think it deals with marketing or marketing boards. That is different than milk. I should be an expert on milk, because my family uses about 4,200 gallons a year, in quick calculation.

We have mentioned the system of management we have. I wanted to indicate that this is something that was expounded upon, the threat to our orderly marketing system or whatever, during and after the free trade negotiations that went on; how marketing boards could be -- and it looks like they have been -- threatened significantly.

Along with that, we have a situation that deals with something Monte Kwinter touched on, the GATT situation, where you have two extremely powerful economic bodies, the European Community and the United States, doing battle in the area of agriculture subsidies and so forth. The Americans have different ways of having a subsidy arrive at the farm gate, and the EC, of course, is very protective of its agricultural community. The problem that has created for us compounds upon the things I have just talked about, again reflecting on our ability as a lesser financial power, as a country, to deal directly with the type of battle that is going on between these two powers.

In the secondary version, it is impacting. Our ability to access the American market, as Mr Seguin has just indicated, is limited to a greater extent than we limit the United States from accessing ours. That all brings about the question of the level playing field and how much of a level playing field has really been created over the last period of time with all those factors taken into consideration. My concern, I guess, culminates in the question: Do you see those particular problems in trade minimizing as we go along?

Mr Seguin: Not really. Under the free trade agreement we have approximately seven years to negotiate a deal on subsidies. Essentially, the federal government delayed pursuing it, as did the US federal government, pending the GATT negotiations which were to be resolved in December of last year. They were not. We are looking, if Congress agrees to a continuation in negotiations, probably at late this year or even next year.

In that agreement of subsidies even on a broader scale, it will still take a number of years to implement. No one is asking that these be implemented, let's say, within one year. So we are under considerable pressure within the country to maintain some other systems in place while these international negotiations continue, and if they are successful, until the agreements have some full impact.

We are also working among the provinces to try to minimize, let's say, the distortion between the provinces. It is not always successful, but we are also trying to do the best we can in non-supply-management products and in supply management products, such that there is easier trade and fairer trade between the provinces and then eventually between the nations. But it is a long-standing problem and it will take a long time to resolve, regrettably.


Mrs Sullivan: I want to ask Mr Seguin about quota. Would it not help Ontario producers and indeed our grocery retailers if there were an adjustment in the quota formula and Ontario received additional quota?

Mr Seguin: In the poultry sector the Ontario government, the chicken processors and the chicken board did pursue together for a while the option of expanding quota in Ontario. Even within an expanding market someone would have to lose, and those were quite difficult negotiations. We have succeeded to a minor extent in improving the quota allocations and total allocation to Ontario, not to the satisfaction of the industry, but there are certain historical difficulties in the original allocation which will not be easily resolved. These are things that will be brought forward to ministers probably in July to see if we can start the steps of eventually resolving that so that we can get the extra quota.

On the milk situation, while there have been discussions on this, this is not as considerable a concern at this time about the reallocation between provinces. It is not quite as considerable as it is in the poultry sector.

Mrs Sullivan: The Ontario Milk Marketing Board thinks it is a concern.

Mr Seguin: It is a concern, but not quite as considerable as the poultry. They are working within the system as best they can. Let's say it has not been brought to the attention of the ministers. There is a definite logjam here that has to be brought forward for signatories, which are the governments and the producer boards, to somehow resolve. It is a concern and we are trying to move on it, but again, we are in a national system. If we did not have a national system, we could not have the border controls, so there is a balance here that has to be maintained and worked at.

Mrs Sullivan: Would the ministry have prepared an analysis based on the allocation of quota for the minister, and therefore for cabinet, relating to the effect on crossborder shopping?

Mr Seguin: No.

Mrs Sullivan: Is that an appropriate thing for you to do?

Mr Seguin: The concern for allocation of supply, in our view, would probably not have as direct an impact on the cross-border shopping issue in the short term. It is more of improving the economies of scale and adjusting to longer-term market shifts. That is something we could be looking at, but to date we have not.

The Chair: Mr Kwinter, one last question.

Mr Kwinter: Yes, if I could. I think we really have a basic problem in that, as I said earlier, we have two conflicting interests. We have the Ministry of Agriculture and Food concerned, and rightly so, about the viability of the agricultural industry. They are totally driven by making sure that happens. On the other hand, we are addressing a problem about why you can buy a lot of these products cheaper in the United States than you can here. Most of the answers basically are going to have to attack the very things that you are busy out there promoting and defending.

Comparably, it is not unique to Ontario or Canada. Japan has supply management in rice. It is a cultural thing with them, and rice in Japan costs four or five times market value. The reason for that is the Japanese want to maintain their rice farmers. When the Japanese go outside their country and they go to other places in southeast Asia and they say, "My God, I can buy rice here for a quarter or a fifth of what I buy it in Japan," it does not matter, because it is serving a purpose.

My problem is I do not see us attacking or addressing this particular sector without a massive restructuring of the whole agricultural industry. My feeling is that, if we take that decision, it is just something we are going to have to accept and live with because the benefits to the agricultural industry and to our security of supply as opposed to economy of supply outweigh it.

I think it is a valid argument. I am just saying that it is going to be very frustrating because, when you try to address it from the consumer point of view, it is a difficult thing to sell to the consumer, to say: "If you go over and buy your milk in Sault Ste Marie, you know what you're going to be doing? You're going to be destabilizing the agricultural industry." That is going to be a tough sell. Do you have any comments on that?

Mr Seguin: With reference to conflicting groups, while there are a number of conflicting issues, what we have tried to do in the last year or two particularly is to bring all the groups together. We realize that in total not all the conflicts are there, that with co-operation they could probably achieve some of the gains they might see from some quick access to the US market or other markets, but in the longer term it is better to work in co-operation. It has been difficult maybe to sell to all groups, particularly consumers, the benefits of that co-operation and of maybe forgoing some short-term gains by quick purchases for the longer-term security.

For dairy products and I believe for poultry products the long-term price increase has always been below the Canadian consumer price increase. For the short term in 1989, the American price for skim milk powder was higher than ours and, just like that, down again. If you were a supplier or a processor buying powder in the United States, you would be at the risk of the marketplace considerably. You could either be put out of business or in a considerable loss position temporarily.

Here at least they have some security of what the supply price position is. It is a certain number of tradeoffs. The processing community in these products seems to have made the adjustment and made the allowance. I think part of the problem is to get the full support of consumer groups, which we do not have, and make them fully understand what the benefits of the system are; to turn it back to the producers and processors and say, "Are there certain adjustments that can be made within the system to make it more flexible and adaptable that consumers see?" That is what the industry groups are now working on.

I take your point that there are conflicting problems, but we are going to be working at them and we have started to work at them.

The Chair: Thank you for your presentation this morning.


The Chair: Our next presenter is Jim Buchanan from Ernst and Young.

Mr Buchanan: I have a slide presentation. Would it be appropriate to ask that we dim the lights somehow to make this visible?

The Chair: Sure, that is not a problem. We are in the dark. That is the way most people see governments as operating anyway, especially the previous governments.


The Chair: I had to get it out before you did, Mrs Sullivan. I knew that was coming. I could read it all in your smile.


Mr Buchanan: Thank you very much for inviting Ernst and Young to make a presentation to such a prestigious group. The firm is very pleased to have this opportunity to present the findings of a report that we recently completed for the federal government, Industry, Science and Technology Canada. My name is Jim Buchanan. I am a principal in the marketing and economics group of Ernst and Young and I was responsible for directing the research on this assignment.

I would like to point out, first of all, that although I seem to be the spokesperson, I am not the sole person involved in the work that we have done on cross-border shopping. I am really speaking on behalf of a team of professionals.

In terms of introduction, I would just establish some credentials. I will let you know who we are. Ernst and Young was formerly known as Clarkson Gordon/Woods Gordon; it has a long tradition here in Canada. We have a tremendous amount of marketing strategy and distribution channel experience. We have a large number of professionals who work specifically in the areas of distribution channel, competitiveness and helping manufacturers and distributors become more competitive.

We also have a great deal of experience with the cross-border shopping issue. I personally have directed our work in Thunder Bay several years ago, Sault Ste Marie last year. On 22 May we will be releasing the results of a report that we are doing on behalf of the Kingston chambers of commerce. We have now done this work for the government of Canada and we have done work in the private sector as well, with manufacturers and distributors who are wrestling with some of these issues, trying to understand why their prices end up being higher at the retail level.

Why was the report done in the first place? I will not go over this in too much detail; I am sure you know a lot about cross-border shopping. In Ontario, we estimate it to be in excess of $1 billion and, let's say in 1990, it would have been in excess of $1 billion, and that is in the goods purchases. We also would estimate, based on work we have done in Sault Ste Marie and in Kingston, that for every dollar spent on goods, there is at least another dollar spent on services while in the United States.

We know this is growing. The trends continue to be that this is growing quite dramatically, perhaps moderating a little bit from some of the 25% and 30% increases we saw from 1989 to 1990, but this is continuing to go on and growing. I am sure you know that this is having a direct impact on border retailers. In Sault Ste Marie, for example, we know there is one gasoline retailer who lost more than $1 million in gasoline sales in 1990 based on their share of the market and what we estimated the shrinkage to be in terms of gasoline sales to Sault, Michigan.

But there are also indirect impacts throughout the economy. In Sault Ste Marie, we were able to estimate the lost tax revenue, for example, to the provincial government and the federal government. We estimated that in 1990 the province would lose about $7.5 million in tax revenue based on the sales that occurred in Sault, Michigan. Other indirect impacts are, in Sault, Ontario, for example, there is an income loss of about $140 million, which is fairly significant when you compare it to, say, the payroll of Algoma. That is the equivalent of approximately 1,000 jobs.

Other indirect impacts are occurring now at the retail level away from the direct border communities. We see people are driving from Kingston to shop in the US. Thunder Bay is the best example of that. I mean, people are driving three and one half hours to go to Duluth, as I am sure you are aware. The implications on the retail sector are now starting to have an impact on distributors, who face increased competition from the US as retailers try to source directly from the US etc. So there is going to be a large ripple effect, we believe, back through the economy.

Why is this happening? You cannot deny that many prices are lower in the United States. We can all find examples where they are not, but many prices are lower in the US. Why is this? Well, cost of goods sold is a major part of the cost of operating a retail business, and we believed that was the one piece of the puzzle that nobody had really come to grips with. That was why we were requested to do this research on behalf of the government.

Higher prices are a symptom of a problem that we found, the problem being competitiveness of the channel as a whole. That gives rise to this need to really understand how retail prices come to be higher in Canada. We were asked to conduct a preliminary study, and I want to emphasize that this is a preliminary study. I do not think this should be in and of itself the basis of major policy decisions, but certainly it fleshes out some of the issues that need to be considered and analysed in more detail as some of these decisions are made.

The purpose is important here: to conduct preliminary research and analysis on channels of distribution for selective product categories in Canada and the US, to identify major issues affecting costs and pricing and to recommend further research initiatives. We went into this knowing that within the time we were allowed and the budget we had to work with we could not come up with all the answers. More work would be necessary.

This is preliminary, as I say, because of time and budget constraints. We selected three product categories based on our experience with cross-border shopping, knowing what types of goods people are purchasing in the US. Gasoline and food were not part of this, although that is a major part particularly for people who live very close to the border. We selected, based on our previous experience, three product categories: consumer electronics, bedding and linen, and women's sportswear. Those are the things that many people are buying when they go over.

As I said, we were focusing on the major issues. We were not able, within the scope of this study, to get into the line item costs at any level of the distribution channel. We did ask some questions as we talked to people in Canada and the US about relative costs, but we did not have a thorough investigation of the detailed cost structures of the players.

We also looked at the other major issue, intensity of competition, and as I said, further research was one of the things we identified because there is much work to be done in this area. Our approach to this was to do industry interviews largely, as well as some secondary background research. We also went to New York to visit some of the factory outlet malls etc, and malls in Buffalo, to get firsthand experience of the retailing formats and to try to draw some comparisons between comparable retail formats and identify comparable products that we wanted to compare.

We started our interviews at the retailer level in Canada and the US and asked questions about intensity of competition, and who the major players are in the channel. We worked our way back starting from the retailers and then contacting their suppliers and so on back to the manufacturers wherever possible. I should say that something like this requires a tremendous number of attempts to interview. We contacted more than 80 people in Canada and the US across the three product categories. We had in excess of what we considered 30 good interviews where we had full co-operation; we had various levels of co-operation but a fair degree of co-operation from the various players that we talked to.

So today I can present some highlights of our findings in the report. I understand that you have copies of the report. I will not show you all the cases, but I will walk through several of them. As I said, some background research was done to try to find some comparative information on the distribution channels in Canada and the US, particularly as it relates to the competitiveness of those channels.

We found there was very little work already done in this area. So we attempted to do our own basic comparison and we looked at 1987 Statscan data and 1987 Bureau of The Census data from the US. We have compared sales per establishment in the broad categories within those two publications. From this we see that on average US wholesalers and retailers appear to be much larger than Canadian wholesalers and retailers in terms of sales per establishment. And that suggests there are opportunities for efficiency and effectiveness within the retailing and wholesaling system in the US.


As I mentioned earlier, we looked at three product categories: consumer electronics, bedding and linen and women's sportswear. For each of these, I will show you the structure of the channel that we identified in Canada and the US, I will show you the markups or how the prices come to be built up and we will draw some general conclusions.

We are not really talking about any one specific product in our examples. What we have tried to do is construct, based on our input, typical cases within the product categories.

So the first one we will look at is consumer electronics. The consumer is at the bottom and the manufacturers are at the top, the manufacturers being primarily in Asia. In both Canada and the US, product is sold by the Asian manufacturer through a manufacturer's distribution subsidiary. This is for major brands.

On the left there are the retail options, being mass retailers, national specialists, independents, department stores and discount stores. We also acknowledge that there is some grey market activity here in both Canada and the US, as a source of supply primarily to independents and discount stores.

I point out that mass retailers and department stores, mostly in Canada, have a larger share of the market.

Ms Harrington: What is a grey market?

Mr Buchanan: Basically a grey market is where somebody, on an entrepreneurial basis, will source product someplace else and move it into a market, bypassing the regular distribution channels. There may be excess inventory some place in Asia, anywhere in the world, that they can pick up for whatever reason at such a good price that it makes it profitable for them to bring that in independently and land it in the country.

Ms Harrington: Is it perfectly legal?

Mr Buchanan: There are some disputes about the legalities, issues related to trademarks and licensing and so on.

Mr Sutherland: What is the grey market percentage?

Mr Buchanan: I am not sure. We understand that there is more of this activity in the US than there is in Canada, because the US is such a large market. If you are an entrepreneurial type and you are able to source product very cheaply elsewhere in the world, the US would be a more attractive market to take product into.

Going back to this, you see that for some products most minor audio and video components are sourced by these retailers through the independent distributor that you see in the lighter blue box. These would be videotapes, audio tapes, etc, but some larger products are sold through the independent distributors to independent stores or discount stores.

In the US, national specialists and discount stores are much larger players in the marketplace than in Canada. In Canada, the department stores tend to be where the volume of audio and video components are sold.

If we look at the case now of a typical video product sold through independent retailers and through this independent distributor, we can see how this cost is built up. The bar on the left is Canada and the bar on the right is the US. These are all in US dollars, I should say.

In Canada, the product would sell for approximately $434, through this and an independent retailer, versus $381 in the US. The differences are that, to start right at the manufacturing level, the manufacturer earns $16 more on average for a product like this on its sales into Canada than it does on its sales into the US. Add to that transportation and duty costs -- the landing costs associated with getting it into the country, which are $20 higher in Canada than in the US -- an additional $8 for the Canadian subsidiary distribution company, an extra $6 for the independent distributor and an extra $3 for the retailer, and you end up with a price which is about $53 higher. This shows how the absolute costs are higher.

The next chart shows how this is built up as a percentage of the total retail price. The pink is the manufacturer, the dark blue transportation and duties, lighter blue subsidiary costs, the orange distributor and the green is the retailer. You can see, although the retailer in Canada is actually charging an extra $3 for that product, on a percentage of the total retail price, his margin would actually be slightly lower in this example, 19.5% to 20% versus 18%, the major difference here being the landing costs, transportation and duty costs.

This slight buildup, starting at the manufacturer level -- the manufactured price is built up to where prices would be about 13% higher in Canada.


Mr Buchanan: That is right, because it is compounded. It starts slightly higher, and then there is a compounding effect.

Let us look at high-volume retailers, department stores, mass merchandisers. The price difference is lower here, and the absolute prices are lower as well. You see in Canada the price being $348 versus $302 in the United States. The manufacturer, again, is earning $16 more on its sales into Canada. Again, the transportation and duty costs, landing costs, are about $20 higher. The subsidiary is earning an extra $12 in Canada. The distributor has been eliminated, and the retailer in this example, the mass merchandisers, the department stores, we have indicated would actually be earning about $2 less on the sales of that product than would be a comparable retailer in the United States.

If we look at that in terms of the total buildup, you can see again that although the manufacturer earns a greater percentage of the total retail price in the US, in absolute dollar terms he is earning more on his sales in Canada. The transportation and duty costs, the landing costs are higher, and you can see here that the Canadian retailer is earning about a 23% margin on that product, versus about 27% in the United States.

Mr Stockwell: But that 23% margin is based solely on the numbers that you have put together. It does not take into consideration the municipal-provincial taxes that he pays that the US retailer would not pay.

Mr Buchanan: That is what he is taking out of it, and then his costs --

Mr Stockwell: Then he has to service his costs by adding the labour, taxes, etc.

Mr Buchanan: His costs are absorbed into that, yes.

Mr Stockwell: So he is taking 23% profit after he pays his taxes, etc.

Mr Buchanan: That is not his profit; that is his margin.

Mr Stockwell: Margin, I am sorry. Then after he pays all that, he could be making less than the American.

Mr Buchanan: That is correct. Could be, yes.

So sourcing direct to the factory subsidiary distribution company has lowered the overall price, but there is still a price disparity between Canada and the United States.

We have some preliminary findings. We found that the channel structures are quite similar between Canada and the United States. However, there are differences in terms of the relative strength of some of the players in the channel. In the US, there seems to be greater competition based upon the rise of the discount stores and the independent or specialist audio and video stores.

Duties and transport costs are generally higher in Canada. It costs more to get the product into the country in the first place; margins are generally comparable, however. The manufacturer may have a slightly higher margin on its sales into Canada. The retailers appear to be earning comparable margins, or perhaps in some cases slightly lower margins in Canada.

Now we will move on to bedding and linen, and once again I will look at the structure, the margins, and draw some preliminary conclusions or findings.

Manufacturer gain is at the top. In terms of comparability, we felt it was best to compare back to the same manufacturer, so we assumed US manufactured bedding and linen products and went through the channels on both sides of the border to be able to draw this comparison.


The manufacturer again is at the top. In terms of comparability, we felt it was best to compare back to the same manufacturer, so we assumed US-manufactured bedding and linen products and went through the channels on both sides of the border to be able to draw this comparison.

The boxes on the left, the US mass merchandisers and department stores, buy directly, for minor brands, from the manufacturer. Independent retailers will buy through a distributor. In Canada, the light blue boxes, it is the same situation for minor brands. Canadian mass merchandisers and department stores source directly. The independents go through a Canadian distributor.

The Chair: Do the manufacturers not have manufacturer outlet stores? Where would they appear in this in terms of them being able to put their seconds and -- not their rejects, but their lower-quality products directly into the markets? The factory outlet malls in Lewiston and in New York are really a major part of the problem. Are they in that somewhere?

Mr Buchanan: We were trying to look at the industry as a whole, and they are not a large percentage of the sales right now, but I think they are growing, and they would be sourcing directly from the manufacturer. In New York, the store that I am familiar with in a factory outlet mall is not actually a factory outlet. It is an independent discount store. It sources from a number of manufacturers. We are giving an overview here. There are variations on it, and that is a good point.

Mr B. Ward: I have a question on the Canadian mass merchandisers and department stores. Is that Canadiancontrolled department stores, or is that just the fact that they are in Canada and they could be American-controlled?

Mr Buchanan: It is not specific. We talked to a number of companies in that category.

Mr B. Ward: Were the majority Canadian-controlled or were the majority American?

Mr Buchanan: I suspect that the majority were Canadian-controlled. There are more Canadian-controlled department stores.

Ms Harrington: Are all manufacturers in the US? Are there not Canadian manufacturers?

Mr Buchanan: My understanding of the industry is that there are some Canadian manufacturers, but they tend to supply, not the full bedding sets, but accessories and so on. The major brands appear to be primarily US.

Ms Harrington: I am quite disappointed. I would think that if I wanted to shop for those things, I could get all kinds of towels and/or sheets that are made in Canada. Is that not the case?

Mr Buchanan: Yes, you could get some. For purposes of our comparison it would work best if we went back to the same manufacturer, because we are trying to determine how the differences arise between the retail price and a manufacturer's. So in only one example did we go back and compare our Canadian manufacturer to a US manufacturer.

Ms Harrington: Okay, but it is true that you can buy Canadian, made here?

Mr Buchanan: Yes, I understand you can. The two examples that we have are for major brands, however. Those were more minor brands. For major brands, the significant difference here is -- off in the top right-hand corner you see a Canadian distribution subsidiary or an affiliate, which tends to add an extra level. All sales for major brands will be sold through this extra level in Canada.

Mr B. Ward: A subsidiary? Where do they come from? Why do we need that extra layer in Canada?

Mr Buchanan: Many US manufacturers in a number of industries have distribution subsidiaries in Canada for sales and marketing purposes to support advertising, promotional efforts. They would also handle whatever repackaging or relabelling might be required. There is a marketing function here, just as the Asian manufacturers of consumer electronics have distribution subsidiary companies to manage the sales and marketing and distribution of products.

Mr B. Ward: They make the product in America. They ship it to Canada. They put different labels on it, and then the Canadian distributor picks it up from there. Is that the procedure?

Mr Buchanan: I am not sure where the actual repackaging would occur, whether that would be done in the US or in Canada, but this is a sales and marketing approach. There would be a physical service in terms of the delivery of goods, as well, so that there is an inventory of goods within Canada to be shipped to the retailers.

The Chair: I think it would be a good idea at this time to let Mr Buchanan finish his presentation because we have time constraints and I believe there will be votes in the House, so I think we should have all the presentation in. If there is time remaining, we can ask these questions.

Mr B. Ward: And if there is not any time?

The Chair: Just SOL.

Mr Buchanan: So the first case we will look at is the independent retailers in Canada and the US who buy through these distributors, the US distributor and the Canadian distributor. You can see here how the costs are built up. Comparable product would sell -- in US dollars -- for about $133 in Canada, versus about $52 in the United States. The manufacturer would charge approximately $1 more for the sales of product which go to Canada than for sales within the US. We add to that our transportation and duty costs of $6, a subsidiary cost of $17, which would not exist in the United States, the independent distributor which is an extra $9 in Canada versus in the US, and then the retailer is, in this example, charging an extra $48 for the product than would be the case with a comparable retailer in the US.

So you can see how the percentage of the final retail price is allocated between the different players in the channel in these charts. The manufacturers in the US are earning a much larger share of that smaller pie. In Canada, the retailers typically earn about a 50% margin on a bedding and linen product, versus about 35% in the US.

There is an additional step here, that subsidiary distribution company, and also an additional cost in terms of the landing cost, transportation and duties. If we source it direct and bypass that independent distributor -- this would be a mass merchandiser or a department store. See, there is still a major price difference here: $96 in Canada versus $36 in the US. Once again, the manufacturer earns an extra dollar on the sales into Canada than in the US. Transportation and duty costs and the subsidiary costs are about $23, and those are costs that do not even exist in the US, and then the retailer is adding another $36 to that in Canada, an additional $36 to that in Canada. It is interesting to note here that that manufacturer in real dollar terms is actually earning the same amount of money on sales in Canada and the US, but you can see that it represents a much smaller component of the total cost in Canada than in the US.

There are a number of additional steps, as I have alluded to -- transportation and duty, subsidiary costs -- and the retailer in Canada typically would earn about a 50% margin, versus about 33% or 34% in the US.

So we see that in Canada our preliminary findings are that there is an additional level in the Canadian channel from major brands of bedding and linen products. This extra level and higher retailer margins add costs to the product, as well as the landing costs -- transportation and duties -- that do not occur in the US for US-manufactured product.

The higher retail margins in Canada are offset somewhat by this aggressive occasional promotional discounting, the white goods sales phenomenon. So although on a regular price basis there are these higher margins, there is some aggressive discounting that is traditional within the industry.

The final channel that we looked at was women's sportswear. This is a little complex. There is the top level, manufacturers. There are domestic manufacturers in Canada and the US that do all of the manufacturing. There are contracting manufacturers in Canada and the US. The contracting manufacturer is the company that basically owns the brand name or the design and has part of the manufacturing done offshore and then some final manufacturing done within either Canada or the US.


Mr Stockwell: They sew on the label.

Mr Buchanan: There are also just the importers as a source of product. There is an extra level. There are additional sales costs within this industry. There is a direct sales force, employed by all three levels, or independent agents. They use a variety, depending on the type of account that they are trying to service and their own particular size and circumstances.

In terms of the retail channel, the next level down, there is "Others." We will start with "Others." There are factory outlets, mail orders, mail order operations. There are discounters, department stores and apparel specialty stores. All of these exist in Canada and the US, to some extent or other. However, the factory outlets and mail order operations are much more significant in women's sportswear in the United States than in Canada, and that is a vertical integration from the manufacturer through into retailing. In Canada, the predominant players for women's sportswear are the department stores and apparel specialty stores.

We found that within that structure, because of the predominance of the factory outlets and the mail orders, there is greater price competition at the retail level in the United States than in Canada. Once again, as in consumer electronics, the structure is identical between Canada and the US but the relative strength of some of the players is different.

The first case is domestically manufactured product sold through department stores by these direct sales forces. In this case, we have looked at products manufactured either in Canada or in the US and then sold. This is fairly straightforward. The manufacturer in Canada is charging about an extra $3 than a comparable manufacturer in the US for a comparable product. The Canadian retailer is charging an extra $9. So the net result is that a similar product would be selling for what would be US$62 in Canada versus US$50 in the United States.

I will not show you the pie chart because there are only two pieces to the pie in each case. What this suggests is that in Canada the retailer has about a 58% margin, versus 50% for the US retailer.

The next case is US manufactured product sold through apparel specialty stores. This comes back to the comparison to the same manufacturer. In this case the manufacturer would generally charge about the same price for sales of product which would go into Canada or the US. We have additional transportation and duty costs which they obviously would not incur. That adds $6. The sales agents would earn the same between Canada and the US on that product and the retailer would add an additional $9 in Canada, which yields a price comparison of $72 versus $57.

In terms of the retail margin, the green part of the pie, you can see that in this example the retail margin is marginally higher in Canada, 50% versus 47% in the US. We have an extra cost here of transportation and duties, that landing cost.

Some of the preliminary findings that we have for women's sportswear: Once again, the channel structures are similar in terms of the options for getting product from a manufacturer to the consumer. We see that there is greater US price competition within the channel, due to the number of participants, brand availability and forward integration. By "forward integration," I mean this move into factory outlet stores by US manufacturers, causing greater price competition throughout the channel. Duty and transportation costs will be higher in Canada and Canadian margins are slightly higher at the retail level.

We have some preliminary findings for the three channels as a whole, based on the research that we were able to do. US firms have scale advantages. Remember wholesalers and retailers, on average, in the United States have almost twice the sales per establishment as in Canada. This allows, we believe, for some opportunities for efficiency and effectiveness in terms of operations, and the relative size of the US market and some of the players within that market allows for some economies in terms of sourcing, so the distributor of consumer electronics products can actually get a better price from the factory than the Canadian distributor can.

I may as well go through all of those.

Operating and overhead costs appear to be higher in Canada. As I said before, we did not look at income statements and balance sheets for specific companies, but through the interview process it was identified that, largely, people felt that labour costs and occupancy costs as well as taxes were higher in Canada than in the United States. Canadian regulatory costs appear to be higher, and by that we mean those regulations which cause costs related to repackaging or special packaging requirements, labelling, duties, standards, measures, all of those things, which means that the product which is sold in Canada has to be slightly different from the product that is sold in the United States.

Some Canadian retailers appear to demand greater margins, but we also have evidence that Canadian retailers on average, within certain types of products and so on, who have comparable retail formats are not charging higher margins. Then, those higher margins are partly to offset some of these additional costs. I think the point was made earlier that that does not mean they are necessarily that much more profitable. I think there is evidence that they are not that much more profitable or any more profitable.

Finally, inter and intrachannel competition is more intense in the United States. By that, we mean that between different types of retailers there is more competition, and then within each category of retailers there appears to be more competition as well.

Something that is not here but is worth noting is that we have found some structural differences, where there are extra levels in the distribution channels in Canada than there are in the United States.

Those are our findings based on this preliminary report. As I said before, we had limited time, a limited budget, and the intent here was to flush out some of the major issues. As I said also, we wanted to identify some of the further research needs. This was our first effort at identifying the research needs and I am sure some of you have additional ideas and we have some additional ideas now. So this is the first list.

We see that there is a need to understand how Canadian firms might become more competitive on a service basis rather than a price basis. What we see with cross-border shopping is a certain segment of the consumer market which is more price-sensitive or more value-oriented, if I can make those comparisons.

One of the ways to counter that would be for everybody to lower prices, which is indeed unfeasible, certainly in the short term. There may be opportunities, and there are opportunities, for Canadian retailers and also for Canadian distributors to compete based on service, finding ways to improve their service to their customers, but more information needs to be developed to find ways for them to do that.


We also think that there will be structural changes to the wholesale industry. It would be important to understand how some of the structural changes that may take place would affect the economy as a whole. In other words, how would the change to larger distributors and retailers to become more similar and competitive with the US affect the way we do business in Canada?

There will be to a certain extent some north-south realignment, I think, within distribution channels in Canada as our economies become a little more closely integrated. Some of the decisions that will drive this will not be made in Canada. They will be made by foreign manufacturers who look at ways to get prices down in Canada to become more competitive and re-evaluate whether, for example, they do have that factory-owned distribution subsidiary. As I say, many of these decisions will be made outside of Canada. There will be a need to understand on what basis those decisions are made and what might be done to influence them or that may be in the best interests of the Canadian consumer and the Canadian economy.

We also see a need to have a much better understanding of the grey market phenomenon in terms of its magnitude and its impact.

Service leakage is something not directly related to our study, but we know from work that we have done that there is a major service leakage, expenditure leakage, associated with cross-border shopping in terms of tourism and hospitality. Those things are part of a package when people go and buy goods. They may be saving enough money on buying goods to incur some additional costs in terms of services. That is a significant component of this as well.

We think there is a need to take the work that we have done to the next level of detail in terms of the cost structures at each level. That is what will start to drive, I think, some of the policy decisions that may occur provincially and federally as well when governments look for ways to help the private sector become more competitive.

It would also be important to expand the number of categories that are under examination. There has been very little work done in this area. We really do not know where the channels are similar or where they are not and why they are different.

We also think it would be important to understand the role of commercial property subsidies here. There are indications that some of the factory outlet malls and so on that are springing up are receiving certain subsidies, tax holidays and so on, specifically to take advantage of the fact that Canadians are now interested in looking at lower-priced goods in the US. That has a role in terms of the relative viability of a Canadian retailer versus the US retailer.

Of course, I think it is important to understand better the role of the regulatory costs: total taxes and packaging, labelling, standards, measures, third-country duties, etc.

Once again, Ernst and Young is very pleased to have been able to make this contribution to your deliberations on the issue. The results of our work suggest that this is a matter of total system competitiveness and we believe that all of the stakeholders, the government at all levels and the private sector, have to work together on making this entire system more competitive. We encourage people -- yourselves and everybody I talk to on this matter -- to stop pointing fingers at each other and work together towards solutions.

Thank you very much. I will take questions about this or cross-border shopping as a whole.

Mr Sutherland: Maybe this is jumping too far too quickly since you said it is a preliminary study, but if I look at the information in the graphs you presented and some of the comments you made, it would not paint a very good picture for my independent retailers in my home town. In terms of sourcing, in terms of what you are saying, larger distribution networks are trying to accommodate for the small economies of scale. Are we going to be able to deal with this problem and still offer some hope for small retailers across the province?

Mr Buchanan: I think so. I think there are some things that retailers, large and small -- I know that some of them are looking at such things as direct sourcing where possible to lower their costs. But in reality, small and independent retailers are by and large going to have higher costs of goods than the people who buy in much larger volume. That suggests to me that these retailers need to find another way to compete, because it is more difficult to be competitive on a price basis if you start with a higher cost base. That is why we were indicating that this whole area of service-based competition, or non-price competition, is a very important one, particularly for the independent retailer.

The Chair: I am afraid that I am going to have to adjourn the meeting because we have to go to the House for a vote. But I would like to thank you for your presentation. I believe it has been very helpful to us.

This meeting is adjourned, hopefully until this afternoon at 3:30 when we will review the report of Anne Anderson, and hopefully we will have the Treasurer here at 4:30. Thank you.

The committee recessed at 1157.


The committee resumed at 1645.


The Chair: I see we have a quorum. Let's move along. I think we may not want to waste a minute.


The Chair: We are fortunate this afternoon to have the Treasurer of Ontario before the committee to speak to us about the budget and this committee's role in the future budgetary process. Welcome, Mr Laughren.

Hon Mr Laughren: Thank you, Mr Chairman. I appreciate the invitation and the organizational skills of Todd Decker in getting us all together here.

I realize that the budget has engendered considerable interest even beyond these halls. I understand that the deficit aspect of it is the one thing that has stimulated a lot of the interest. I would hope that members would look beyond the deficit number and look into the composition of the deficit and exactly what got us to that level in terms of spending, how we got to such a high number. Because let's not try and minimize the number. It is a very large number, $9.7 billion. I do understand that.

I do not want to make a speech here today -- I think members would probably rather have an exchange -- but I did ask the committee, through the budget and through a letter to the Chairman, to think about ways of opening up the budget process. Before members from the third party jump in and suggest that full public hearings on this budget are the only way to do that, what I really meant by that letter to the Chair and the comment in the budget document itself was that the entire budget is shrouded in secrecy and, being new at it, I was taken aback by some of the process.

It seems to me that there are other jurisdictions that are more open in the process of budget-making and involvement. I would certainly be interested in hearing the views of an all-party committee, because if we just do it in Treasury we may miss some ideas that others would have in terms of opening up the process. We will be trying to see what other jurisdictions are doing on this too. Later in May I am going to Washington for a couple of days, and one of the things I am going to be looking at is how they are opening up the process there.

Nothing has been determined. This is not some kind of issue that has been decided and we just want you to go through the motions. As a matter of fact, I see this committee as being part of that process of opening up. At least, I hope it will be. I would be very interested in hearing your views on how we can open it up, what role you can have in it and what role anybody else can have in it. That is not just an idle wish. I really hope we can do something about that, because I think we could end up with better budgets and certainly a better process.

I hasten to add that we have already established the Fair Tax Commission, which is going to be giving us advice on that aspect of considerations, but that does not pre-empt the work of this committee to make recommendations on how to open up the entire process.

I would be pleased to try and answer any questions or have a dialogue with members of the committee.

Mr Carr: One of the questions I have deals with the promises that were made during the election campaign. You may be familiar with the Agenda for People, where the costing is laid out. I understand you were even part of the process that did that. When you talked about the bottom line there, we see that you talked about a two-year cost of $2.3 billion. This was what the election was virtually run on and in fact, I guess, won on. Then when we end up with the wonderful first budget, the numbers are such that the $2.3 billion over two years, in terms of the deficit alone, works out to be about $17 billion or $18 billion.

My question is very simple: Why the discrepancy? Why did things change so much from August of last year, during an election campaign, to April of this year? The program, I might add, was fairly well costed out -- education, first year, $500 million, and so on -- then all of a sudden it went completely out of whack and we have this big deficit. My question very simply is: What do you say to the people of Ontario who may have voted for you for this and ended up with a $10-billion deficit?

Hon Mr Laughren: First of all, I think that being from Oakville you are a very wise person and that you would not make an assumption that the election was run or won solely on the Agenda for People. It is much more complex than that. I think you would agree it was a pretty complex mix that caused people to vote the way they did. However, this was the major platform on which the New Democrats ran in the election, so I am not backing away from that at all.

I think that you would understand, as well, from statements we have already made, that the implementation of that Agenda for People would simply not be possible given the way the economy collapsed in 1990 and still is in serious difficulty for most of 1991. I am sure you would be in a very responsible way up there giving us proper what-for if we were to implement what is in the Agenda for People, given the limited means we have this year. I think you would not want a higher deficit than $9.7 billion.

Mr Carr: No, thanks, it is high enough. But I guess what I am getting at is that the numbers in terms of revenue change a little bit. I guess when you look at it, you had projected out the $44 billion and this year we are going to be at $43 billion, so we lost a billion there, but what I am talking more specifically about is the cost of programs, and you had some very definite increases in costs here.

You have almost a billion in the education funding aspect of it, so you did try to lay them out. I guess what I am concerned about is the fact that when people look at this, that is why we get a little cynical about politicians, because during an election campaign we say something or we admit something and we do not cost it out.

In fact, very specifically in this document, I think the Premier in the attached press release talked about the fact that he wanted to not be like the Liberals. In fact he went through there and he said, "We estimate the two-year cost to be about $1.8 billion." So that is why I think the public becomes very cynical, because during an election campaign you say it is going to cost $1.8 billion and then we look at a rise in expenditures that was dramatic.

Notwithstanding that -- sure, some of the social services costs went up -- it does not account for the tremendous discrepancy from $1.8 billion to virtually $18 billion. That is what we will end up with in just deficit alone over a two-year period when you put them together. So people thought they were voting for some very worthwhile programs that were only going to cost $1.8 billion and then virtually within a year we get that. I think that is why I am concerned, because, as you know, our big feeling is that if the --

Hon Mr Laughren: Wait a minute. You are implying that the Agenda for People is in this deficit of $9.7 --

Mr B. Ward: A point of order, Mr Chairman: Before we continue, we are on very limited time. I am hoping that we could follow what we have done in the past and have one question per person.

Mr Carr: Why do we not do it by time limit by caucus? Do you want to divide it up by three?

The Chair: That is a good idea.

Mr Carr: How much time do we have?

Mr B. Ward: We think the bells are going to ring, probably.

Mr Tilson: You can have my time.

Mr Carr: Okay.

Mr B. Ward: Just so that we allow everyone an opportunity to participate, Mr Chairman.

The Chair: You can wrap up your comment and then have the question.

Mr Carr: Do I get only one question? Because if I know how much, I might jump to a better question.

The Chair: Jump to your other question.

Mr Carr: Okay, cut off all the --

Hon Mr Laughren: I am sorry, but I really did want to know whether you are implying that --


The Chair: Could you close the door, please?

Mr Carr: I never get a chance to speak with you and I finally get a chance --

Hon Mr Laughren: No, I am serious. I thought you were implying that the Agenda for People that was costed out at $1 billion point something, suddenly had ballooned to $18 billion over two years because of the two-year deficit, the accumulation of the two years of deficit.

Mr Carr: No, what I was getting at is that basically what people voted for -- the NDP said it was going to come in with all these programs, and essentially, when you look at this, it says it is not going to cost us all that much, $1.8 billion. And then whammo, when we get to the actual facts, that is where the cynicism comes from, the fact that one thing happens before or during an election period, and then something happens afterwards.

But since my time limit is going to be fairly short here, maybe I could jump to something else, the actual debt servicing cost. I had the fine staff at research project out the cost of what the actual deficit would be, and our original deficit before we came in last year at $38.8 billion. We were looking at a cost of $362 million a month, $83 million a week, close to $12 million a day or almost $500,000 an hour; that is what it cost in servicing the debt last year.

With it going up dramatically, I wanted to see, in light of the fact that we are now probably going to lose our triple A credit rating and there have been some projections that we are literally looking at paying, just in debt -- not paying for education or health care costs -- $1 million an hour to service the debt in this province, I was just wondering what your projections are over the next period of time on the actual servicing of the debt.

Hon Mr Laughren: I actually have those numbers here. I have them only as percentages of GDP and of revenue, but you wanted absolute dollars, did you?

Mr Carr: Yes. We had broken it down on a cost-per-month basis, and that was based on servicing the $4.3 billion debt in 1990-91. So basically, if we double the debt -- we are not quite going to do that -- you would be looking at almost $1 million an hour just to service the debt, and that is not to pay for any of the programs. That would be $1 million an hour, 24 hours a day, 7 days a week, 365 days of the year. I just wanted to see what your calculations are. We might not hit quite the million, but I wanted to see where you were at.

Hon Mr Laughren: Also, I have not done nor asked anybody to do the breakdown in that kind of micro way. I can remember a few years ago, when I was sitting where you are, figuring out the costs of our health care system per hour, per day and so forth. When you do it that way, it does look like a very high number. This is the cost of the interest on the debt per year --

Mr Carr: You can break it down. Even if you have got a yearly basis, obviously we can do it.

Hon Mr Laughren: For 1991-92, it is $5 billion; 1992-93 is $5.7 billion; 1993-94 is $6.4 billion and 1994-95 is $7 billion. Of course, the reason that goes up is because there is a deficit each year so that the debt is higher, even though the absolute number on the deficit is going down each year. Do you follow me?

Mr Carr: Yes.

Hon Mr Laughren: The cumulative debt goes up, therefore the interest on it climbs each year as well. I have not broken it down the way you have.

Mr Carr: I take it this was based on us having a triple A credit rating and so on. So we could probably say right off the bat that once that slides, these numbers go up; whatever percentage, but they will go up.

Hon Mr Laughren: Mr Carr, be very careful, because I was making that assumption too, and then I looked at what happened the last time Ontario lost its triple A credit rating, which was in 1985, following 42 years of another government.

Mr Tilson: That was during the accord.

Hon Mr Laughren: Yes, but the decision was made before there was much damage we could do. Anyway, what happened, and I do not know whether you can see this or not -- this is the Ontario 10-year yields. If you look at 1985, when the credit rating was downgraded, the actual yields continued to go down. That was because interest rates were going down.

Mr Carr: Interest rates were going down and they could go down again.


Hon Mr Laughren: Do not get me wrong. I am not trying to say it was because the credit rating went down that the interest rate went down. My only point is that now interest rates are also on the way down. So it is difficult. I would be careful about making an assumption that if we do lose the credit rating -- I still hope we will not, but we could very well do that -- and it does go down, that does not necessarily mean that the rate, the cost of our borrowing, will necessarily go up, because it did not historically. When we got the triple A credit rating back in 1988 once again, it did not seem to make a big difference.

There is no question that when you lose your credit rating you pay more than you otherwise would, but I would caution as well that I suspect -- and there are others who know this aspect of the business a lot better than I -- to a certain extent that has already been discounted by the bond sellers, that to a certain extent it has already been anticipated that we may lose our credit rating or that the deficit is high and that it is being reflected already, perhaps.

Mr Carr: When you look at what the Agenda for People says, which would be $1.8 billion, what in fact the --

The Chair: Mr Carr, I have to cut you off there and give the Liberals their opportunity now for 13 minutes.

Mr Phillips: Oh, is it a time thing rather than one question? Okay.

The Chair: That was the suggestion.

Mr Phillips: Just on that subject, you remember the Treasury officials provided us with the numbers. They said if we go from triple A to double A it costs us $5 million per $1 billion worth of borrowing. That is the number to go from triple A to double A.

Hon Mr Laughren: I do not think that is correct.

Mr Phillips: That is what the Treasury document said. You will find it in Hansard.

Hon Mr Laughren: I do not think that is correct, but go ahead.

Mr Phillips: Believe me, that is what the document said.

Hon Mr Laughren: That is not my recollection of the number, but go ahead, I did not mean to interrupt you.

Mr Phillips: It is $2.5 million if it drops from triple A to double A plus. If it drops to double A --

Hon Mr Laughren: I am sorry, I misunderstood you.

Mr Phillips: That is exactly what I said. That comes from the Treasury numbers. So I am just saying, if you borrow -- we now guarantee Hydro's money, so I think that is in the same thing -- if in fact we have got to go to the market for $10 billion and if in fact we go from triple A to double A, I do think it is going to cost us $5 million per billion, $50 million, I think. That is the Treasury number. That was not my comment.

Hon Mr Laughren: But you are also making an assumption of dropping two notches rather than one.

Mr Phillips: Yes. They are saying it drops from triple A to double A.

Hon Mr Laughren: Okay. I do not know why you are making that assumption, though.

Mr Phillips: We will see.

Just so I am clear on the numbers -- and by the way, without sounding too concerned about it, I can just tell you our feedback on it and it comes in the context I think of concern about Quebec, concern about the federal situation, concern about the federal deficit. The budget cannot be viewed in isolation.

I will just tell you, I am really quite worried about it -- not just the $9.7 billion. It is kind of the next five or six years. I know we will have a little sparring match and you will say things are fine, but I am personally very worried about this on top of everything else.

You know the numbers. I think there are 250,000 more people unemployed now than there were six months ago.

Hon Mr Laughren: Well, a year ago.

Mr Phillips: Right? I know these numbers.

Hon Mr Laughren: Yes.

Mr Phillips: That is about 1,600 more people every day, seven days a week. The unemployment numbers come out tomorrow. I hope they are good. I would not bank on it, but I hope they are good finally.

My big concern is just who is going to create the jobs, Hopefully, if we have got time, we can get into some of the numbers in here, but just to make sure I have the right -- because this is what the job creators -- not the business community, the job creators -- are looking at.

I believe that your consolidated deficits on page 55 are going to $7.8 billion in 1994, and I go back to page 50, where you use the 90% nominal growth in gross domestic product. I believe that just to get to the $7.8-billion deficit there are $5 billion of new taxes built into that.

So, as we look down the road, first, the very best deficit is $7.8 billion, and that assumes another $5 billion of new taxes that are not there right now. We look a little bit further down the road and it is a question I asked you in the House today -- I think all your future projections are quite heroic, to use your word, in terms of the economy: In your very best look during good economic times, you are looking at 3% to 4% real growth down the road if I am not mistaken. In spite of all that, we will still be looking at a deficit of at least $5 billion if you use the same terminology you use right now.

And this is what the bond raters will look at in the next few weeks; it will not be just the $9.7 billion it will be that the deficit goes on and on and on. Even to hit those deficit numbers, you assume, I think, $5 billion of new taxes and then when we finally get the thing balanced and operating we still have at least a $5-billion annual deficit on capital.

Honestly, the people who are looking at where they are going to invest to create jobs are asking, "Is this the place I am going to invest?" For all of us who are hoping that the unemployment numbers will turn around, you have your job creation plan in here, but I believe, Treasurer, most of it is really holding jobs except for the $700 million for two years for the creation of 18,000 jobs.

I do not mean to be overly pessimistic, but my question is: As the job creation community is looking at those numbers, can you give us any help in terms of what I can say to people who are looking to create some jobs? Why should they be here?

Hon Mr Laughren: I appreciate your comments, and I do not find much fault with what you are saying. I would make a couple of cautions. I think your interpretation of those out-year numbers in the entire fiscal plan is not unfair. I just put a caution in that scenario where you have so many new revenues, expenditures going up so much and the deficit resulting from it. That is one way of putting it together as a package. You could alter the revenues, you could alter the expenditures, and so we will see.

Those are quite conservative forecasting numbers. One of the problems that some people have had was that they are perhaps too conservative and the deficit stays too high in those years. My own sense, and I can remember agonizing over these numbers, was that I would rather put numbers in there that people might find unacceptably high but that we felt we could achieve. Now, you can snort at that, or some people could snort at that, but I want to tell you, even those numbers --

Mr Carr: These numbers?

Hon Mr Laughren: No, I am talking about these numbers.

It is aggressive in one sense in terms of potentially new revenues, but at the same time we think we can achieve those numbers and it does give us a reduction in the deficit every year after this year. So I think that is terribly important.

In terms of this year's deficit -- you talked about only the anti-recession package being new and so forth; there was the employee wage protection, I think it is almost $200 million, $175 million, and some other things as well -- basically, there is no question about it, this is a recession-driven deficit. It is mainly maintaining existing programs and some reallocations; I think we reallocated about $700 million and took programs out and put new ones in and so forth, to put our stamp on some things. But basically it is a maintenance budget that maintains existing programs. If you look at that $6.7-billion increase in the deficit, if you can just put your mind around what we would have had to do to get it to stay at $3 billion, it would be absolutely incredible, the cuts we would have had to make, and I think there would have been outrage across this province. Some people do not like the deficit, I understand that, but if you were to compare the outrage at the deficit with the outrage that I too would personally feel over cutting $6.7 billion worth of programs --

Mr Phillips: No one suggested that, though, did they?

Hon Mr Laughren: No, I am not saying you are suggesting that. I am saying that when we look at the deficit I hope people will look at the composition of it. That is the point I am trying to make, that it was not a wild spending spree that led to this deficit. I hope members understand that.


Mr Phillips: My question was on the investment in job creation. Remember, I was saying that for the people who are looking where they are going to create jobs, this is one jurisdiction they can do it and they can do it elsewhere in Canada. They are going to look not just at the $9.7 billion, because if that were a temporary blip, people would say, "We can live with that," but they will look at the five-year plan. What do we say to those people?

Hon Mr Laughren: What is in the deficit numbers that would make Ontario a bad place in which to invest? It seems to me that we have some tremendous assets here. I am not saying this as an act of boosterism or anything like that, but look how well placed we are geographically, look at our labour force, our management skills, our mix of social programs and quality of life. Those are all things that are important. Look at our health care system. It is the envy of virtually everybody south of the border. That is where you are talking about investment being directed other than here. It is still a great place to invest.

It is true that in order to pay for this deficit it is going to mean those new revenue sources will be required, if that is what you are getting at. Absolutely. I think to pretend otherwise, or not to have maintained the existing programs the way they are now, would have been a serious mistake as we head into the recovery.

It is not a vigorous recovery, as you will see by those numbers, not like 10 years ago which was a much more vigorous recovery. That is why the numbers go down slowly. Unemployment stays naggingly high, which means it is hard to get the deficit down much more dramatically than that without cutting out capital programs, for example. I do not think we want to do that. That is a signal that we are investing in Ontario as a government, and people will judge us by the kind of place it is to live and work, and I do not think we should depreciate that.

Mr Phillips: I am not. I think everybody knows --

The Chair: I am sorry, Mr Phillips, I am going to have to stop you there.

Mr Phillips: How much time have I got?

The Chair: You just ran over by 40 seconds. Mr Ward.

Mr B. Ward: I will pass to Mr Jamison.

Mr Jamison: I want to welcome you here, Treasurer. In your statements you talked clearly about trying to tackle the recession and shorten it, of course, by acting the way you have and I certainly applaud you for it. I find it rather odd that the Treasurer would be brought here to the committee to talk about the budget when 130 members of the Legislature cannot debate that in the House as we hear the bells ring. I think it is very important that we understand that very party is here today asking questions, trying to understand the budget at this committee, yet will not allow debate on the floor of the House. I find that to be confusing, to say the least, considering the democracy we try to keep in place in this House.

Having said that, I know our time is limited and we should be going back to the House shortly. I would like to ask you one question, if you could explain, because it is my understanding that a number of factors on their own, with us standing still as a government, would have left us with a rather high deficit in itself. Being proactive in trying to shorten the recession, expenditures were made over and above that. I wonder if you could expand on that.

Hon Mr Laughren: I will stand to be corrected on this, but I think if we had taken no initiatives at all, just stayed pat, total maintenance of existing programs, the deficit would still have been in the neighbourhood of between $7 billion and $8 billion. Am I exaggerating? Was that about right? Somewhere in that neighbourhood anyway. If there is a more precise number, I could get it for you. That is why I was trying to emphasize the fact that it is not a spending-spree deficit.

I must say, though, that I regretted Mr Carr being cut off because of time. I really did want to hear his views. Perhaps when the budget debate continues in the House, Mr Carr, I would really be interested in hearing your views.

Mr Carr: Or if I meet you on the street, we can talk.

Hon Mr Laughren: You leave my social life out of this.

Mr B. Ward: Mr Chairman, I recognize that we have less than nine minutes to get upstairs. I would like to --

The Chair: I was speculating on terminating the questions in about three minutes.

Mr B. Ward: Because of the pace we have to utilize because of the Conservative actions to get upstairs, I move that this meeting be adjourned.

The Chair: Unfortunately, there is no debate on that. All in favour? All opposed? There are four opposed. Carried. We are adjourned until 10 o'clock Thursday next.

The committee adjourned at 1717.