Wednesday 29 January 1992

Election of Chair

Pre-budget consultations

Toronto Dominion Bank

Douglas Peters, senoir vice-president

Ruth Getter, senior economist

Conference Board of Canada

Jim Frank, vice-president and chief economist

Paul Darby, director, forecasting and analysis

Infometrica Ltd

Micheal McCracken, president

DRI/McGraw Hill

George Vasic, director of economics



Chair / Président(e): Hanson, Ron (Lincoln ND)

Vice-Chair / Vice-Président(e): Sutherland, Kimble (Oxford ND)

Carr, Gary (Oakville South/-Sud PC)

Christopherson, David (Hamilton Centre ND)

Jamison, Norm (Norfolk ND)

Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND)

Kwinter, Monte (Wilson Heights L)

MacKinnon, Ellen (Lambton ND)

Mahoney, Steven W. (Mississauga West/-Ouest L)

Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

Sutherland, Kimble (Oxford ND)

Ward, Brad (Brantford NDP)

Substitution(s) / Membre(s) remplaçant(s):

O'Neill, Yvonne (Ottawa-Rideau L) for Mr Kwinter

Sullivan, Barbara (Halton Centre L) for Mahoney

White, Drummond (Durham Centre ND) for Mrs MacKinnon

Clerk / Greffier: Decker, Todd

Staff / Personnel: Campbell, Elaine, Research Officer, Legislative Research Service

The committee met at 1005 in room 228.


The Vice-Chair: I call to order the standing committee on finance and economic affairs. We have representation from all three parties so we will try to get started. We have enough for an overall quorum right now. Just before we begin we need to go through the business of electing a Chair for this committee. I would like to do that right now and open the floor for nominations for the position of Chair. Mr White.

Mr Phillips: I nominate Ron.

Mr White: I was going to do the same.

The Vice-Chair: Mr Phillips, you are nominating Mr Hansen. Okay. Do we have any other nominees?

Mr Johnson: I nominate Kimble Sutherland.

The Vice-Chair: Okay. Any other nominees? Mr Hansen, will you stand?

Mr Hansen: Yes, I will stand.

The Vice-Chair: Good. I will not stand. All right, I declare Mr Hansen the Chair, if he wants to come.

The Chair: I would like to thank my nominator and the committee for total confidence in my election to the Chair. Thank you.


The Chair: We will start with our pre-budget consultation this morning. I have already met Mr Peters down there. Would you please come forward with your colleague and represent the Toronto Dominion Bank. I hope we have good news. You have one hour for your presentation. If you could leave some time at the end of your presentation for the committee, the three parties will ask questions on your brief. You may proceed.

Dr Peters: Thank you very much to all of you for hearing our views on the Ontario economy. My colleague Dr Ruth Getter is with me. Her area of expertise is the provincial economy and she will make our presentation. First of all, I will tell you that we have handed out a brief paper on the Ontario economy together with our outlook for the Canadian economy. We will leave those with you for your information and I call on my colleague Dr Getter.

Dr Getter: Good morning, everybody. You have been given a package of four items. Let me just go through it very quickly. The small booklet is our macro outlook for the Canadian economy, our January forecast. There is something called Report on Ontario, which basically summarizes our views on the Ontario economy and its prospects, and a one-pager called Provincial Update, which summarizes our provincial forecasts for all the provinces. On the back you have a summary table so you can compare Ontario to other provinces. The last piece is a publication called The Economy, which was written by my colleague Teresa Chandler, on competitiveness. I will be referring to that too. I think it is a very useful document.

What I would like to do today is briefly describe the current situation in Ontario, the factors that have contributed to the current situation and what the prospects for the future are. Ontario is the only economy in the nation where activity has contracted for two years in a row. Our estimate is that output declined by 0.8% in 1991 and by a further 2.3% in 1992.

Last year I sat in this chair at about the same time and my forecast then was that Ontario's activity would decline by 2.1%. So I do not feel too badly about the forecast in the sense that it was accurate, although I feel quite badly that it was as bad as it was. I looked back at what I presented here last year and I said, "Well, that's not too bad in terms of forecasting accuracy." I hope my forecast today for the next couple of years will be equally accurate. I am going to give you all the bad news first and then move on, hopefully, to some good news. I am going to summarize where we are.

Our employment rate is up from 5.1% in 1989 to an average of 9.6% in 1991. In the goods-producing sector, which includes manufacturing, construction, utilities and so on, employment is down by 8%, which is really a very sharp decline, but service industries did a bit better where employment is down by only 1.2%. The manufacturing and construction sectors were the worst hit of all sectors in the economy and employment in those sectors was down by 8% and 14% respectively.

Our housing market: The bad news continues to roll in, although there is some glimmer of hope on the horizon. Our housing starts in 1991 fell to a nine-year low, 52,794 units. That is about half of what was built in 1987. The resale market is better, however. The news there is better. Sales rose about 25% in 1991 as house prices fell and mortgage rates fell as well.

Moving from our housing sector to our manufacturing sector, we know very well that it has been devastated which is, I think, the operative word. It accounts for about 50% of national production. In 1990 shipments fell by 5.2% and in 1991 by a further 6.2%. That is the lowest level since 1984. The worst-hit industries were textiles, non-electrical machinery, non-metallic minerals, primary and fabricated metals and wood and furniture products. There were more modest losses in food processing, clothing, rubber, chemicals, electrical and electronic products and transportation equipment.

Other economic indicators are equally bad. Retail sales are down for the second year in a row, business bankruptcies are up by 30% and exports are down by about 5%. So now we should probably all go and slit our wrists. I do not know, but the overall picture I just presented is a very depressing one.

Let me move on a little bit and let's try to understand what is really going on here. The major question I get asked, and I know I ask it all the time, is whether this is a temporary downturn or a major structural change. That is the crucial question everyone is asking. If it is a temporary downturn, we should just hold on and it will pass. If it is a major structural change, that means something very different.

In a typical economist's answer, the current state is a combination of both a cyclical phenomenon and some structural adjustments going on at the same time and it is very difficult to isolate which is operating at any time.

Let me go back and see if I can isolate some of the factors that are operating. Even in the absence of any structural change in the economy, we would have had a downturn in the economy. The pace of economic activity in the late 1980s was absolutely non-sustainable. In the good old days, the go-go days where everything seemed possible, we never thought: How is it possible to continue going on like this for ever? Now we are asking: Can we be in a recession for ever? We never asked that in the good old days.

At that time house prices were rising to unprecedented levels. Affordability was out of the question for most people. There was enormous overbuilding in both residential and non-residential sectors and a huge oversupply of commercial space and condominiums came on the market and it is going to take some years to absorb that. There was excessive borrowing by businesses, especially in the real estate sector, and overexpansion. Expectations were simply out of touch with reality by the late 1980s and we were due for a crash.

At the same time, the Bank of Canada was fighting inflation. Now we have to remember that this monster inflation they were fighting was averaging about 4% to 5%, which is not exactly terrible in my estimation and, I believe, Dr Peters's estimation. But in its fight against inflation it caused interest rates to rise very rapidly in 1989 and early 1990. It choked off economic activity and essentially helped push the economy into a recession in the first quarter of 1991.

At the same time, and partly as a function of high interest rates, the Canadian dollar rose steadily, which hurt exports and company profits. To add to the bad news, in the midst of a recession in January 1991 the government imposed the GST. This had an absolutely traumatic effect on consumers. They were already pretty nervous and when the GST came on they just stopped spending. They were just traumatized. I do not know about you, but I am still traumatized when I have to shell out 15% on everything I buy. I think the adjustment to the GST is taking a lot longer than anyone anticipated.

In case we did not have enough problems, at the same time tariffs continued to fall as part of the free trade agreement. Domestic producers lost their protection against US competition and something happened that no one really anticipated to any degree as far as I can see: consumers ended up in a situation where they had a very high dollar, they were faced with the GST at home, there were now lower tariffs or customs duties for stuff brought in from across the States, and it simply made shopping in the United States irresistible. Any rational person faced with those conditions would say, "Why should I shop here?" Cross-border shopping became a major phenomenon and I think in the last month there was a record number of trips. This is still going on.

We already had a very weak economy and cross-border shopping siphoned off income from provincial retailers, which made things even worse. It also did something else: consumers became very educated by this process. When we had a very protected market, consumers did not really know they could get good quality for lower prices and a different kind of service and retailing. They became educated. They went across the border and saw things they had no access to before. They have become especially price conscious. They are not willing to shell out the kind of money they used to shell out because they know better. They know they can get a better deal elsewhere and they want the same kind of deal here. So there has been an educational experience going on in the past year or so.

In addition to the cyclical downturn we were going to have anyway and the unique factors such as the GST and the free trade agreement, Ontario was also undergoing some structural change. That is a really nice buzzword and everybody talks about it. The catchword of the 1990s seems to be "competitiveness." It is something we are lacking apparently. I have found a real lack of understanding about what competitiveness means, so I would like to spend just a little bit of time talking about it: what it means for us and what this structural change is we are talking about.

Let me first define what competitiveness is. Competitiveness is the ability to produce and sell goods which are either cheaper than competitors' products or, because of certain characteristics such as higher quality or improved technology, superior to competitors' products. I have talked to a lot of people and competitiveness to them means we have to become cheap producers of cheap goods. We have to be able to compete with cheap Korean-made goods or things produced in Third World countries. That is not the case. We need to become competitive in the sense that we need to be able to produce any kind of goods, be they high-value-added goods or low-end or resource-based goods, better than someone else, and that someone else is usually the United States. This whole discussion of competitiveness is covered at great length in The Economy. If you really want to get into it, I urge you to read it because it is a very simple explanation.

We measure competitiveness by something called unit labour cost. I never understood that terribly well even with all my background but I think I now have a grip on it. The key to remember about unit labour cost is that three things go into it: productivity of labour, how productive, how much output per employee, per hour or per worker you have; wage rates, how much you pay your workers; and the foreign exchange, the value of the Canadian dollar, because we are comparing productivity between ourselves and the United States so we need to measure it in common currency, which is US dollars. Those three things make up what we call unit labour cost.

If our unit labour costs are rising faster than unit labour costs in the United States, that means we are losing our competitive position. That is what we need to remember. In fact, that is what has been happening. The reason our unit labour costs have been rising is threefold. First, our productivity, our output per worker, has not been growing as fast. Second, our wage rates have been rising faster than our US counterparts'. Third, our Canadian dollar has been rising. Our competitiveness has deteriorated because of those three reasons. It is not simply because the dollar is higher or our workers have become less productive or they get paid too much. It is a combination of all those three things. In order to improve our competitive position, we have to improve in any one of those three areas. We could have the dollar fall, we could have wage rates fall or we can improve our productivity.

Dropping the dollar is a short-term solution. In fact, the reason we were competitive earlier in the 1980s was because our dollar was so low. It really camouflaged what was happening underneath, which is that we were losing in terms of productivity. In those years when the dollar was low, we really indulged in being not very productive, and now we are paying the price for it. Dropping the dollar would help, but it is a short-term solution.


Dropping wage rates is not something anyone would recommend. The only thing we can do in terms of a long-run improvement of competitiveness is to improve our productivity. That is really the basis of what we are talking about when we talk about structural change. In the short run, it means that to improve our competitive position we need to become more productive.

As we all know, Ontario's manufacturing sector has undergone a very painful period of downsizing, rationalizing and modernizing in order to become more productive. The result has been major job losses, many of which are permanent. In this recession, 50% of all layoffs in Ontario were permanent compared to the last recession when only about 25% were permanent. That has been a really major shift. Those jobs will probably not come back.

When we talk about restructuring, I think there are really two phases to it. One is something I call the short-run phase, which is how we make our existing industries more productive, more competitive. We have already done most of that. I do not think we can do much more at this point to improve productivity and competitiveness in our existing industries.

The second part of restructuring, which people like Michael Porter and other gurus talk about, is a long-term process and it has to do with which new areas we should look into, how we should foster research and development, how we should train our workforce so we can produce other kinds of goods. We need to focus on what is happening in the short run and what is going to be happening over the long run, and that is going to be a 10-year process. I am going to leave you with that and you can ask questions later.

I have a question here, which is the heading of the next section, "Is the Worst Over?" I have presented a fairly depressing picture so far. Are there any signs of improvement? I have dug through all the data I can dig into -- I guess there are more, but I dug into as much as I could -- and I think there are indications that the worst of the short-term adjustments is behind us. Remember, I am talking about short-term restructuring of our existing industries and the cyclical thing that has been happening here.

If you look at the Report on Ontario, on page 2 at the top of the page there is a table. It gives you employment by industry. What I did was I looked at where the peak of employment was for all of Ontario over the last cycle and where the bottom was. Then I looked at the same thing in each industry. What we see is that the peak of employment in Ontario happened in February 1990, where we had 4.997 million people employed. The bottom was in February 1991, where we had 4.737 million people employed. That is where we get that famous number of 260,000 jobs lost. People throw that number around a lot, and it is true. Between the peak and the trough of the cycle, we lost 260,000 jobs.

However, if you look at October's number, which was the latest number I had when I was preparing this, we see there has been an increase in employment. We have had a gain of 44,000 since the bottom of the cycle in terms of the total economy. I thought that was pretty nice, and then when I started looking at each of the other industries, I was kind of surprised because in every other industry, in every single industry, at least in these aggregates, we have had a net gain in employment since the bottom of the cycle. Each industry hit the bottom at different times. We did not all move together. So if you look at trade, for example, the peak was in November 1990 and the trough was in August 1991. We lost 120,000 people, but we have gained back another 25,000 since October.

That shows me that employment in all our major industries is indeed expanding. If it were still dropping, if economic activity were still falling, this would not be happening. To me that is a pretty positive sign that there is a fairly widespread expansion going on. It is very difficult to see that when you look at the monthly numbers because you have one month of positive, you know, an increase in employment one month, then a decline, and you cannot really see the trend, which is why I kind of looked at it this way. It gives you a consistent picture.

The other things I looked at are layoffs, and I was quite surprised. The Ontario Ministry of Labour released its layoff numbers for the end of December, and it turns out there were 18% less layoffs in 1991 than there were in 1990. I was surprised, because when you read the newspaper you think there is no one left because everybody has been laid off. But if you look at the numbers the Ontario government has published, and I assume they are correct, there has been a decline. So the pace of layoffs is decelerating, and this compares to what happened between 1989 and 1990 when layoffs actually doubled. That is, to me, a positive sign. Maybe there are no more people left to lay off. I do not know. But I am saying that is no longer, in spite of the headlines in the news, on an upward trend.

On page 3, at the bottom of the page, I have a similar table to the employment table, but this has to do with manufacturing shipments. I will not go through every part of manufacturing, but again, if I take the peak, these are shipments and these are indices, so we can compare where they were. The peak of our manufacturing sector shipments occurred in February 1989, the trough, the bottom of the cycle occurred in February 1991, and that is a 16.4% decline in the value of shipments. However, if you look at what happened by October, we have had a gain of 6.5% since the bottom of that cycle. If you look at every single subsector in the manufacturing sector, you will see that there have been significant increases since the bottom of each of those segments' cycle.

I find that to be a fairly positive sign as well, because we worry about our manufacturing sector. That does not mean to say we are back where we were. I am just saying, to me, there is some movement and it is in the right direction; it is up.

I will summarize our outlook, which you have in detail in this publication. The Canadian economy we forecast to grow 2.7% this year, which is pretty much the consensus forecast, and I believe it is the federal government's forecast as well. I am forecasting Ontario to grow by 3.6%, and when I say that most people say, "Are you crazy?" Maybe I am, but I will stick with it. It may sound very optimistic, but if you look at what this means, it means that if we grow by that amount we still will only be where we were in 1989. Okay? We went down pretty far, so an increase of 3.6% is not going to get us above where we were a couple of years ago.

I believe we are still going to see very sluggish growth until springtime, but then the housing sector will revive quite strongly. Housing is much more affordable. Mortgage rates are at 18-year lows, and lower house prices have made housing much more affordable. This is especially true for first-time home buyers.

We have estimated that in Toronto the income required to carry a monthly mortgage in Toronto has dropped by 30% between June 1990 and November 1991. That is a huge decline. It means that if people who already own a home refinance their home at the lower mortgage rates, they too end up with a saving. What they do with that is, either they put it against their mortgage or they spend it, or some combination of the two. It gives them more disposable income. So I think there will be more money in consumers' pockets.


Much of our recovery depends upon what happens in the United States. We heard President Bush last night. It was a rousing speech with lots of applause, but I am not quite sure what is going to come of it because many of the measures he proposed have to be passed by Congress, and Congress is not in the mood to pass anything he proposes. But I think he gave a signal and he probably did enough to hopefully raise some confidence. It will have more of a psychological effect than anything else. We need the US economy to recover -- I think it is on the way to recovery -- because we need our export sector to grow, and that will really help us.

We expect growth of about 4.5% in the two years following, 1993-94. Our unemployment rate will still remain fairly high in the short run, above 9% this year, because people who have dropped out of the labour force will come back and that will keep our unemployment rate high, even though employment will grow. We expect housing starts to climb to about 72,000 units in 1992 and to 81,000 by 1994. That is still below the levels that we were used to in the 1980s, but it is a lot better than what we have had.

We tend to get so buried in the bad news we read every day that we forget some very basic facts about Ontario. I do not want to be a flag-waving Ontarian or anything, but I would like to remind you of a few basic things about this province. We have some advantages in this province and none of them have changed.

First, we are located in the middle of the country. Our geographical location has not changed. We have not moved anywhere. We are still here. We are close to major markets in the United States. That has not changed. They have not moved and neither have we. We are the most diversified economy in this country. We are not dependent just on manufacturing. We are not dependent just on the resource sector. We are very highly diversified. We have the most highly skilled and well-educated labour force in the country. We complain about our labour force all the time, but we need to keep these things in perspective. We are still the primary destination of immigrants and foreign investment, and we will continue to remain the financial and commercial centre of this country.

Given what is happening with the constitutional debate, I do not see the financial centre and the commercial centre of the nation moving east. I also do not believe it is going to move to Winnipeg. Where we are means that we have those advantages and they will remain. Vancouver may end up being a bigger centre than it is now, and that is happening, but the major activity is not going to shift to Vancouver. Ontario will retain the lion's share of activity in the nation. That is not going to change.

I may be too optimistic. I hope I am not. Maybe you will invite me back next year and I can tell you if my forecast was right. I hope it will be. But I feel much more optimistic than the headlines would have me believe. We focus much too much on the negatives and we do not see anything positive. With that, I will end.

Dr Peters: If you have questions, we will be glad to answer them. I would add one little item, though. The gains: I emphasized that on looking at these employment charts and the manufacturing shipments tables, they do not add up. They do not add up because of the different timing. What you see is very different timing in various industries, and that is why you get at the bottom of a cycle this flood of bad news/good news, because some industries are still declining while others are advancing. You get a kind of mixture.

What this shows, though, is that we have reached the trough in all industries and we have moved up in all industries. The movement up in all of those industries has been modest as yet, yes, but they have all shown positive gains both in shipments and in employment. I think that is the major good news that Dr Getter was giving us.

Mr Carr: Thank you very much. I wanted to talk about the tax situation. I was going through some of my notes here. The Canadian Federation of Independent Business says that taxation has become the number one problem. You mentioned the situation with the GST scaring people off. As an economist, when they put that $75 tax on cars, you would look at it and say, "It really wouldn't make that much of a difference." When you talk to car dealers, they say, "They would pay $1,000 to get the car washed, but as soon as you say it's a tax, people resent it at all levels, federal, municipal and provincial."

The Treasurer has said that he has not ruled out tax increases in the next budget. We are looking at a deficit at $14.3 billion. Most businesses looking at it are saying that a higher deficit means somewhere down the line, in terms of investment, we could be looking at higher taxes. The CFIB study says that as a result of the last budget with the record high deficit, 60% had scaled back their plants. What would your recommendation be for the Treasurer with regard to taxes? What would you say to him?

Dr Getter: I have seen a study put out by the Ontario Treasury and Economics ministry which says that Ontario still enjoys a tax advantage over major states like Michigan and Illinois and Ohio, and New York, I guess. I think that tax advantage has been eroding and will continue to erode as we continue to raise taxes. When I heard the Treasurer and I read the fiscal outlook, I was very alarmed. I was alarmed because there was much more discussion about tax increases -- 12 pages to 6 pages of spending cuts -- and I think that proportion gave me a message.

I think the worst possible thing at this time is to burden Ontarians with more taxes. It sounded to me like the plan -- I am not reading the Treasurer's mind or anything, but it sounded to me as if personal income taxes were going to go up, capital taxes were going to go up and there was going to be something done with the retail sales tax to broaden the base. All of these things are not good news for us. I think there is a perception out there, both from the business side and from the consumer side, that we are overtaxed. All the studies in the world from treasury are not going to convince people otherwise, and I think you are quite correct. As soon as people hear the word "tax," they get their backs up.

I would urge the Treasurer to go a little easier on his plans to reduce the deficit purely by tax measures.

Dr Peters: The major measure that will reduce the fiscal deficit either provincially or federally is to get a strong growth in the economy. You will not get a strong reduction in the deficit without strong economic growth. You will proceed to get further mired in deficit. So if tax increases were an alternative, were to dampen economic growth or to spur economic growth away from the province, you would clearly not be moving in a direction that would help that very substantial deficit, except maybe on a very short-term basis. But the longer-term basis is going to be that the Ontario economy is going to be growing rapidly. That will be the answer to any major reduction and continued reduction in the deficit. To encourage that, I would suggest that not a tax increase at this particular time would be the best thing.


Mr Carr: There are many factors that go into investment decisions. As part of my responsibility as critic, I have met with some of the international banks. They tell me very clearly that notwithstanding the statistics -- they may be wrong, but their perception is for a lot of things -- they see the private sector being driven out of the housing market with the rent bill; the same with day care. They take a look at the high deficits. They take a look at the new labour legislation. They are saying, "We're telling our clients, `Don't invest in the province of Ontario.'" They say, "Gary, we know you are pushing a lot of these things that we stand for, but we can't come here and lie to you and say that we are." So I agree with that.

The whole broader issue of what we do with that deficit is the question. I know as economists you sometimes talk about the statistics. On page 15 of the Ontario Fiscal Outlook, the Treasurer has listed where our expenditures are going. As you know, the big whack of them come from social expenditures, 74% for health care, education and social services. In order to tackle it, very clearly you said that we cannot have any tax increases. As economists looking at it, where do you see, in the expenditure side, any areas to reduce the operating and/or capital expenditures in Ontario? Any wonderful suggestions? It is a million-dollar question, but if you could help us we would be really appreciative.

Dr Getter: You do that one.

Dr Peters: I think it is a several-billion-dollar question. The message that I read from the Premier's televised remarks, and it was a slightly different one than made the headlines of the papers, was that the limitation of grants to municipalities, universities and hospitals to 1% was a challenge to them, and that in a period when we are looking at inflation in Ontario which has been actually declining recently, they were getting some real increases of maybe 1% or 2% in real funds. The funding was going to be a plus of 1% or 2%, and they were going to be challenged to manage their individual municipalities, hospitals and universities within that amount.

I think that is the challenge that exists in this province today. We do not have an inflation rate of 5% or 6%. We do not have the necessity of running up inflation numbers that are going to pressurize things like wages and costs and all of the items. So all of our government sector must be operating within that guideline and saying, "Look, we have to operate on the basis not of 5% or 6% inflation but on a minus 1% inflation, so that every one of our suppliers, whether they are labour suppliers or what have you, have to be challenged to bring goods to us that are going to cost less."

I think that is the key factor. It is a management of those very large portfolios in the provincial government, the Health portfolio, the Education portfolio and the welfare portfolio. The challenge to manage those portfolios in a manner that will give you real increases in the delivery of government services at lower costs is the challenge to the government today, and that is a challenge right down the line to the very smallest municipal government and the smallest hospital.

The Chair: Mr Carr, we have to go on. Mr Phillips, eight minutes.

Mr Phillips: In your presentation, I was curious, on the employment numbers, why you would not have used the end of December as your comparator rather than the end of October.

Dr Getter: When I was preparing this, the numbers I had available to me were just to the end of October. On the employment side for Ontario, I think the numbers for November are in. I am not sure if the December numbers are in yet.

Mr Phillips: But they were released at the same time as the layoff ones. You had the layoff ones. The ones for end of December show a fairly different picture.

Dr Getter: I would have to look at that. I just did not have it available to me at that time.

Mr Phillips: Just for your information, it is now down below that February 1991 employment number. Actually it has turned around in the last two months. I think it is now 4,711,000. If in fact that continues to decline and it is below the trough -- and the manufacturing number I think is well below the other one; it is now down to 853,000 -- would that change your conclusion at all?

Dr Getter: I would really have to look at the whole. I will do that, as a matter of fact, as soon as I get my hands on the numbers. As I said before, though, if you look at month-to-month numbers, you can run to opposite conclusions each month. If we look at GDP for the nation as a whole, for example, it is up 0.2, then it down minus 0.1, then it is up 0.3, then it is down minus 0.4. Depending on which month you are in, you come to different conclusions.

I took October because it was the last date I had, but what I was trying to point out is that the trough did not happen the month before October. It happened several months before in most of these industries. Now, if I find that the December numbers are all lower, then perhaps I would have to reconsider and say, "Things are getting far, far worse than they were before." But I really would like to go through all the numbers.

Mr Phillips: I agree with you on using the one number. That is why I was surprised you used just one number yourself, for October.

Dr Getter: It just so happened that was the number I had available to me at that time. I seasonally adjusted the numbers also. I do not know if the numbers you are talking about are seasonally adjusted or not.

Mr Phillips: Yes, they are. You people are really close to the business scene just because you see it every day. Are you beginning to see a turnaround in investment? I think all of us would agree that is where the manufacturing sector will get the productivity increases you are talking about, with investment. Are you beginning to see now the turnaround, that the worst is over and the investment is beginning to pick up in capital?

Dr Peters: I do not think you will see a major change in investment in manufacturing until the capacity utilization gets up a little bit. There are massive amounts of excess capacity in most industries in Ontario at the moment, especially in the manufacturing area. Where the declines have been as large as they have been, you will not see very large amounts of investment. What you will see is small amounts of investment and you will see the investment levels being maintained.

When you look at the economic numbers, if the investment level stays steady in the national economy, that does not mean your equipment is falling off the floor. That means you are adding that much new equipment. So even maintaining investment at a flat level means that you are adding a lot of new investment each year. What you are seeing now is the kind of investment that increases efficiency and cuts back the use of workers. That is why we see the layoffs, because it is an efficiency-producing investment that is being undertaken now, even though you would not see overall great, large levels of investment.

Most of the decline has been in construction. That is the key. The machinery and equipment, which is the first thing you do -- if you wanted to increase efficiency, you would get a new machine instead of an old one. That is continuing. Yes, we do see that in businesses; not large increases, no. You will not see that until you get to the next phase. You get back to higher capacity utilization rates, and in the boom period that we had in 1987-88, we had a boom in investment at that time. There will not be that boom until we get to maybe 1995 or 1996, when we get the economy rolling again.

Mr Phillips: Your forecasts of economic growth are more optimistic than the Treasurer's. I gather you feel he is being a little too pessimistic?

Dr Getter: I went to a seminar that was given, where Treasury and Economics presented their revised outlook. Their outlook, I believe, had been 3.8%, and they dropped it down to 2.2%. At the time, I thought they were being unduly pessimistic. That was just before Mr Rae's speech.

I think they are too pessimistic. I think we are going to see fairly strong growth in the second half of the year. I am going to stick with that. If I see that the next few months are really far worse, declining numbers everywhere, then I will revise it. But at the moment I still feel I will stick with this.

Mr Phillips: One last question, and then my colleague has one. In your judgement, how important is the manufacturing sector to the economy? You know, it is 20% of the jobs, and some people argue that it is the service sector that drives it. How much of an influence does your organization feel the manufacturing sector has on our economic outlook?

Dr Peters: The manufacturing sector is a key sector in export-oriented industries and in import-competing industries. In that way, it is more important than the 20% level that you would get. It is not the be-all and end-all; let me put it that way. I cannot work for a service industry and say it does not matter what I do. I am not going to tell you that. As an economist I would not say that. But it is a key factor in the export business and we have to pay our way in the world.

That is one of the problems Canada has as a nation right now. We are not paying our way in the world. Even though we have a deep recession, we still have an international current account deficit of $25 or $30 billion and that means our import-competing industries are not sufficiently competitive to give us even a balance, let alone pay back some of the $100 billion that we borrowed over the last five or six years.

In that sense, the manufacturing industries outweigh their proportion. The service industries are not largely in that, although some of them are. Banking, for example, is an exporting industry. We export banking services in fairly large amounts and bring in some fairly large amounts of money in exporting banking services.


Mrs Y. O'Neill: I just wonder, Dr Peters, if you would like to comment on Ontario capital cost allowance reinstated as it was before and not limited to the environmental criteria and if you feel that would be useful. You were talking about equipment investment. What made you think of it?

Dr Peters: Capital cost allowances are always a key factor in investment decisions. Demand for the product is an even more key factor. Increasing that would be a positive factor for investment in part of the equation. But with the past utilization down so low, the big factor is getting demand for the products. That is another key factor that we should consider as well.

Mr Sutherland: Just a couple of quick questions. First of all, on your charts of employment by industry, where is retail in this? If you separated retail by itself, would it also show a positive increase or would it show a negative increase in employment?

Dr Getter: Retail is in the trade. There is a category called trade. I do not know. I would have to look at the numbers. I will do that.

Mr Sutherland: Could you possibly provide that for us? It seems to me that in some respects part of the confidence problem relates to people who work in retail sometimes -- although it is not an appropriate term I cannot think of a better one -- a second-income type of thing to support a mortgage or be able to afford more. If that second income is down, does that have any impact on overall consumer confidence? From my standpoint, it does seem that right now is a great time to buy if you want to buy something, but it still seems very slow. You have talked about a lot of things here. Can you give some overall sense of where consumer confidence is right now, and is that a major factor for recovery?

Dr Getter: I think it is a major factor. I think consumers are still scared. They read the newspapers every day and they get even more scared. I think, though, that consumer confidence is recovering or about to recover. If it is true that there are less people being laid off and that employment is expanding, then this business of always seeing your neighbours being laid off and hearing the stories is going to peter out in the next couple of months.

People will become less scared. As you say, this is a great time to buy, especially to buy a house. I think many people have held off, waiting for interest rates to really get down to their lowest point. I think they are just about there. House prices are not going to fall any more as far as I can tell. I think consumer confidence will start to build in the springtime. We will see that, but I think it is key. I am not a psychologist. I can only tell you from my own experience and I know all of us have this kind of fear. You think twice about buying something whether you have a job or not.

Mr Sutherland: Does the Bank of Canada still have room in terms of moving on interest rates to close the differential between us and the United States, and in terms of some devaluing of the dollar?

Dr Getter: Yes. Given that the government of Canada has its hands tied behind its back in terms of fiscal policy, the only thing it has left is monetary. They do have room, because the spread between our interest rates and these of the United States is still quite high. The United States has moved much more aggressively than we have. I believe they will probably move some more, so there is room for us to move. The dollar seems to be falling. I hope Mr Crow will allow it to continue to kind of fall. I think there is more room. Surely as the dollar comes down that would help us.

Mr Jamison: That is a very interesting presentation. I thank you for coming today, Douglas and Ruth. I cannot help but reflect back on last year's occasion to meet with you and many of the economic experts we met with last year who came here to give us information that would help us to try to meet the challenge. We knew we were in for an economic downturn, so sharing the information with the experts was valuable in trying to plan a game plan to fight the recession -- that is what we chose to do -- based on the term that was forecast.

I look down the list again, and this year the same experts are coming in. I can honestly say that none of you were right in your projections. What in fact makes you feel more confidence or as confident about your projections this year about a recovery, a rebound, as you felt last year? It is very important to realize that, because a lot of the information you give us really supports treasury information and allows us to make decisions based on what direction we should go in. You have talked about a stronger recovery than the Treasurer would expect. Why would that be?

Dr Getter: Last year I sat here and Treasury had a forecast -- I do not remember what it was; one point something per cent -- and I said, "It's going to be minus 2.1%." So I was right and they were wrong. That is all I have to say right now.

Mr Jamison: What I am talking about is the term of the recession.

Dr Getter: I will let Mr Peters answer that.

Dr Peters: What I would like to do is not discuss whether we are right or wrong but rather what it is that gives us some confidence that there will be a recovery. I think that is the more interesting question. Usually, in an economic recovery in Canada, in almost every one, four factors have been key to getting the economic recovery in the country, and Ontario is 40% of it, so I can talk in national terms. First is a growing US economy; second is a monetary policy that brings Canadian interest rates down to a level about US rates or lower; third is the falling Canadian dollar either during the recession or just after the recession, and fourth is a federal fiscal policy that is expansionary.

As this particular time we do not have those four factors. This is the first recession we have had that has not had those four factors and that is why the recovery has been so slow and stultified. We are looking ahead now in this year 1992 and I think we see a stronger US economy coming across as a reasonable forecast. That is a reasonable assumption. The US has realized that it needs some economic stimulus and it is going to. That is the one plus we look at. Second, we do see a narrowing of interest rates. Interest rates have fallen substantially in Canada even though they still remain well above the US rates, well above where they should be. Third, we do not as yet have a sharply lower Canadian dollar, although it has declined quite a little bit in the last eight weeks. Fourth, we do not have an expansionary federal fiscal policy, nor am I looking for one if I read the Minister of Finance correctly.

I am looking ahead. Instead of getting a very strong economic recovery as we did out of 1982-83, when it was 6% real growth in Canada and about 8% in Ontario, we are looking for a much slower economic growth rate out of Ontario, half of what it was, and a slower economic growth in Canada as a whole. Nevertheless, there is an amount of economic growth there. We look for the lower interest rates to give you lower mortgage rates, which they are now, to give you some consumer confidence. Nothing will improve consumer confidence more than a little bit of money in the pocket of the consumer, and that he will get when he renews his mortgage.

The housing market is a plus in the early part of this year because the affordability is stronger, much better. I think Dr Getter mentioned 30% better in Toronto. That brings with it some spending on consumer durables; it brings a movement of houses. If somebody buys a new house, he moves out of another one and purchases furniture, consumer durables, and that brings the recovery along. It may be spring or summer before you see those numbers and the way we report statistics it may take a little longer than that. But that is the reason we have a feeling the economic recovery is moving ahead, not nearly fast enough for my own liking; I would like to see a 5% or 6% real growth rate. That is what we need in this country. I have been saying that for some while. We do not need 2.5% but I will settle for 2.5%. That is a lot better than the minus 2% we had last year.

The Chair: I have to say we have run out of time. Mr White, I will put you on first for the next group. As I was saying, I was hoping for some good news and I guess minus 2.1% last year and 3.6% this year is good news for this committee. Thank you for appearing.



The Chair: The next group is the Conference Board of Canada. James Frank and Paul Darby, would you come forward please. I would like to welcome you to the committee. We have one hour for the presentation and question-and-answer period. You may start. Please identify yourselves for Hansard in case some of the names have changed.

Dr Frank: Good morning, ladies and gentlemen. I am Jim Frank and I am with the conference board. My colleague is Paul Darby. What we propose to do, if you do not mind, is to go over a prepared statement that I put together for you today. I have given this to you so you can follow along with it. In addition to that are copies of our two attitude surveys, business confidence and consumer confidence, as well as our latest national outlook. You have a lot of numbers in front of you. As we did last year at this committee, we would like to go over and cover some issues and then we will do our best to address any questions you may have. I would like to speak for between 10 and 15 minutes and my colleague will talk for about 10 and focus on the Ontario scene.

We are very pleased to have the opportunity to come here again this year. As you probably know, we are one of the leading forecasters in Canada. A lot of our members are scattered all across the country, one of which is of course the Ontario government. We have not fully updated our Ontario forecasts as of this morning. Paul will give you an indication of where we think the numbers will settle down. It is not going to affect the issues or the argument that we are going to present to you today.

I really would like to say a couple of words about the conference board so that you will all know at least where we are coming from in terms of our comments this morning. We are a private-sector, not-for-profit research outfit funded by business, government and other organizations in Canada. Our mission is to be the leading private applied research institution dedicated to enhancing the performance of Canadian organizations within the global economy.

In all our actions the board is guided by a number of principles. The most important one for our purposes today is our principle which I quote from the mission statement: "To be objective, independent and non-policy-prescriptive in all our work." This means that we undertake research and analysis of major issues without trying to be prescriptive or making recommendations as to what business or government or labour or anyone ought to do. Our aim is to inform our members of what we think these initiatives might bring to them and mean to their businesses.

Given this principle, in our presentation today on the economic outlook Paul and I are not going to be making recommendations to you or lobbying on behalf of any position one way or the other, in particular opposite your budget submission. We just hope the information we present to you will be useful in your deliberations and be seen as independent and objective.

What about the Canadian economy? The weakness in the second half of last year and current events suggest there is little likelihood of a return to growth in the 4% range until the spring of this year. It is a very slow recovery. Our current outlook has been revised downward to a little over 3% for this year and next year.

A major factor behind this downward revision is the weakening in the US, which we now forecast to grow about 1.7% this year. We assume that the US economy is stalled until the second half of 1992 before you see much pickup in growth there. The overall weakness in the US is going to hold export growth to about 4% this year for us. One area of relative strength is housing starts in the US, which should be up around 15%. This will help lumber exports, not a major thing in this province, of course. Auto and parts exports are also a major strength, but in the second half of this year.

In spite of the weak outlook, there remain some key downside risks. I guess if I leave you a message today, it is probably that. Recent collapses in employment, possible structural changes and damage to the manufacturing sector, continued high level of consumer credit and so on are some of those downside risks. This latter reality means that the recent bout of cuts in interest rates may do little to stimulate further spending, aside from the areas of housing, autos and other durables which are affected by immediate cuts in interest rates as people refinance.

We think the fate of this outlook very much lies in the hands of consumers, people like you and me, people who walk the streets, people who buy goods and services in the stores. Our forecast assumes that interest rate cuts are going to trigger household spending in the first quarter of 1992. Consumer spending will grow only 2.5% this year. This is very weak compared with previous recoveries.

Part of the sluggish growth reflects employment growth of only 1.75%, as firms are reluctant to rehire, given the uncertain path of recovery. This weak employment growth will hold unemployment above 10% throughout the year and dampen consumer confidence, make consumers quite reluctant to spend. A positive influence will occur on consumer spending because of some small real wage gains that occur early this year, as wage increases still exceed the very low rate of inflation we expect to have in the first half of 1992.

From a government revenue perspective, this weak employment and wage growth leads us to forecast a gain of only 4.6% in personal income in Canada as a whole, virtually unchanged from what happened last year. Thus the base for personal income tax collections is going to rise very slowly. Tax collections by federal and provincial governments from personal income taxes rise by only 4% to 5% this year, compared to 1% last year. So the turning point is there, but it is still a very gradual upturn. We also forecast a gain of only 3% provincial retail sales taxes across the country, compared to a gain of 6% in GST revenues.

Most of the risk to the outlook for consumer spending remains on the downside. With threats of increased layoffs and declines in confidence, we think households are going to concentrate on paying down debt rather than spending. This perception is underlined by the results of our most recent consumer attitudes survey, which I have given you. Not only did consumer confidence grind to a halt, but it actually dropped 10 index points in the fourth quarter. Especially serious was the large decline that occurred here in this province from 83 to 66. This is a very serious issue. Consumers are very nervous, and if our experience with this index is anything to indicate the future, they are not going to be reluctant to spend. So consumer confidence has dropped.

Mr Sterling: I have just a point of clarification. You said they were not going to be very --

Dr Frank: Inclined to spend.

Mr Sterling: Okay. You said --

Dr Frank: They are very reluctant to spend. Sorry.

The decline of 73,000 in employment in the last two months of 1991 -- and of course a lot of that occurred in this province -- and falling manufacturing shipments all show how serious the situation is. A consumer spending binge is certainly just not in the cards at the beginning of this year and probably throughout the year.


On the business front, business investment of course is important. Roughly 60% of spending is consumer spending; you take another 20% for business investment. Our business confidence survey results are only a little bit better than those for consumer confidence. In the fourth quarter the index dropped three points from 101 to 98. The important thing here is that this index should be increasing at this point in the business cycle; instead it fell a little bit. Businesses see very weak economic conditions for the next six months. This is not going to help investment.

A very important finding in this survey was the sharp change in inflation expectations among businesses; 69% of our respondents now expect inflation in the next six months to be 3% or less, compared to 36% in the third quarter. There has been just a sea change in expectations about inflation in the corporate community in Canada. Whether this change in expectations remains is going to be a key to success in this anti-inflation focus over the coming years.

The recession has hit consumers and businesses very hard. Corporate profits declined about $30 billion since peaking in 1989 and employment remains 250,000 people below the peak it reached in pre-recession months. As we look ahead, business conditions are expected to remain grim and employment gains weak even though the recovery is under way.

Our outlook for corporate profits emphasizes the competitive pressures that exist in 1992. Profits will not reach their pre-recession levels until after 1993. It took three years in the 1981-82 recession for this to occur and it is going to take longer this time. Several factors lie behind this outlook for profit levels, and I think they are important to emphasize.

On the demand side, that is, the consumer side of the profitability equation, how much money do consumers have to spend? There has been a big drop in employment since the recession started and it is not going to be reversed quickly. As I said, the decline in the last two months of 1991 really hurt. It is a real setback at this stage of the cycle.

The fight for market share and margin squeezes is going to remain the order of the day in 1992. There is not much prospect for rapid improvement in corporate profits from the consumer side of the equation. This means that income taxes paid by corporations will not be growing much in 1992, after having fallen by about 18% last year. Thus the level of corporate tax revenues remains lower than it was in 1989.

Furthermore, we think business conditions will remain tough because prices received for primary manufactured products are also likely to rise at very modest rates. There is little prospect of a major upswing in world commodity prices over the next couple of years and corporate profits are going to remain depressed, a factor which could easily short-circuit any stimulus from lower interest rates on investment.

Remaining profitable and improving profitability is going to depend on volume gains and cost control much more than on price gains over the next year. This is an important dynamic within the business community. The same point applies to manufactured products and is equally discouraging for profit growth and business expansion. Businesses and manufacturing are faced with a very tough year. Cost control will be essential for survival. The recession has been particularly hard on the manufacturing sector and it has almost certainly suffered structural damage.

A look at the results during this recession make the point. Employment loss this time is about 325,000 in manufacturing in Canada -- Paul will comment on Ontario -- virtually the same decline as in 1981-82. At that time it took us eight years to regain employment levels in manufacturing. What with plant closings, relocations to the United States and so on, the question is, will it take longer this time? The answer is almost certainly yes. This may well be leading us to overestimate the rate of recovery, particularly in this province, where most manufacturing is located.

Overall, the near-term outlook for plant and equipment spending, which is investment, has been revised downward substantially since our last forecast. The major factor is non-residential construction spending, both energy and non-energy. You take housing out of that, which is the only really good outlook component. The weak recovery, very low capacity utilization rates and a dismal level of corporate profits preclude any recovery in non-energy, non-residential construction investment until 1993. On an annual basis the decline is about 5.5% in 1992.

The outlook for overall energy investment has also worsened dramatically since the last forecast. It is mainly the result of declining natural gas prices. Environmental concerns have forced us to take the Grande Baleine project out of the medium-term outlook altogether, so overall energy investment grows by only 0.8% this year. That is a very weak performance.

For non-energy machinery and equipment investment, we expect the recovery to begin in early 1992. Much of the force behind this arises from ongoing structural adjustment on the part of manufacturers as they strive to maintain competitiveness in the face of what we call a high Canadian dollar. Part of the adjustment is assumed to be achieved through cost savings as labour is replaced by more efficient capital equipment. Overall, non-energy machinery and equipment investment is expected to increase by only 1.6%, so you have really weak investment here.

The housing sector, as I said, is the only area where we see a bit of a bright spot, and residential construction is forecast to grow by about 13% this year. That is basically driven by demographics and declining interest rates.

I would like to comment a bit on fiscal and monetary policy and then turn to the issue of the currency. The 1991 federal and provincial budgets, except in Ontario, were restrictive and we see little change in fiscal policy in 1992. We have included the unemployment insurance premium increases already in our forecast, and this has a minor dampening effect on disposable income at the beginning of this year.

There has been a little sign of weakening on the federal side in terms of the resolve to hit the $30.5 billion, and as you noticed, the other day they announced they would hit $31.5 billion. Our forecast is more in tune with about a $35-billion deficit at the federal level.

The current outlook in terms of interest rates calls for a prime to average around 7.5% in 1992 and rise gradually to average about 8.5% in 1993. That is because as the recovery picks up, we expect interest rates to rise gradually. From September 1991 to date, short-term rates in Canada have fallen roughly 1.75 percentage points, but this decline is almost entirely the result of declining US rates. The spread has been remaining virtually unchanged since then.

The current outlook assumes a partial loosening of the Canadian monetary policy in the first quarter of this year, with an additional 100 basis point, or one percentage point, decline in the spread, unmatched. Of course that means the US rates are not falling. This interest rate decline is in our forecast because we believe it is going to be used as an attempt to bolster what is a very weak economy in this country.

We have made a lot of progress on the inflation front and we have a relatively tighter fiscal stance in this country than in the United States, so we are guessing, at least, or forecasting, that this will not lead to a devaluation that will be very abrupt. Our annual forecast for 1992 is 87 cents compared to what we are at today. We can discuss that if you are interested.

The severity in the situation of inflation can be seen in the retail sector, which has had a decline in the CPI in the fourth quarter of only one tenth of a percentage point, but that is the first time this has occurred in 20 years. You can see how tough business conditions were in the last few months of 1991. Our forecast for inflation this year is 2.2%. It has been revised downward sharply because of this fourth-quarter result in the CPI, the delay in Quebec's GST harmonization and some other minor factors. Although we have a modest pickup in inflation in 1993 as demand strengthens, we think there has been quite a shift in expectations on inflation -- I mentioned the business confidence survey -- as well as in terms of labour relations results that are coming through now.

The slowdown in North American growth has caused sustained deflation in many raw materials and industry product prices. Prices have been falling. Steel, pulp, paper and mine products have all been hit hard. As the recovery takes hold we think there will be a general firming in product prices and this will bring some underlying pressure on inflation, especially as we move through this year. The feeble recovery in North America and the situation in Europe and Japan do not lead us to believe there will be any commodity price boom this year or next year in the world's economy.

On the currency, there has been a 21% increase in the Canadian dollar since 1986 and we think this is largely explained by the Bank of Canada's tough stand on inflation, in spite of the influences of the current account deficit and relative inflation performance. Fighting inflation with high interest rates has led to a very wide spread between Canadian and US short-term rates. Higher interest rates have had the effect of making the Canadian debt even more attractive to foreign investors as well as compelling Canadian corporate and government borrowers to look abroad for funds.

The critical question for credibility in international markets and continuing strength of the dollar is whether the commitment to lower inflation made in the 1991 federal budget will survive the pressures of the next few years. By forecasting a higher dollar through 1995 -- around 85, 86 cents -- the conference board is explicitly assuming that anti-inflation policy will remain tight and wide interest rate spreads will prevail. A devaluation is inflationary, and for a government and central bank bent on keeping inflation low, devaluation is something that will be avoided, in our view, or allowed to occur only very slowly over time. Another way of looking at it is that the 21% appreciation over the past five years has been an anti-inflation "gift" of something like one percentage point a year in inflation, and it is not going to be easily given up.

Since 1986, we have had an appreciation from 72 cents to 87 cents, the latter being the average last year. Canadian manufacturers are having trouble selling abroad, especially in the United States, and Canadians find cross-border shopping very attractive. I should also say that we trade a lot of services, such as travel and hospitality, and the rise in the Canadian dollar has discouraged American travel to Canada while making it even more attractive for Canadians to travel south. Alcohol and gas are seen as cheap, and they are, and there is no goods and services tax. The hospitality industry is a major employer. These are hotels, restaurants, motels, amusement parks, you name it, and they go into the recession at about the same time as everyone else. It takes them longer to come out because spending is discretionary.


A lot of factors affect the currency value and these range from perceptions regarding political issues, such as the size of federal and provincial deficits, current account balances and associated capital flows and monetary and structural economic policy changes. The interaction of these factors is enormously complex and their relative importance can change quickly. That is why it is so difficult to estimate the net effect of all of these things on the currency.

What we will say, and what we have been saying for quite a long time now, is that the chance of a major devaluation to the 80-cent area within the next few years is very limited. Canadian businesses, whether in primary products, lumber, mining, newsprint, you name it, in manufacturing or wherever, are going to have to learn to live with a "high" currency. This is going to remain a key factor in forcing adjustment and, in our view, keeping inflation under control in the near term.

The comments I have just concluded here in terms of the Canadian scene and the issues we think are important in terms of our outlook are reflected in the comments I would like Paul to make on the Ontario situation. Then we will be more than pleased to try to address any issues or questions you want to raise.

Mr Darby: As Jim pointed out, in fact we are just now in the process of putting the finishing touches to our most recent outlook for the Ontario economy. I have not handed out any hard copy this morning, partly because the numbers are still subject to change but also because I wanted to make sure you had the most current thinking, at least on the economic picture for Ontario.

Based on the national outlook that Jim just spoke about, we are looking for growth in Ontario this year to be somewhere around 3.5%, and the rate of CPI inflation to be down sharply to about 2%. Employment growth, however, is very sluggish and only slightly over 1% in Ontario this year. The unemployment rate stays high, just under 10%, say in the 9.7% range. I guess the one major bright spot in the outlook is that we are looking for housing starts to get up to around 85,000. There were only 53,000 starts on average last year.

Again, building on Jim's comments, consumer spending, though pretty weak compared to previous recoveries, is still a major source of that 3.5% growth we are talking about. We do expect the consumer to start coming back into the stores, certainly by the second quarter. In the April to June quarter, we are looking for some return to the market on the part of households. For consumer spending as a whole in Ontario, we are hoping to get back somewhere close to 3% growth this year. In real residential investment, based on that large-share recovery in housing, a lot of which is now behind us, we are looking for growth in real terms on the order of 21% in Ontario in 1992. Those are the two major sources of strength that generate that roughly 3.5% growth.

The situation on the investment side is not nearly as rosy, probably another decline on the non-residential investment on the structures side and then only very slight growth on the machinery and equipment side. Exports, given the weak outlook we have for the US, I would say will be very weak for a recovery year and probably not exhibit much strength until we get into the second half.

Finally, I would point out some of the damage that has been done to the Ontario economy. Jim mentioned the employment figures of the last recession, which was seen as very severe and deep, when overall employment in Ontario fell by 221,000 jobs. To December of 1991, Ontario has lost 212,000, almost the same numbers as we saw in the 1981-82 recession, which at least in growth terms was much more severe.

Manufacturing employment in Ontario tells another story. While in the last recession roughly 150,000 jobs were lost in Ontario in manufacturing, this time the number is 216,000 jobs. So if you are looking at it from the perspective of the manufacturing sector in Ontario, this recession has been much, much worse than the terrible 1981-82 recession. There is no doubt that the Ontario economy has taken it very much on the chin.

Jim talked of risks on the downside. I have to emphasize that the most recent economic data we have got since the national outlook was prepared -- this provincial outlook will be based on that national outlook -- is, I would say, on the downside. We are looking at employment losses again in November and December, which also struck hardest at Ontario. We would not expect, as Jim said, to see those kinds of employment losses at this stage in the cycle.

The sharp drop in consumer confidence in Ontario, which has come out in our most recent survey -- not yet public by the way; you are the first people to get a look at it -- is again cause for thought and certainly introduces some overall downside risk to the outlook. We would not at this stage want to suggest that Ontario will not recover in 1992, but I think the 3.5% growth rate may have to be tempered a little in terms of the most recent information.

Mr White: I had a couple of questions following from our last presentation, but I will attempt to tailor it to you. An issue brought up then, and by you as well, is the decline in manufacturing employment and production. In the last presentation an attempt was made by Ms Getter to suggest that we have both a cyclical recession and a structural sea change. I realize that is not part of your notations, but when we have the discussion in regard to the devaluation of the Canadian dollar, or the overall increase in that dollar, of course that produces the cyclical change. But with the free trade combined with that, I am wondering what effect that combination of a structural change with the cyclical change, which you are really addressing your notes to, would have in terms of recovery in the manufacturing area.

Dr Frank: Let me talk to that a little bit. Then maybe, Paul, you could just give a rundown on the auto sector and what we see there, because that is an example of a structural kind of change, the change that is going on underneath all of this, and that probably is not directly related to the immediate situation.

We have no estimates of the numbers of people or plants or whatever that are lost as a result of structural versus cyclical change. I believe that is not very easy to do, perhaps impossible. What does seem clear, though, is that the decline in employment in manufacturing and the steady stream of headlines that we see of actual plant closings and shutdowns suggests that there is a structural change going on. There are some components of this economy that are, if you like, downsizing or disappearing. The best examples of those are in the auto sector, in parts components, where you see that pretty clearly. We have had an example of that just recently.

The Canadian competitive position is very much affected by the value of the currency. When we did our analysis, to go back to the structural issue as it is linked to free trade, we did not anticipate a rise in the value of the currency related to free trade at all. We see the rise in the currency as a cyclical thing, associated with interest rate policy and spreads, as I mentioned to you.

Our assessment when we did the work on free trade a couple of years ago was that there was not going to be a big structural change in Canada, with the exception of food processing, where you could see some change coming in, and footwear, clothing, textiles and furniture. Those are the main areas where you could see a structural change occurring.

What has happened in this recession is that we have had a province, Ontario, that has two years of declining activity. Two years is too long to be talking about cyclical change only. You really do have to belly up to the issue of structural change, ask where that is happening and try to find out whether anything really can be done about it short of major devaluation, which as we said earlier is not likely in the cards.

It is very hard to separate these things, but our sense is that there is more and more likelihood that we have suffered some structural change that is not going to be easy to reverse. That is why I said earlier that we may find ourselves forecasting a recovery that is quicker than what is going to take place, because we are working from history, which does not have that structural change built into it.


Mr Jamison: A very interesting presentation. I recall you were here when I asked my last question about projections and how we all seem to have misjudged the depth of the economic downturn.

Just a comment and then a question. I tuned in and listened to Governor Mario Cuomo of New York state. Of course we are always being compared to losing business and jobs and investment over there. Their financial outlook of a deficit for the state is between $5.5 billion and $6 billion on the operating side. Given that climate, my question would be hinged to what the President of the United States, in his own little fireside chat, said when he spoke to the people of the United States and tried to give some indication of what he intends to do. Our whole economy here exportwise is hitched very directly to the potential upturn there as well. I wonder if you can make some comment about what you see in that area.

Dr Frank: I watched the state-of-the-union address last night. I guess I had a couple of reactions. First of all, the amount of money that is being talked about there -- and this is really just off the top of my head because you cannot assess that without knowing the details, the timing and all the rest of these initiatives, so just put that in the context of what I am going to say to you -- is small. The US economy is a huge economy and, as I listened to him, the amounts of money, talking about housing, some withholding tax form changes, are small. Whether that will make a whole lot of difference that we will notice here in Canada, I would doubt. That is my initial rough cut on it. I do not think you can rely on what Bush did last night to make a whole lot of difference south of the border. The big thing down there is the interest rate situation. That I think is going to make the lion's share of difference. What he did last night, I would say, is going to be very modest.

Mr Sutherland: First of all, thanks for coming in. It is interesting to see that you are far more optimistic in terms of housing starts for Ontario than the previous presentation. What do you think makes you more optimistic than what they have been forecasting? We know that the Toronto Real Estate Board has come out with a study saying, "There's never been a better time to buy a house in this area because of the prices and the interest rates being down," but my sense is that a lot of people are still just looking. Not that many people are actually out there offering. Do we think people are going to make the most significant investment given the other things you said about consumer confidence in general?

Mr Darby: I have a few remarks with respect to that. The housing outlook we have for Canada as a whole, and the remarks also relate to Ontario, has underneath it of course the very significant declines in mortgage rates we have seen ongoing over the last year and a half or year and three quarters. There was quite an acceleration in that decline in mortgage rates over the last four or five months, and certainly that sets us up. As you said, "Never a better time to buy house."

Also, I think it is important to recognize that we still have a major demographic pressure on housing, coming mainly from immigration but also from just the rate of domestic household formation. Household formation is probably running in the order of over 200,000 units a year in Canada. Housing starts down around 180,000 are in some sense not sustainable in a long-term context from a demographic perspective. People will, hopefully at least, get a roof over their heads one way or another. It may be multiple houses, it may be cheap apartments, but they all count as starts.

It is important to recognize that the outlook for the housing picture in 1992, particularly in Ontario, does have some downside risk, and you mentioned the factors. It is a major investment, and consumer confidence is certainly down in Ontario as we have seen from the most recent data.

Finally, the most recent data on housing starts -- we have had a couple of months now in Ontario, the November and December numbers -- are also off quite substantially from the pace that we saw, say, in August through October, and it certainly puts the 85,000 start forecast for housing starts that we have now for Ontario next year in a critical light. Again, we feel there could be some risk on the downside.

But even saying that, it would be very difficult to imagine housing starts in Ontario, for example, being under 75,000 starts, still a major increase from the 53,000 starts we saw in 1991. The underlying pressures I talked about in terms of affordability from the much lower interest rates and also the demographic pressure will definitely play a role in 1992. I just cannot see how we could get around that fact. While 85,000 might be too strong, to suggest that there will not be a recovery in housing at all in 1992 I feel is, at this point at least, definitely overstating the case.

All that said, housing is still not nearly as large a proportion of the economy as the consumer as a whole. I think that is where we have to think about focusing our efforts and attention in making decisions about how strong this recovery is going to be.

The Chair: Mrs Sullivan, your party has 10 minutes.

Mrs Sullivan: I too was going to follow up on the housing question. I think the points you have just made are very interesting in relation to having the projections perhaps being more likely at risk than you had first indicated. But I wanted really to concentrate on the question of growth in the manufacturing industrial side, where we have seen the most substantial job loss in manufacturing over the last while. I was interested that your real growth projection is 3.5%, which would take us below 1989 levels of economic activity. Comparing that to treasury's estimates of 2.2% real growth for the 1992 fiscal year, you might want to address those two different projections.

In terms of manufacturing itself, with your predictions that business investment is going to be slight, the machinery and equipment business probably negligible, inventories probably at their lowest levels now, how do you see that being kickstarted? We are expecting that lower interest rates are going to kickstart the housing industry and perhaps automobile sales. Where is the kickstart coming in manufacturing?


Mr Darby: The points you raise are good ones. It is important to recognize that for the manufacturing sector in Ontario a lot is exported to the United States. Here is where the important role of the outlook for the US economy comes into the outlook for Ontario. As Jim has already mentioned, our outlook for the US in this year is very weak, only in the neighbourhood, I believe, of about 1.7%. Normally, if you look back at previous recoveries, we would ride on the coattails of the US to a large extent. The housing sector would certainly come back, but the US economy would serve as a major engine of growth for exports and manufacturing in Ontario.

This is not something we see happening this time around, not nearly to the same extent as it did in previous recoveries. This is a major problem for the Ontario economy as we move through 1992. Nevertheless, growth of 1.7% is better than declining growth in the United States and does help to generate some increase in manufacturing activity in Ontario to meet that demand. A kickstart is perhaps not the word you would want to use, however.

Another issue is domestic consumption. It is important to recognize that there is a fair amount of Ontario manufacturing which stays within Canada and feeds domestic consumption not only in Ontario but in other parts of the country. Again, the fact that we are forecasting the consumer in Canada to come back on the order of 2.5% to 3% this year is a major source of strength and is one of the major factors behind suggesting we could get some new growth in manufacturing. But as we have pointed out and Jim has pointed out, that consumer outlook, although we are sticking to it, has some downside risk attached, particularly on the basis of the most recent numbers.

The short answer to your question is some growth from renewed activity in the United States; however, not as much as we would normally expect. The majority of the activity would come from homegrown increases in consumption and, to some extent, the housing sector as well. There is some manufacturing directed to the housing sector. As for machinery and equipment, most of that is imported. We have some growth in the forecast, but we certainly would not look for that as a source of strength for domestic manufacturing.

Dr Frank: Can I add one point here? To elaborate briefly, coming out of 1981-82 Ontario just skyrocketed. If you look, probably the most important factor was the auto exports. We had an increase of about 18% in 1984-85. It was spectacular. It was something like serendipity. We happened to be producing the mini-vans, which sold like hotcakes south of the border. As we scan our eyes across the industry here, the auto sector, and ask ourselves, "What products produced in Canada are going to sell like hotcakes south of the border?" frankly we do not find a lot. There is a structural issue in autos that we can come to if you are interested. But that feeds then to the steel industry, everything that feeds into the auto sector -- very modest performance.

Mrs Sullivan: I know my colleague has another question, but can you just address some of the structural issues that you see in the auto industry in about -- how much time do you need?

The Chair: You have four minutes left.

Mrs Y. O'Neill: I have only a short question.

Dr Frank: We will take one minute.

Mr Darby: You are probably already well briefed on the layoffs that were announced by GM. Clearly what we are looking at here is import penetration. As Jim has pointed out, you cannot imagine any rapid turnaround in the cost structure or the organization of the North American auto industry. This is something the Ontario economy is going to have to deal with for at least the next five, and perhaps on the order of the next seven to 10, years. That is something that should be taken very much to heart. When you start talking about structural change, there is no quick fix in the budget for that. You are going to have to learn how to manage your way through extremely difficult times in Ontario from a structural perspective for five or seven years. I think that is the message.

Mrs Sullivan: Thank you. I am delighted again to have heard from the prestigious conference board, which is I think the way you were referred to all the way through the last budget cycle.

Mr Christopherson: It is just disappointing that we would have to deal with this all the way through our second term.

Mrs Y. O'Neill: I want to go to consumer confidence very briefly. You have used as one of the factors of analysis a credit squeeze. Could you tell me what you feel caused that credit squeeze? As the second half of that, do you think some of this reluctance which you underline is psychological? I know there are several factors, but is some of it psychological, that the consumer is really keeping the wallet closed?

Dr Frank: All right. On the credit squeeze thing, interest cost for consumer debt as a share of disposable income is higher now than it was in the 1981-82 recession. In other words, it is around 10% of your disposable income as a society goes to service credit card, mortgage and other interest. Why is it that high? People borrowed a lot of money.

Mrs Y. O'Neill: When the times were good.

Dr Frank: Just cut away all the fuzz from it. If you go out and borrow $100,000 to buy a house, there it is. What happened is that interest rates -- we have been through this story -- were pumped up and up went interest costs. That is why the credit squeeze is there. One of the elements we think is critical in this consumer turnaround issue is the fact that when you look at consumer credit for mortgage rates, automobile loans and, let's say, consumer and bank loans, you can get interest rates that are down in the single-digit or 10% area for those things now. A lot of people, though, carry significant balances on credit cards, which have not seen interest rates drop much, a little but not much. That is why we are saying that as you refinance you get a big pickup from lower interest rates. That is the story.

Now, as for the question on just a psychological side, your guess is as good as mine. You are a politician, you walk the hustings, you talk to people. When you have in a country 70,000-plus people losing their jobs in November and December, just before Christmas, that is a cold shower. I think just about all of us personally know people who have been unemployed for lengthy periods of time. That affects our willingness to spend. It takes time to get through that. I would say there is an element of that but I could never begin to quantify it.

Mr Darby: If I could just elaborate briefly too, consider the borrower who has been locked in for a two- or three-year mortgage and is renewing this spring. He looks at it. Maybe he has a $100,000 mortgage he is still carrying. He might save $200 a month on his mortgage payment. What is he going to do? Is he going to keep the same term structure, take the lower payment, go out and spend the $200 or is he going to say: "No, I think I'm going to pay this mortgage off more quickly. I'll keep my payment the same. I'm going to reduce the amortization period. I'm not going to increase my spending"? That is a purely psychological decision, and it is important for our forecast of consumer spending, given the most recent data on consumer attitudes. That is a well-respected survey, so it is hard, good information. It is beginning to look more like the consumer may lean towards reducing his amortization, lowering his debt load, as opposed to, as you put it, opening up his wallet.

Mr Carr: Thank you very much for your presentation. Barbara alluded to the fact that you were very supportive of the last budget. In fact, the Treasurer and the Premier spent an extended period of time championing your endorsement, and I say "endorsement." Compared to the other economists, you were one of the few ones. It was interesting that when I looked at the Canadian Federation of Independent Business studies 98% of their members thought the $9.7-billion deficit was too high.

Two questions: First, now that we are going to $14.3 billion, what do you see happening to the provincial deficit? Maybe you can elaborate where you see it. The Treasurer has said that if nothing is changed and there are no cuts we will be hitting the $14.3 billion. Where do you see it heading?

Second, as economists often like to revise their forecasts, I was wondering if you would like to publicly revise what your thoughts were on the last provincial budget. Did you think it was a good one in light of what has happened? Remember, your good friends Mr Laughren and Mr Rae will be listening.


Dr Frank: First of all, did you read the piece?

Mr Carr: Yes, I did. I also heard the Premier's comments and the Treasurer's.

Dr Frank: Good. Okay. If you had read the piece, I would think that you would not be presenting it quite the way you are presenting it.

Mr Carr: But you know how the Premier presented it and how the Treasurer presented it.

Dr Frank: Do you take my point?

Mr Carr: I see, yes.

Dr Frank: Thank you. In terms of the situation now and this 14.3, I can read just as you can. The government has said unequivocally that it is not prepared to accept that number. I do not know what it will turn out to be. If you take our forecast here and look at the growth rates we are talking about, it is going to be a real challenge to make the expending cuts that are probably going to have to be made in order to keep the deficit on the track that they were talking about last year.

As I said in that article, the marketplace is going to exert a lot of discipline here because you are going to have further downgrading of bond ratings, a lot of trouble in terms of confidence if you have tax increases. People are concerned about that now. I think you can see that in the surveys all across the country. So what are the choices? These are political kinds of questions.

Last year at this meeting, we were told the deficit was somewhere around three and change, and you know what happened. We do not forecast directly the provincial deficits. We do forecast directly the federal deficit. What is the likelihood of this track coming through? I do not know. I suspect they are going to move heaven and earth to try to meet that projection they had in their 1991 budget.

Mr Carr: I appreciate what you are saying. I know how politicians at that time took what you said. I did read it. But it came out as being an endorsement, and for whatever reason the Premier and the Treasurer took it that way. I know even some of your members rushed to get a copy of it to see exactly what you did say. Having said that, I think what comes out of it is that the Treasurer and the Premier think very highly of your forecasting techniques and your expertise. With that in mind, the Treasurer is obviously listening to these hearings and will get copies of them.

With regard to taxes, the Treasurer has a decision to make: cutting spending. Again, I appreciate that you projected what the federal deficit was going to be. You do not do that with the provincial. There are two things he can do, cut the spending or increase the taxes. On the tax side, you are a good friend of the Treasurer. What would you say to him on taxes? Should you increase them? I am talking about, broadly speaking now, the provincial sales tax, the corporate tax and personal tax. Would you say to him on taxes, "Floyd, this is what you should do"?

Dr Frank: First of all, I would not say what he should do. I think the issue here is one of trying to sort out how much of the spending situation, the increasing costs in this government are a function of the cyclical changes that have occurred and the structural. I am absolutely amazed to see in this document compound annual growth rates for a decade in social welfare spending at 20%. That, most people would agree, is not sustainable. Legal aid rising at 15% a year for a decade is not sustainable.

The issue here then is how do you deal with those kinds of spending growth rates in an economy where we just report here a severe drop in confidence among consumers in the province, declining employment still in the province at this late stage in the business cycle? What will happen to consumer confidence if you raise taxes?

You can speculate about that and you can segment the market if you like to see which groups of people are going to react and which way they will react as well as I can. That is just speculation. On the tax side, the corporate tax system, from a policy point of view you have to watch your relative performance, relative tax loads, compared to your key competitors, because if you get that out of line too much you are going to have loss of employment opportunities. It is as simple as that, because capital is mobile.

Those are the kinds of considerations you are going to have to look at. You have to look at the incidence of tax increase. If you increase sales tax rates, you have an inflationary impact from that, you have a confidence impact from that, and it is also the largest source, you know -- for a one-point increase you get the largest amount of revenue from it. But you can see what would happen to the inflation rate from that and you can see the groups of people that hits directly, and you can speculate about the impact of that on confidence. It is not going to be an easy budget.

Mr Carr: With regard to some of the net employment gains and losses, I had our friends at legislative research put together some of the stats that you will know from the Statistics Canada labour force February 1990 report. Looking at the job losses between --

Dr Frank: February 1990?

Mr Carr: This is the date we are looking at, February 1990 to November 1991.

What they did is take all provinces and look at the changes. They used the Statscan statistics and did it in percentage terms. When you look at that period, and remember now, we are thinking February 1990; that is from prior to the last provincial election until November 1991 of last year. They were the most recent statistics. Out of that, what came very clearly is, and let's talk in percentage terms, 4.6% of Ontario jobs were lost.

There were some that actually had an increase. British Columbia had an increase in jobs. Alberta was very moderate, virtually stayed the same, that is, 233,000. Quebec lost about 2%. The same federal government, the same interest rate policy, the same free trade policy, all these things were similar.

What you have to ask yourself is, what did we in Ontario do differently to finish so badly? Some people say it was manufacturing. Quebec has a high portion of its economy in manufacturing too. In simple terms for people, what did we do differently? Actually, it is not even your government. It is probably the previous government, because it seems to be from February 1990. But looking at the statistics, what did we in Ontario do that the other provinces did not do to deserve this tremendous loss of jobs?

Dr Frank: First of all, the words you use in terms of deserving this loss of jobs are inappropriate. Ontario does not deserve to lose jobs any more than Quebec or Alberta or anyone else. The answer here has to be in the structural impact of the changes that are going on around the world. We have talked a little bit about the impact of the high currency on manufacturing per se in this province, and Ontario I believe has a considerably larger percentage of manufacturing than Quebec does.

It is a similar situation to what happened to Alberta. When oil prices collapsed in 1986, Alberta just fell down badly. That is a structural issue. There is not a lot you can do about a province that produces a large amount of oil or natural gas. The same situation now applies here with Ontario. As I have said, when you get a currency moving up considerably in a fairly short period of time and you impose on that the impact of a recession, a severe slowdown in purchasing power for the people, consumers, something gets hit. Manufacturing was hit in this province, and especially the auto sector, and especially the housing sector. What goes into houses? Durable goods, furniture, appliances, floor coverings, drapes, carpets. Where do we make those in Canada? A lot of them are made in this province. So if you have a housing sector that collapses as much as it did in Canada, it is not surprising Ontario gets hit. The same thing applies with autos.

It is not an issue of deserving. It is more an issue of the structure of this province versus the structure of other provinces. Take Saskatchewan. Saskatchewan produces grain, potash, a little bit of uranium, and it has one oil well. Farmers are in terrible shape. It is not surprising that potash is not selling because potash is used for fertilizer. Uranium is not selling because we are not building any nuclear reactors. Grain prices are rock bottom because of what is going on in the world. I mean, that is Saskatchewan's structure, and I would make the same point here in Ontario.

The Chair: Dr Frank, I would like to thank you and Mr Darby for appearing before this committee. I think your knowledge that you have given this committee is going to be used in the upcoming pre-budget consultation summaries there.

Dr Frank: Thank you. My pleasure.

The Chair: Thank you for appearing. This committee will be adjourned until 2 o'clock sharp.

The committee recessed at 1159.


The committee resumed at 1412.


The Chair: The next person to come before the committee is Michael McCracken. Would you please identify the outfit you are with? We have one hour for your presentation; we have a question-and-answer period within that one hour for the members of the committee here.

Mr McCracken: My pleasure to be here. Mike McCracken, president of Informetrica Ltd. We are an economic research firm in Ottawa. I have on a couple of other occasions met with the committee, and I would like to simply give you a view of what the economic outlook looks like to us at the moment. I will try to do that very quickly and then we will throw it open for questions and I will try to field them as well as I can.

I have prepared for you a handout which is, perhaps, somewhat simple from your viewpoint, but this is what I have to use for CEOs of companies because they can just follow those arrows that we use a lot easier.

Let me first make a point about what is going on throughout the world. The first chart shows what the forecasts have been by the OECD, the Organization of Economic Cooperation and Development, essentially the developed-country club for the seven countries which are referred to as the G-7.

I have shown the growth forecasts for 1991, 1992 and 1993, and you might say, "Why did you bother leaving the old ones on there?" I left the July ones on there very purposely so you could also compare those to what they said last month when they released their December forecast. There are a couple of points I want you to take away.

First off, in every G-7 country the growth slowed down in 1991 and most of them are forecasting a pickup in 1992, although two key economies, Japan and Germany, are expected in fact to continue to slow in terms of their growth in 1992.

The forecasts made more recently, the ones released last month compared to those six months earlier, are generally lower for 1992 across the board, the only exceptions being the UK, which went up slightly, but partly because it got worse in 1991, and Canada, which did not change its forecast at the OECD between July and December, although, as you perhaps are aware, there were some modifications to some of those forecast numbers last week.

The year 1993 is generally seen as a pickup year in almost all the countries, with an average of about 1.1% growth increase for all of the OECD. There was not a number provided in July 1991 for 1993, but we are in an environment with the external economy improving in 1992 relative to 1991, and improving further in 1993. That is the backdrop, but keep in mind the pessimism that seems to have come in during the last six months. We may come back to that.

That is one of many assumptions behind our forecasts. The forecasts I am speaking to you about today are primarily based on the forecasts prepared at the end of 1991. There are still some further shoes to drop before we do our next cycle on it, but I would be happy to respond to questions on these points subsequently in terms of where we might change.

A real quick look at the arrows: 1991 was down, a growth of about 1.3% nationally; 1992 is up; 1993 is up, and for 1994-96 the arrow should sort of show up but at a more gradual pace.

This year the strength will come from lower interest rates, improved trade, lower inflation helping real incomes and some recovery in housing. We have already seen the housing pick up off the floor it was on at the beginning of last year. We see in 1993 some continued expansion, exports, investment and inventories, adding a growth of about 3.7%, and 1994-96 averaging growth a little bit above 3%.

What I want you to take away is that even though we had a recession in 1990-91, it is not going to continue that way for ever and growth is likely to be restored. But even with what some of you no doubt will put down as rather rosy forecasts, the implication of even those growth rates are that the substantial rise that we had last year in the unemployment rate from a little over 8% to 10.3% essentially stays there in 1992, makes little progress in 1993 and also little progress in the 1994-96 period. We remain in our forecast, unfortunately, around 10% all the way up. That is because the potential growth rate of the Canadian economy is about 3%, and those are the kinds of numbers we are kicking out at this point in time in terms of our forecasts.

Behind this is a continuation of at least the spirit of the policies we have had for the last several years of fairly restrictive monetary policy and restrictive fiscal policy, both federally and provincially, at least in large part. In this environment the exchange rate -- the next page over -- did appreciate in 1991, and we suggest to you the best bet is to expect the dollar to stay roughly where it is. Anyone who can tell you they can forecast the exchange rate is either extremely wealthy or a fool, or both. Those are not mutually exclusive classes, as we know.

The point I would try to make to you is that if inflation in Canada is lower than it is in the United States -- and there is no reason to expect it might be continuing that way -- that is not the kind of pattern one should expect to see a depreciation in. We have for operational purposes said that the dollar will remain unchanged. We think the dollar is overvalued, but I would suggest to you that as long as the Bank of Canada maintains its inflation targets, it is not going to go for a nominal depreciation, and what will happen if you want to get some stability into the exchange rate is that you will have to do it by inflation in Canada being much less than in the US. That will lead to what we call a real depreciation that will eventually get to a stable point.

On the inflation front, the arrows were of course up substantially in 1991, all because of taxes, particularly the goods and services tax. In 1992 the inflation rate will be down substantially and essentially unchanged in 1993, 1994, 1995 and 1996, running around 3%, plus or minus a half. That is by and large consistent with the Bank of Canada targets; at least it is well within the range or band that it has. A few years further out we get into some trouble in matching their objectives, but not necessarily in the near term.


Just so you appreciate where we are at on the CPI, at the end of the year, in the December numbers the year-over-year change was 3.8%, which was suggesting quite modest inflation. In fact if you leave out the tax part of that, you are probably down under 2%. In the last three months of 1991, the most recent data, if that were expressed as a rate of inflation at annual rates, it would have been zero. In 1992 we are suggesting 3%, but it could be lower. The year-over-year number in January, the one you will be getting in a few weeks, could be as low as 1.5%, so I think that will be quite a shocker to some who have not been following the numbers. So inflation is certainly cooling.

In interest rates, because of that coming down in nominal terms, we have seen some easing in 1991. The prime rate ended at 8%. In 1992 there is certainly some further easing. We have seen some of that already. A prime of 7% or less by the end of the year is still in the cards. In 1993, some continuation of, I would say, fairly low nominal interest rates, perhaps the long-term interest rates also easing as people become convinced that inflation is at a lower level, and in fact there is even room for further easing in 1994, 1995 and 1996.

That sounds like good news, but I would point out that even the interest rates we have today, which seem low, are quite high by historical standards when expressed in real terms. If, for example, the current rate of inflation is zero and you are sitting there with a prime of 7%, that is a 7% real interest rate you are facing, or, if you are borrowing at 7% or 7.5%, you are still in a position where you are not stable in terms of your debt ratios. I think I went over that previously with the committee.

But these nominal interest rates are coming down and they certainly provide some help to the economy and some help to federal balances. The federal deficit in the calendar year 1991 is up at about $31 billion. In national account terms, that is equivalent to about $35 billion or $36 billion. The number we just got yesterday is for the fiscal year and is a little bit rosier than that, but this too is a forecast, so we will see what happens. But improvements in 1993, 1994, 1995 and 1996 and basically the combination of better economic growth and lower interest rates will contribute to substantial improvements in the federal balance. We are assuming at this point no significant change in policy on the fiscal side.

That is covering the big numbers. There are lots of concerns out there. Let me just hit them very quickly: Is the recession over or not? Are we going to get these further interest rate declines? Will the financial system keep glued together in Canada and the US? We have seen a couple of benchmarks passed on the international negotiations on GATT, but there is still the potential for failure, and if so, what follows that? Then of course our regular actors, fallouts from constitutional debates and continued federal-provincial wrangling. We can come back to those if there is any discussion you want.

Turning to the next chart, I want to explain to you what this is. If you need further explanation at some point, I can send it down to the committee, or you may be getting the monthly economic review, I do not know.

Why is it that we seem to be so bloody confused at this point in time in terms of what direction we are going, whether or not we are going to have a recovery, what is happening in the US, what is happening in Canada? I would contend that we all got fooled by the events surrounding the Gulf war, and in particular by the substantially higher oil prices from August 1990 on and then the also quite rapid falloff in those oil prices in March, April, May and June of 1991. A big oil price hike, as a first approximation, is not unlike a big tax increase. What we essentially had was a tax increase imposed in August worldwide, it lasted about six months, and then the tax was taken off. That alone would give you an oddball pattern to any set of data you might look at. In Canada we had our own little fillips, with the GST in the first quarter of 1991, leading to perhaps some delays in spending, and in the fourth quarter of 1990 some hurry-up spending in some sectors and not in others. Certainly the external environment was affected by the Gulf war, but internally we also took that hit with higher oil prices.

What you see in front of you here are the quarterly changes. The light grey bars are what was actually measured by Statistics Canada through the third quarter -- the national accounts and growth of GDP -- and the black dot is an estimate, starting in the fourth quarter of 1990, of what the numbers would have been if we abstracted from the effects of higher oil prices and the GST. What you would have seen is a much more gradual recession, but one that would have continued out through the third quarter of 1991. In the last panel there, if the fourth quarter shows no growth on the actual data, or very little growth, that would be consistent with a rather rapid pickup in the underlying economy.

Let me make it simpler for you. With the end of the Gulf war, there was a big boost in economic activity in the US and Canada in the second quarter. That is that big grey thing up there. Then that petered out. So people looking at those data see things cooling down. Their minds are set on that arrow pointing downward to the right. But it would appear as if the economy in fact is coming out, but slowly, from a recession, due to other factors independent of the war, and we should be looking forward in fact to improvement. We will get an idea of this as the next few months come along. We are obviously making some heroic assumptions here in terms of the timing of these effects, but what is key for you to know is that these are symmetrical; that is, what was taken out of one quarter was put into the other quarter, and all of that arithmetic was over by the third-quarter levels of 1991.

I have tried this on a number of people in both the US and Canada, and at least those who are close to the data seem to say: "Yes, that fits with what was going on in our minds at that time. We were euphoric and we thought we had recovered and, yes, now that we think about it, it might have been related to that cessation of war or the beginning of the war."

Anyway, I leave that with you as a thought. On the monthly numbers, the recession may have been over back in April or May; we have been expanding since that time. In the last couple of months, however, it has sort of plateaued out. We did a number on Friday which I suspect will be down slightly or up slightly but it will not be a big change. On the other hand, if we continue to slide, it could be that we will have a longer recession than the 1981-82 one. But so far the drop has amounted to about half the drop that occurred in the 1982 recession.


A final note just on the unemployment rates in this recession. I think I showed this chart to you last time and we have simply updated it. This essentially shows when the unemployment rates started rising in the different provinces and nationally and when they started falling. It has not started falling yet, although it has been, on a sort of three-month moving average basis, going flat in Canada, although the provincial components are still rising on a three-month basis.

The key point to notice first off is that Ontario's unemployment rates started rising in the early part of 1989. As of December, the total change that has occurred in Ontario is an increase of some 4.9% in the unemployment rate, larger than any other province. The next largest was PEI, which is up 3.4%. So sure enough, Ontario got particularly hard hit. It is not surprising, because in all the work we have done, the policy instruments that have been used to create this recession, namely, higher real interest rates and a higher exchange rate, show a concentrated effect on Ontario. Ontario was hit by that type of policy more than, for example, a broad tax increase or a number of other ways they could have chosen to create their recession.

Those are my formal comments. I do not know whether there are any questions about that, but I would be happy to throw myself open to your questions or comments.

Mr Phillips: Thank you again for your help. I may have missed it in these remarks, but in terms of looking at Ontario's real growth rate in 1992 and 1993 and its unemployment and employment numbers, have you got a feel for what we might look at here?

Mr McCracken: Consistent with these forecasts, we had a fairly robust growth in Ontario, about 4.8%, 5.3% in the next couple of years, bouncing off two very bad years, and the unemployment rate declining from an average of 9.7% in 1991 to 9.5% and then down to 9.2% by 1993, suggesting that the growth in Ontario was above the potential growth rate.

So far, I would say we are not uncomfortable. I want to see what is in the two federal and provincial budgets, but the uncertainty on this one is probably more on the US side than anywhere else. If the US economy is less rapid, and there is some sense that forecasters have marked that down there, then that will impact particularly on auto demand in the US, which in turn will particularly impact on the Ontario economy. A very large contributor to this growth was pickup in US auto demand. The reason the US auto demand is important, as you perhaps are all aware, is that it is that which drives the industry in Ontario, not Canadian demand for automobiles. We only make a small percentage of those in Canada.

We have not altered our forecast here yet, either nationally or provincially, but the tendency would probably be to go down if we adjust that US forecast. Now President Bush announced a program last evening. You will have to be the judge as to whether you think it will make all the difference. Certainly lower withholding will be something which will be a plus for consumer demand. Improved depreciation allowances will again be a plus for the transportation sectors, as well as other equipment. Capital gains taxes will not make much difference. A moratorium on government regulations probably will not make much difference. But there are enough things there which at least on balance would suggest that if you were pessimistic about economic growth prospects in the US as of Monday, perhaps as of Wednesday morning you are a little less so -- not a lot less so, but a little less so. Of course it should be said, I guess, that given that it is a presidential election year, there is a very strong motive for Mr Bush to try to make this a very good next 10 months, because that has a lot to do with the probability of his getting re-elected. Interest rates are down too, and that should help trigger much more than we were thinking they were going to be a couple of months ago.

At this stage I have not revised my forecast down to 2.2%. We were not that far away from what the ministry was last December, so I was quite surprised by the magnitude of the revisions in the material tabled by the Treasurer last week. It seemed to me to be quite a pessimistic view of what would happen, although that might be the outlook pre-budget.

Mr Phillips: No.

Mr McCracken: Maybe post-budget it will look better. Is that conceivable? No? Okay.

Mr Phillips: You are in the 4% range?

Mr McCracken: Yes. We will see what happens. All I can tell you is that the Ontario economy is very sensitive to what we do to the US auto outlook in particular. We could move that number around one percentage point just by delaying the recovery, but if we delay it, the demand is still there, okay, so you pick it up with strength in the subsequent year.

If Ontario is as low as 2.2%, then the number I have the most difficulty with is the federal forecast of 2.7% for Canada. That is tough to square. It would imply a level of performance in some of the other regions in the country that would be quite phenomenal. When you look at our forecast for 1992, with the exception of Newfoundland and the territories because of resource developments, Ontario led the pack. If we mark that one down, it is not clear where one gets the strength to sustain a growth for all the rest of the provinces in excess of that of Ontario's.

Mr Phillips: That is useful. You are the third economist we have heard from, the third group, and they all are in the 3.5% to 4% range.

Can I have a couple more questions?

The Chair: You have about three minutes.

Mr Phillips: Your dollar estimate staying at 87 cents surprised me mildly in that I think others are predicting a slow drift down. In fact now it is below 86 cents, I think.

Mr McCracken: Yes, it dropped down to 85 cents and has now moved back up. I do not know what it is today; I do not watch it that closely.

Mr Phillips: But you predict for the next four years a continuation of that.

Mr McCracken: Yes. We used to have a forecast of depreciation because it made things work a lot better, but there is no way you are going to get that kind of depreciation and achieve the targets on the inflation front that the governor of the bank has set out. Those are not consistent with a depreciation. Ergo, what gives? We are assuming that either Crow or someone like him remains in that job and that this long-term policy of keeping inflation under control --

Mr Phillips: Because I am going to run out of time, can I just interrupt you? What do you estimate the impact of a one-cent drop in the dollar is on inflation, gross?

Mr McCracken: In the first year we get about 0.25% to 0.3% for 1%, or a 10% depreciation will give you a 3% CPI increase. After about three years it is up to about 5% for 10% or 0.5% for 1%, because what happens is that you also get an impact back through your wages, through your domestic prices, and the level brings you up. That is consistent with import content of about 30% or 35% in most of the economy, plus the decisions that are made by people who price in US dollars and so on. So we are not uncomfortable with that number. That number is one tenth of that in the United States, so we have nothing to learn from them about how to deal with depreciation. They let their dollar drop 20% and no one seems to give a damn. It is a different world.

Mr Phillips: That is because we have so much import-export.

The last question is just whether you can give me advice in terms of, if we are looking at a deficit this year in the $10 billion to $12 billion --

Mr McCracken: The provincial deficit?

Mr Phillips: Yes. Does that have any impact on your economic forecast?


Mr McCracken: No, not in any negative way. If that is a result of something which -- let me keep it simple. The deficit itself has no direct role. It is an outcome of our forecast, not an input to it. Certainly, if you spend more and as a result end up with a deficit, in our models and our work if you spend more you will get more. You will have a better-performing economy.

Mr Phillips: There must be an end to that eventually.

Mr McCracken: It depends. If the interest rates are consistent, real interest rates with real growth, there is no necessary end to it. If you try to run an interest-rate policy which makes it very burdensome to undertake debt financing for everyone, not just governments, then, yes, you can make it a very costly process. That is the situation we have been in, unfortunately, for some time.

The Chair: Okay. We have to carry on with Mr Carr.

Mr McCracken: I will have to be quicker.

Mr Carr: I have heard some of your comments because you are so often on the television. I appreciate your coming here and giving us your input.

It is interesting that you talk about interest rates. I remember in the early 1980s renewing mortgages; we all remember looking one year at 19% interest rates. In the early 1980s we had inflation at 12% and we still had double-digit unemployment. Now interest rates are down to 9%, or whatever you renew a mortgage at, inflation is about 3% and unemployment is at the same level.

What I was interested in was the unemployment rates on your schedule from the period through to 1991. This morning I was talking with the Conference Board people and the statistics between February 1990 and November 1991 show very clearly that Ontario has fared far worse. If you look at British Columbia, which has actually had an increase in jobs, as has Saskatchewan, it is ironic that both those provincial governments that had an increase in jobs were both defeated. Your job figures do not necessarily translate into provincial support.

When I spoke with the Conference Board, they said one of the reasons is that Ontario is heavily manufacturing and they talked about the interest rates, the high dollar and so on. They then went on to say that Saskatchewan has been hard hit, as we know the farmers have. In spite of that they still had an increase in jobs.

My question to them and to you is the same. During that period of time, percentagewise, we lost 4.6% of our jobs. Quebec, which has a high manufacturing output as well, lost 2%. Essentially, Ontario fared far worse in percentage terms, the ones we are using from Statscan that our fine friends at the legislative research have done. Suffice to say, Ontario fared far worse than all the other provinces. During that time, what was it in particular, in light of the fact that what we are talking about with this particular body is what the provincial government can do -- what did the provincial government do during that period that made Ontario such a bad place in terms of job losses?

Mr McCracken: I think I would have a hard time pinning down the actions of the provincial government during that period that made it worse, other than to annoy the feds. That is essentially what led to, or was part of, the move to substantially higher interest rates, to cool down the overheated economy. You would not see that anywhere else in the country but you would see it here. As a result, of course, the move to both fiscal and monetary restraint with a real vengeance then created a recession. They will admit that this recession is not an accident. This is very much a deliberate move to cool things down and it started not at the end of 1990 or early 1990, but before.

I do not think during that period -- if anything, the complaints were the opposite. The provincial government continued to expand, to spend during that period and that presumably would have been, at least from an expenditure viewpoint, a positive activity. I do not sense a reason to pick out and blame the previous provincial government for the job losses. Some could argue that maybe they should have moved to try to offset it, but I think all that would have meant is that the feds would have pushed even harder in the other direction.

Mr Carr: I have had a chance to listen to you in the past. Of course I do not want to jump to conclusions, and you can correct me if I am wrong, but historically I would say you would be one of the economists who -- again keeping in mind that we are going to be giving advice to our Treasurer -- would say that we should be spending more to get out of this particular problem. If you could give advice to the Premier and the Treasurer with the upcoming budget, I would like you to think of two areas. What should we do with the deficit? Should we try to control expenditures and keep it from running up? The other critical question is the area of taxes. You talked a little bit about some of the taxes, as did the other economists. The Toronto Dominion Bank economist today said very clearly, "Don't raise taxes." What would your suggestion be to the Treasurer with regard to the deficit and taxes? In very simple terms, what would you say to him?

Mr McCracken: Floyd, take a Valium.

Mr Carr: If I was the Treasurer, I would, too.

Mr McCracken: I would suggest first off that he not get overly excited and raise a lot of taxes. I think that would be counterproductive. It would be particularly counterproductive if they were taxes which affected the CPI and triggered some Pavlovian response from the monetary policy side.

We have had this discussion before on the expenditures side. Let us all agree that no-one of any party, of any ilk, of any training, wants anything that is a dumb, wasteful expenditure. Putting those aside, then it certainly does not bother me if there is expenditure on things which governments do fairly well. Increased expenditure on infrastructure is one of those, increased expenditure on training is another, if we can figure out what it is we want to train people for. Anything that can be done either alone or in cooperation with the federal government to trigger private spending, business investment and consumer spending, is to be taken as a positive move.

The deficit will be what the deficit will be in the end. The $9.7 billion was a fascinating number only because it was slightly below $10 billion, and $14 billion has now become a fascinating number because it is above 10. But we can be sure, post the next budget, the number will be below $14.7 billion, right?

Mr Carr: True.

Mr McCracken: Announced, anyway.

Mr Carr: As I said earlier this morning, it is my critic's responsibility to go out and meet with businesses, and the perception is that we are very highly taxed in this province. As a matter of fact, just to show you what happens, the night before last my office was broken into. The reason they went right through two offices was to get to the cigarettes in the variety store and they stole about $10,000 worth of cigarettes. They did not touch anything. We had free brochures on what is happening in the government of Ontario and they did not even stop to read them.

It shows very clearly that when we, for example, tax a product like that we set up black markets and so on. Businesses are saying to us that they feel overtaxed and most businesses are smart enough to realize that when you run up deficits, somewhere along the line you will have to have tax increases. Historically what has happened is that it is very difficult to tax individuals, so they have looked at corporations.

As you know, the Fair Tax Commission is looking at corporate taxes as a part of fulfilling the mandate of the NDP's minimum corporate tax. Their report is coming out, which I understand has some dissenting views. It is fairly broadly based and there are two trends of thought. Very specifically, on a corporate tax, knowing the statistics out there now --

The Chair: Mr Carr, if you do not get the question out pretty soon the answer is going to run out of time.

Mr Carr: I used to be quick when I first was elected. Very quickly, what would you suggest the Treasurer do with the corporate tax?

Mr McCracken: The provincial take on the corporate income tax is a fairly small part of the total tax burden in that area as well as small in terms of his total revenue. If he wanted to be quite exciting he would simply eliminate it. He will not. Treasurers tend to be conservative and whenever you occupy some tax room you tend to want to keep it. It would not bother me if he just threw up his hands and said: "I put more effort into collecting this than it's worth. We'll just drop it. We'll put a revenue tax on or we'll go with a GST-type tax to pick up the revenue loss we have there. How's that for you, business? A signal, you know, that we're not in your face at all, supposedly." By and large, I would suggest there is not much else. He could do some things in depreciation allowance, restoration, all that tinkering, but we all know that if we cannot get the coordination with the feds to do it, it is not worth a hell of a lot. If he goes up they will go down, or vice versa, on any of these measures at the present state of affairs.


Mr Sutherland: Coming back to the issue of where the deficit should be, I guess when you mentioned the things the government does well in terms of infrastructure, you really want people to have a good analysis of difference between deficit going for operating versus deficit going for capital. Do you see a difference in the benefits of those?

Mr McCracken: There are different leakages, that is, different impacts they may have on the economy. Revenue you collect is what we sometimes call fungible: You can spend it on anything. So it gets a little tricky to say, "This is a good deficit and this is a bad one" because there is a difference between two large numbers you are dealing with. But certainly one looks to a return on infrastructure different from the return one might get for an increase in welfare payments. That does not mean, however, that you necessarily want to forgo an increase in welfare payments for infrastructure. We look to governments, I believe, to be responsible in a number of areas. I would not suggest, as some might, to cut 10% off of welfare and build 10% more bridges because I use bridges and I do not get welfare. That is often the level of analysis behind those proposals.

I would not say we need to worry about how the deficit is there. I think we do want to worry, in all the things we do, whether we are running a deficit or not, what is the payoff, what is the efficiency, what is the social return to the activities we carry out in government. Sure, they can be improved. But we are not going to say, "Let's stop doing anything until we can improve them." We have to make those improvements while we keep this economy moving at the same time.

I will leave with you a little two-pager that talks about some other actions that might be taken in the federal and provincial budget. This is more on the polemic nature, so I am not fitting the very well-balanced kinds of comments I have been trying to make to this point.

Mr Sutherland: When you gave the figures to Mr Phillips for growth for this year for Ontario, you said over 4%.

Mr McCracken: Yes. Our forecast was actually 4.8%, the one we produced in November. As I say, I suspect that will come down, particularly if we weaken up our US forecast, to 4%. Make it 3.5%.

Mr Sutherland: Roughly 4%. You also gave the unemployment figures at 9.5% for Ontario.

Mr McCracken: Coming down from 9.7% to 9.5% was our forecasted average for 1991. We did not have the actuals at that stage, but I think that is fairly close to what it was.

Mr Sutherland: I certainly do not have the most solid understanding of economics, but it would seem to me that if you are going to have any type of recovery, the unemployment rate has to come down. I am just wondering why so little decrease for the amount of growth you are projecting.

Mr McCracken: In the first year out you get what is typically called a cyclical rebound in productivity. That means the output picks up but the employment does not come with it. The kind of employment growth we are getting in that first year in Ontario, consistent with those numbers I gave you, was 2.1% in 1992, which sounds strong. That certainly sounds welcome and good. At the same time, though, what has happened in the last couple of years is that the participation rate has been dropping like a rock, surprisingly so. If that had not happened we would be sitting up here talking about an 11% and 12% unemployment rate. We expect, however, as we come out of this recovery, and as happened in the 1982-83 period, that those participation rates are going to pick up. You will have extraordinary labour force growth matching your employment growth, almost, and that is why the unemployment rate will decline only marginally, even though you have a very strong growth here.

Mr Sutherland: Okay, and your figures for year two were predicting somewhere around 5% growth, and that is still only going down to 9.2% for unemployment? You are seeing that trend occur over more than just the first year, well into the second year?

Mr McCracken: That is right, yes. We had a very severe fall-off. We had a 2.8% employment increase, and the unemployment rate dropping down to 9.2%, and then it goes down to 8.9%, 8.5%. I would be the first to admit that we could be off by half a point one way or the other on those growth rates, but the key thing to plant back there is that labour force growth has been subdued because of the deficit, the recession. When that turns around you are going to get people coming back in and giving more than normal labour force growth.

On average, I suggest to you that in the case of Ontario about 3% to 3.5% economic growth is required to stand still; that is, to get no change in the unemployment rate. That is what we would call the potential growth rate of the Ontario economy. For the Canadian economy as a whole it is somewhere in the order of about 2.5% to 3%. You are a bit higher than that because your productivity growth is a bit better.

Mr Sutherland: Do you have any figures on the basis of overall investment in Canada? Traditionally a large portion of foreign investment has come to Ontario. Do you have any figures to indicate that the percentage has declined in the last couple of years, or is relatively the same amount of foreign investment overall still coming to Ontario as a percentage of the overall Canadian economy?

Mr McCracken: No, I do not have any data on that. I am willing to bet money without looking at the data -- and then we will go look at it -- that Ontario has been doing very well, thank you. Let me explain why I say that. The numbers you see in the paper and in Statistics Canada's flows are only new direct investment coming in. That is about a third of the total foreign direct investment that comes into the country in any one year, the way we measure it. The balance is reinvested earnings by organizations already located in the country. Those do not get measured on a quarterly basis; they get measured in some other data we look at in terms of foreign investment position.

We already have a large amount of foreign-owned business in Ontario. My suspicion is that they are reinvesting, as they have in the past, and so you will see a continued substantial reinvestment occurring in Ontario, probably still leading the country in that regard. Oil companies can sometimes throw you off, but that has not been a problem lately. I think that is the number to look at if you are trying to establish what people are doing and thinking etc, because that represents not only the decisions of the new direct investment but also those that perhaps know the country very well and have been here for many years. What are they doing with their funds? Fortunately, those data are getting updated more currently and should be available through 1990 and 1991 probably by March, April or May 1992.

Mr Sutherland: If you had a foreign client, would it be your judgement that overall the Ontario economy is still very sound?

Mr McCracken: Oh, sure. I mean, we have not blown up the bridges. We are still located within one day's truck drive of a significant part of the North American market. We still have a well-educated labour force. Why would you not want to put it here, or elsewhere in Canada for that matter? Nothing has happened that has caused things to go sour.

Mr Sterling: May I answer that question?

Mr McCracken: Oh, you want to answer? You are supposed to ask.

The Chair: Mr McCracken, thank you for appearing before this committee and for your wisdom and knowledge.

Mr McCracken: I apologize for being a couple of minutes late, but I managed to beat most of you.

The Chair: You are welcome to stay with us for a period of time to listen to some of the views of other witnesses coming before the committee.



The Chair: The next gentleman to come forward is from DRI/McGraw Hill, Mr George Vasic. Welcome to the standing committee on finance and economic affairs and the pre-budget consultations. We have one hour for your presentation with questions at the end of your presentation up to a period of one hour.

Mr Vasic: I believe the handout I am planning to use has been circulated.

The Chair: Yes, I believe all the members of the committee have a copy.

Mr Vasic: I much appreciate you asking me to come back and speak to the Legislative Assembly on the prospects for Ontario and Canada. The handout I have given you takes some of our own latest forecasts as they relate to things I believe you are interested in. I see from the agenda that you have been talking to economists at length and will continue to do so for the next day or so. I wish you the best in being able to listen to this dry, though important, subject for that length of time.

As a result, rather than going through many of the basics you are probably hearing and will continue to hear from each of the groups, perhaps I can concentrate on a few of the other things that hopefully you will not hear from them. None the less, as an economist I have to start on the first slide with a very brief statement of where we are and where we have come.

What is most important -- I think the graph depicts it very well -- is that after an initial rebound last spring the Canadian economy, and this is also true of Ontario, has essentially relapsed through the fall months of 1991. A new curtain of gloom has descended on the economy and as a result consumer and business confidence, though it never picked up strongly -- what optimism was generated by the initial rebound has again wilted. I think the greatest apprehension we face at this time is that the fear is going to feed on itself and lead to a self-fulfilling prophecy of doom once again in 1992. What is important to note is that the increased pessimism about the state of the economy has come despite a steady improvement in the economic fundamentals that typically have shaped consumer confidence.

We are a firm that analyses these things in a statistical manner, the intangibles as well as the tangibles, and what we have found over the years is that the vast majority of consumer confidence is in fact economics-related. You can look at the unemployment rate, you can look at the mortgage rate and you can look at the inflation rate, and if you put those together you find that the vast majority of what consumers are telling their pollsters is explained by variations in those three indicators; in fact, about 85%. If we look at each of those indicators, we find that two have been improving while one has been stable. Mortgage rates are at their lowest levels in nearly 20 years. The inflation rate is down a full three percentage points from where it was in January 1991 and, when the GST comes off, will be even lower when the next CPI is released in late February. For all you have heard about the lack of job creation, the unemployment rate itself essentially remains steady.

What I am suggesting to you is that what we have here is a situation where the pessimism really has gone well beyond what the fundamentals suggest it ought to be. Of course economists are no people to tell other people how to feel about things, but I think it is worth noting that gap is there. The economic fundamentals, and what I mean by that is a sober look at the actual statistics, do not suggest that pessimism should be as high as it is now.

What could be the reason for that? If you ask most people, it is because it is worse now than it has ever been. That is clearly not the case. Certainly for Canada as a whole the recession has not been as severe and, as I will show you in a moment, for Ontario things this time around are in some cases a little worse and in some cases about the same as they were in the last recession.

I think part of it is that people have short memories. The headache you had eight years ago, once it has gone away, does not seem to hurt as much. The one you have now, even if milder, is the only one you are concerned about.

Another element might be media reporting. Frankly, I believe this has contributed to the overall pessimism in the economy. As a result the newspapers and television, which are centred in Ontario, have been spreading the message of gloom quite forcefully throughout the land. There is also good evidence in the United States that through the fall months the US television networks in particular increased their efforts to show a White House race that really would be a race and thus played up every aspect of the weak US recovery. That got filtered through to consumer confidence measures and those measures again were cited as the most damning indication about what the future will hold.

The only problem with this is that if you go back to 1983 and 1982 and look at the media reporting back then, it was also quite negative. I have done that and I remember that year very vividly. We usually get negative media reporting, as I am sure most of you can appreciate, but it is hard to say that it is any worse now than it was last time around.

I think the situation is that there is a realization that our problems are long term in nature and not just cyclical. As a result, when the cyclical components of the economy improve, confidence will not necessarily snap back. It suggests to me -- I will speak about this a little more later on -- that policy as a result should be more oriented to the long run, because even if short-run fixes will provide some immediate relief, they probably will not convince consumers and business that our long-run potential has been improved. If there is anything different -- and all recessions are different -- it is that underneath the cyclical downturn there has been a reduction in the perceived long-run trajectory of the economy, and that is the realization that people are feeling is going to hurt them the most; even when the short-run recession is over, there is no pot of gold at the end of the cycle.

What I want to do this afternoon is examine a little more the issue of consumer confidence and attempt to put it into some perspective. I want to look at that also within the context of Ontario. Then I am going to talk about some of the major short-run prospects and themes for the next year or two and then discuss a couple of long-term issues, because from what I have said already, you can imagine those are the ones that are, in my view, most important. You may want to turn to the next slide, which is titled "Selective Confidence?" When you are talking about confidence, and everyone seems to be these days, it is critical to look at actions rather than expressions. I find several inconsistencies between actions and expressions that do not support the view that consumers are totally paralysed, though it is clear they are saying they are.


The first one I offer you occurred during the recession. One difference of this recession compared to the last one that no one seems to have noticed is the behaviour of the personal savings rate. We went into this recession with an exceptionally low personal savings rate. During the recession, amidst all the doom and gloom, all the drops in the reported measures of consumer confidence, the savings rate stayed stable and low. The number is about 10%, by the way. In the last recession, the 1981-82 cycle, we went in with a 14% or 15% savings rate, which was quite high by historical standards, and during the recession the savings rate rose very substantially and was touching 19% during the worst of the recession. That is real fear. When we went into this cycle, one of my fears was that since the savings rate going in was at a 20-year low, what would happen if people really pulled back? The cycle would have been much more severe. In fact, they did not. This suggests to me that there is a discrepancy between that and what they are saying to their pollster when he calls late at night and asks about the state of affairs. I do not know what the reason is, but it is a very important development because this is an actual action that you can measure, and it did not occur. The story line about consumer confidence would suggest that if anything, the apprehension is higher now than it was last time.

We have done some research in the US, as I was mentioning earlier, about the determinants of consumer confidence. What I said earlier was that confidence, as people are saying, is worse than it ought it to be given the economic fundamentals. The question then is, what happens to consumer spending during these particular periods? We have looked at this over a long period of history and we find that when a consumer is saying one thing but should be feeling another, patterns in consumer spending tend to support the view that they are acting on the economic fundamentals. In other words, if they are unduly pessimistic now, that extra increment of pessimism does not seem to translate into lower spending. I think that is a very important point.

I will talk about how our US outlook has been revised in a few minutes, but it suggests that some of the confidence numbers should start picking up for no particular reason except that they are excessively low now. But that will also mean that spending gains will not improve, because our belief is that the reduction in spending has not neared the decline in what people have been saying about consumer confidence.

Another issue related to consumer confidence is that of the great overhang of consumer debt. About this stage in the cycle, the consumer is basically saying, "I am never going to let that happen again." What happened, of course, was that they accumulated a lot of personal debt in the second half of the 1980s. Then on top of that, rising interest rates came and they had a very severe liquidity squeeze. Lower interest rates are now alleviating that. The conventional thinking is that as a result, consumers are so scared that they are going to essentially save all of that extra cash flow.

My view is that that will largely occur, but not completely. Ironically, one of the benefits of having an overleveraged sector is that when rates do drop, the impact on cash flow is even more substantial than it would otherwise have been. Short-term interest rates right now are about half the levels they were in the spring of 1990, and for mortgages they are at least one third below what they were in the spring of 1990. As a result, we believe some of that will trickle through to actual spending.

I want to look at some recent reality about consumer confidence. Again, what I mentioned earlier was the issue of actions versus expressions. If you look at the chart on consumer confidence, I have two things that are very sensitive to consumer spending or to consumer confidence: spending on housing starts and motor vehicle sales. These are Canadian numbers, by the way.

In a nutshell, what you find is that the rebound in housing has been, all things considered, reasonably respectable. Car sales picked up through the summer months, but it is car sales that have relapsed in the second half of the year. What we are finding here is that if there is a problem with confidence, it does not seem to relate to housing nearly as much as it does to car sales. This, of course, is perverse since housing is a much larger expenditure, a more leveraged expenditure. If anything, you would think consumers would be more scared of making a large commitment rather than a smaller one, but that is not the case. This also, in my view, supports the view that perhaps the doom and gloom about consumer confidence is somewhat exaggerated.

The question as it relates to this chamber is, what about Ontario? Turn to the next slide, if you will. I want to contrast that with the situation in Ontario as it stands today. We all know that Ontario's recession has been much more severe than Canada's, and the employment graph that I have on that page amply makes that clear. However, if you talk to most people in the province, they are also convinced that this time around they know they are the hardest-hit province in Canada, but they also feel that it is much worse than last time around. The fact is that the numbers do not really wash with that. For example, in the 1981-82 cycle, the total reduction in Ontario employment was 223,000, or 5.3%. This time around the peak-to-trough decline in total Ontario employment has been 258,000, or 5.2%. That is approximately the same rate of decline.

The other perception out there is that this has been a white-collar recession as opposed to a blue-collar recession. This also does not make a lot of sense given that the reduction in manufacturing jobs is a much larger per cent of the total reduction. The truth is that white-collar manufacturing jobs are being shed along with blue-collar ones, but the fact of the matter is -- my recollection is clear on this -- that the 1981-82 cycle was in fact the first white-collar recession in Canada certainly since the 1960s.

The other thing to note is that the reduction in non-manufacturing jobs this time around has also been a lot less. The peak-to-trough decline in manufacturing employment this time has been 218,000 jobs, which suggests that there has been a drop of only 40,000 jobs in the non-manufacturing sector. This compares to 67,000 last time around. Importantly, the declines in manufacturing have occurred over the last four years, and this underscores my earlier point of there being a long-term element here. From December 1987 to December 1991 there has been a total loss in Ontario of 218,000 manufacturing jobs. In that same period of time, however, non-manufacturing employment has increased by 151,000. The point of all this is that in Ontario, the situation this time around is roughly the same as it was last time around, yet perceptions and commentators would argue that it is much worse.

So what about reactions? What I want to do in the next two charts is go back to the housing and automobile situation that I charted for Canada to see how the Ontario consumer is really holding up. If you look at those two charts together, what you essentially find is that in Ontario, both housing and automobile sales have been more or less mirroring the national picture. The housing rebound was perhaps two months late, but essentially it has shown an upward trajectory from February 1991.

You will hear more doom and gloom about housing in Ontario because folks tend to be comparing it to the unsustainable levels that were reached in 1988 and 1989. But the fact is, and that graph shows it very clearly, that there has been a noticeable rebound to what are probably levels that are three quarters of the way to sustainable levels. Frankly, part of the starts in the rest of Canada have been supported by government programs, so in some sense the rebound in the rest of Canada as shown here is artificially high. In fact, according to our forecast, the housing rebound both in Ontario and Canada has been so respectable that we are calling for a relapse as a result.

The opposite is true of cars. As was the case with Canada -- I do not want to call it spectacular, because it was not -- we had a rebound that was not totally unrespectable through the summer months, and essentially in the fall months car sales completely relapsed back down to recession levels. Again, what we are confirming is that here in Ontario, whatever you have heard about consumer confidence, the message is (1) they are acting much the way they are in the rest of Canada, and (2) the problem is not in housing as much as it is in the automobile sector. That is why in some ways it is ironic that the proposals you hear being put towards the federal government are how to stimulate the housing industry and you have not heard too much about what to do with the auto industry. What I am suggesting here is that we might take a little closer look at the auto sector.

Having raised the issue, I do have one small proposal on that subject. It is an outgrowth of some work that we at DRI have been doing for clients in the United States, but essentially it is a program to scrap old cars, to provide a bounty for old cars. This would be financed with an increase in the motor fuel tax.


Let me just take a moment to outline what they have suggested for the United States. Essentially it was a $700 bounty from the federal government -- which would be a price that is higher than the average retail price for cars that are about 1978 and older -- if they turn them in during the current year. It is always important, when you are designing programs to jump-start the economy, to have a deadline. Without a deadline there is no jump-start, because there is always tomorrow to take the action.

We found in our simulations that essentially there would be a trickle-up effect, if you will, into newer car purchases. This would be particularly beneficial to low- and middle-income citizens, who would get the extra cash beyond the value of their current vehicles.

Of course, you could do this without it being financed, but as I suggested to you earlier, any such action should of course be financed from other taxes. The DRI estimate for the United States was that this program could be fully financed with a two-cent-per-gallon gasoline tax, or the equivalent thereof.

The other benefit of this, in addition to providing additional automobile sales -- which, it goes without saying, is particularly important for Ontario -- is that it would produce very large immediate gains in air quality. It turns out that cars produced even in the late 1970s are 10 to 20 times dirtier than today's cars. A big improvement and a very cost-efficient way to improve air quality is to simply get those off the road. If what we have here is a program that can accomplish environmental objectives as well as providing a small boost to auto sales through an increase in the fuel tax, I think that would be something that is certainly worth considering.

Of course, the total effect is not going to save the recession. The major reason is that what you are doing is really moving money around. We are not proposing that one spend billions of dollars to subsidize an area of spending and then have that show through completely in the deficit. What needs to happen is for it to be subsidized from funds from other areas. That is my one suggestion on what might be done for auto sales, and we will talk a bit more about the importance of that in a few minutes.

What I have been saying so far is conventional in the sense that the line of discussion assumes that the recovery we need to see is solely dependent on a revival in consumer confidence, on the belief that if the consumer could be persuaded to start spending again, this would spark enormous multiplier effects that would quickly ignite broad increases in economic activity. My view is that this line of argument clearly misses the point about why most economists believed this economic recovery was going to be weak. The leading edge of the recovery does include consumer purchases of durable goods and housing, but these two items only represent about one fifth of total consumer spending. The rest of consumer spending does not tend to kick in until the middle or later part of the economic cycle. If you look at consumer spending excluding those areas, it was 1986 before they led economic growth, year four of the economic recovery, and of course we had a full-fledged recovery before that occurred.

The reason most have been predicting a very weak economic recovery is due to two other factors which are present at the leading edge of the recovery and which we know will not be very strong this time around. These two are the inventory sector and exports, and I have two graphics for those.

The inventory sector is a rather technical and boring topic, but let me summarize it in about two sentences, if you look at the slide entitled "Inventories Stay Lean." I first remind you that during the 1983 rebound, where we had a very strong recovery of 6.5% growth over the first four quarters, about 40% of that came from the inventory cycle. Importantly, it is not a new accumulation of inventories, it is rather the end of the de-stocking phase of the inventory cycle. If you look back at 1982 you can see that the inventory-to-sales ratio was plunging very dramatically during 1982, and then it levelled off.

Essentially what happens is that during the recession you have a big negative from inventory de-cumulation. Then, in the recovery, you replace that with essentially a zero, or no accumulation, and that, for economic growth terms, is a plus, just as any other plus would be removing a negative. It imparts some strength.

If you look farther down that graph, you can see that in this cycle we clearly did not have a major or even minor inventory cycle. This was one of the lessons that businesses learned. In fact, this was one of the elements that cushioned this cycle, compared to what it might have been had there been a major inventory overhang. You can see in our forecast that we continue to see a declining trend in inventory-to-sales, so right off the top you can take 40% of the growth we had last time around. You can drop that 6.5% right down to 4% just by ignoring the inventory sector.

The more important element comes from exports, if you look at the next slide. You probably heard quite a bit this morning, and you will hear quite a bit in the next couple of days about the deteriorating prospects for the United States economy and how that will impinge particularly drastically on Ontario. Suffice it to say that we actually showed some pretty strong export growth through that second and third quarter of last year, if you remember the first panel where we had an initial kickup in growth.

Our merchandise export grew at rates in real terms of 25% and 12% during the middle quarters of 1991. Unfortunately, 80% of that was in transportation equipment, and of course a lot of that came from here in Ontario. What happened was that in the fall, when the United States consumer became unnerved once again, partly as a result of the excess media reporting and partly as a result of diminishing reality in the United States, our export stopped dead in its tracks.

What you are seeing and hearing from the United States now are very substantial reductions in United States economic growth. I look back at our March forecast of last year, right after the Gulf war ended, and we were looking for 3.3% growth in the United States next year. Our forecast now is 1.7%. But what you have to look at is where their reduction in growth is coming from. That is what is important. Presumably most economists -- I am getting to it -- who will come before you do not just plug in United States GNP growth; they have to look at where it is happening. If you look at the United States outlook, as I did, what you find is that the reduction in the United States outlook comes completely from their own lower exports, lower non-residential construction and a milder inventory swing.

Last March the forecast for 1992 consumer spending was 2.3%; it is now 1.9%, a marginal reduction but not a large one. But the bottom line for Canadians is United States import growth. Surprisingly, this has been revised up. Now the United States has gone and changed its national account system to more closely match ours, since we are leaders in this particular area. So you cannot compare the figures exactly, but if you go back to the original ones, the revision would be from 7.1% to 8.1% in United States imports.

Of course, the next question is from where and what is the United States importing, and is that related at all to what we produce? What you find is that the strength in United States imports is going to be seen in automotive and other capital goods. It is mostly in the business area, and things like petroleum and so on have actually been scaled back.

What I think is important to recognize is that this province does produce a lot of manufactured goods and we do export a lot of machinery and equipment. Important for Canada as a whole, our exports of machinery and equipment are now significantly larger than our exports of agricultural, energy or forestry products and are about 90% the size of our automotive exports. It is a very important sector for us. It has held up well so far in this economic cycle, and if our United States outlook is anywhere near correct, we should have an increasing tide.

So while we are a little distressed that the US outlook has been revised down, the fact of the matter is that the areas where it is has been revised down are not the ones that are critically important to us. In fact that is why I have the slide "A Smaller Share of an Expanding Pie." The US import pie at 7.1% growth for US imports -- it is 6% on their new 87-cent dollar basis, but even that is a big growth number compared to all the other growth numbers you are going to see out there. If we can even keep our share in that, it will end up being a better number than we will be able to achieve domestically.


What I have done on that chart is basically to graph in real terms our share of US imports against the real value of the Canadian dollar. That is a Canadian dollar adjusted for inflation differential. Note that it is on an inverted scale, so when the dollar reached its lows in 1986 we were at the top, and when it reached its highs recently we are near the bottom of the scale. That is just to make the visual correlation a positive one rather than a negative one. It is easier for people to see positive relations.

What our forecast has in fact is a continued decline in our share of the US market. Even so, the tide of growth in the US is strong enough that we will be able to see 5%, 6%, 7% real growth in Canadian exports over the next year. I think that will be an area that will pleasantly surprise many people.

A lot of folks by about this time are saying, "Well, that's all very interesting and I certainly hope you're right," but what they really would like to see is some fact now that leads to growth later. It is very difficult at this stage of the economic cycle to really believe that the recovery is coming when you have really no tangible sign that it is here already. If I can offer you one, I do that on the next page, which is the yield curve slide, which says it is positive for growth.

I think one factor that may have been overlooked in this entire situation is the accumulated effect of interest rate declines. Unfortunately, what most economists and people do is tend to look at the level of nominal interest rates compared to some historical number. You might even look at the level of real interest rates, but one thing that gets overlooked is the relationship between short-term rates and long-term interest rates. Essentially, that is what we call the yield curve. That is the light line on that chart. It is basically constructed by taking the long bond yield less the short-term treasury bill rate. Right now you would get a difference of about two percentage points in round numbers, nine less seven. If you then look at that and how that has moved compared to how economic growth has moved, you see a very hand-in-glove fit over the 1980s. In fact, relative to most economic relationships, this is pretty good.

The only thing I have done in that chart is lag the yield curve by one year. The other way to interpret that is if you take the yield curve today, it tells you what growth will be over the next year. The benefit of that is that no one can argue about what the yield curve is today; we all know what interest rates are today. That will not change, that will not get revised, that is not subject to forecast error.

If you look on that chart, if you go on the right-hand scale to 2% -- and you will notice that the 2% does not come until a year into the chart, because that line has been lagged by four quarters -- at the right-hand side of that chart, if you look at the line that is 2% and then go over to the left-hand side of the scale and look at real GDP growth, you get a number like 6%. You can see that our forecast of economic growth over the next year is, annually, about 3.3%. Over the next four quarters, it is about 4%.

That rate is quite conservative compared to what the yield curve is telling us. What I am suggesting is that perhaps rather than looking at forecasts of 4% growth with scepticism, make some allowance for the fact that even we may be playing it a little bit conservatively because of this historical relationship.

Another thing you can do is look at other times when the yield curve has been about 2% and look at what the economic growth rates were. They are all at least 4% and sometimes as high as 6%. Finally, if you take a look at where the recovery is so far -- the solid line through 1990, 1991 and 1992 -- we are more or less right on track with where we should be.

I offer this one graph to you as the ultimate simplification of the world but one that will, hopefully, offer you a little more confidence that a sizeable, more tangible recovery is not far away.

In overall summary, where we are with our economic outlook is that relative to most folks, I think we are less pessimistic than they are. It is interesting to note that many forecasters are even above what the Department of Finance is saying, which is 2.7% growth for 1992. Essentially where we are is that the recovery so far has been really propelled largely by an increase in interest-sensitive purchases, mostly housing. We expect this sector to pause and we really expect the recovery as a whole will be treading water through the first quarter of this year. But essentially, come the spring, we expect that export growth will grow by a larger amount than many and the lagged effect of lower interest rates, lower real interest rates and a very steeply positively sloped yield curve will provide a boost to growth.

I do not guarantee that you will be feeling much better, however. As I caught from the end of the last speaker, the issue is that you need about 3% growth just to feel like things are standing still. If we indeed achieve 4%, you may get a sense that we are going sideways and maybe there is a floor underneath you, but that floor will not have much upward momentum.

At this point I want to shift a bit to the longer term and maybe just offer a few comments on the longer term. At the beginning of my remarks I indicated that I think this is what is really important at this juncture. To that I have three slides which I will get to before I finish, and maybe I should do that rapidly in view of the time.

The competitiveness issue: I think we have all heard amply on that subject. I am not sure anyone knows what the word means any more, but I offer the following observations from that particular slide.

First of all, the deterioration in our competitiveness has come from what was the most advantageous position that we had in the last 30 years. Relative to the US, 1986 -- ULC, by the way, means unit labour cost -- was the best position we ever had. Not surprisingly, it also coincides with about the lowest value of the dollar that we had during that period. Since then, of course, we have had three elements to underscore that deterioration. One was the exchange rate, the second was wage increases growing ahead of productivity and the third was lagging productivity growth vis-à-vis the US itself.

The point is, if you look at this particular graph relative to the last 30 years, yes, we are above one but we are not nearly as bad as we were in the late 1970s, and I might suggest there is some element of this issue being clearly overdone. I also point out that for the average manufacturing firm, labour costs are about 20% to 22% of its total costs. Whatever the impact on unit labour costs, it is still not the most significant item on their overall bill.

One thing that I think has not been receiving sufficient attention is the issue -- and this is on the next slide -- of where the deterioration in labour costs has come from. Part of it is wages and salaries, but also part of it is what is known as non-wage costs or supplementary labour income, which I have charted there as SLI. What you have seen in the last several years in fact is that it is the supplementary labour income, which is things like contributions to private pension plans, unemployment insurance, Canada and Quebec pension plans, workers' compensation, welfare, etc. These have been growing much faster than wages themselves. This has of course added to the problem. However, many of the indices that you see published in Ottawa and elsewhere only include base wage rates and not the total wage bill in the package. It is very important that this adjustment be made to reflect the relatively fast increase in this particular component.

It has also helped foster this clash of perceptions between labour and business. Labour, if you look at its base rates, truly has not seen gains much better than inflation for several years. If you then take taxes off that, one could argue their real after-tax income has been deteriorating.

Employers, on the other hand, who have to pay the difference with this supplementary labour income, are seeing a much higher wage bill -- much higher than reported inflation. On top of that, if you look at manufacturers' selling prices, they have been flat or down for the last three years. The relative cost of labour, from the firm's point of view, has been rising rapidly, while from labour's perspective it is getting less and less take-home pay. Both perceptions are correct, but the gap is explained by this wedge of increased costs mandated by government.


I mentioned at the beginning what we need to do here is focus on the long term. Providing quick solutions I do not think is going to cut a lot of mustard with typical citizens today because I really believe they are not going to be fooled by this any longer; they know what the situation is and they know temporary job works, even in area of infrastructure and so on, may only add temporary relief to what is a declining underlying trend.

What you really need to address, in my view, are measures that affect the long-run potential of the Ontario economy. The reason for that is on my last slide, that is, productivity. The only thing we really have is our productivity, our knowhow, if you will. Exchange rates can fluctuate. Labour negotiations can ebb and flow, but at the end of the day all we have is our knowhow. What you see on the graph is, in my view, quite startling.

Our productivity growth was doing just fine through the first half of the 1980s, and then it stopped dead in its tracks. I do not think it is a coincidence that this corresponds to the period when the Canadian dollar was at its lowest point in the postwar era. I cannot help but believe that corporations were not as vigorous in their pursuit of competitiveness with the help of a 68- to 70-cent dollar that languished through there. As a result, what we have is a very large productivity gap. As you can eyeball from that chart, the accumulated difference over the last five years is about 15% vis-à-vis the United States.

The good news is that productivity gains have started to come back. In 1990 -- this is using Department of Finance sources -- we saw manufacturing productivity increase about 2.7%, and it looks like the increase in 1991 will be even more. I do not take the view that productivity is gone for ever. I believe we are experiencing, in a sense, more than a cyclical rebound here. What had to happen was that there needed to be some excessive pressure on firms to find those gains and do it. There has not been, in my view, an underinvestment problem in Canada or in Ontario.

If you look at investment during the boom years of the late 1980s, it was quite strong in Canada vis-à-vis the United States, so that investment has occurred. In some sense, what may be occurring is the ideal where we have put in that investment, those capital goods were relatively cheap as our dollar was rising -- we import quite a bit of capital goods -- so we were able to put in the machinery and equipment much cheaper. If the dollar should now fall from what is a much stronger competitive position, we could reap some very significant gains.

We have done some studies in the area which, since they are proprietary in nature, I cannot totally share with you, but I can share perhaps some of the major thrust of it. First, we looked at the share of exports in the United States market. This was really to examine the free trade agreement a bit. The question basically was, was there a big change in 1989, 1990 and for what data we had of 1991, and for what reason? The short answer was that there was not a substantial deterioration in market shares for manufactured goods in that period.

Second, we looked at investment for Ontario industries during that period, and we did it two ways. We asked, given the severity of this cycle, how has investment performed in Ontario compared to other historical episodes? We found here that the decline in investment was not at all out of line with what you would expect on a normal cyclical basis, suggesting again that the idea there has been more than the usual may not be totally true. In addition, we took the same industry on a North American basis and we said, "All right, how is Ontario investment in this particular industry compared to investment in that industry on a North American basis?" There we found again no significant difference. In many instances, the performance was relatively better than was experienced elsewhere.

Rather than concluding that there has been a major historesis or deindustrialization of the Ontario economy from which we cannot recover because there is nothing left to recover from, I suggest that the information to me is not conclusive. I will not say definitely that manufacturing is in the best shape it has ever been; that is clearly not the case. But what I am saying is that I believe that the negativism about it is overblown and that, in fact, we have been seeing some productivity gains in the last two years partly as a result of the pressure induced by the overvalued exchange rate. I am not saying that is how you should do it, but it is a result of that.

I just want to summarize now and leave you with a few concluding thoughts for the current situation. Obviously, with the current situation, there is a growing fear of really not providing help to the citizens of Ontario during these very difficult times, and I know you are receiving all sorts of advice on this subject. First, let me say that we should not forget that a deficit on the order of $10 billion to $14 billion is help, and this fact should not be forgotten. Collectively, federal and provincial governments are probably pumping $50 billion into the economy this year. This is a help, and we cannot just cast that aside, because that is sort of what we expected the deficit to be.

No economist knows what the deficit itself should be or the debt-to-GDP ratio or indicators like that. All we know is that when they get worse, you are more leveraged than you need to be and you have less scope to act when you need to most. This recession has been a very good example of that, particularly at the federal level which has seen its fiscal situation deteriorate from a position that was exceptionally strong in the mid-1970s. I am not suggesting that Ontario's is going to do that, but I am suggesting that we are in exactly the same position.

Debt growth will now be very strong in Ontario, and in my view what needs to seen during the next Ontario budget is a path of declining deficits during the recovery. Even if you are a fiscal conservative, you can accept, understand, justify, explain a deficit $10 billion to $14 billion, whatever the number. Whether it is $14 billion or $12 billion or $10 billion does not really make that much difference, but what we need to see is progress during the recovery.

What was disconcerting about the projections a year ago was that there was very little improvement in the deficit during the recovery, and the spending was growing 3% or so in real terms per year. That is what we do not want to see. We do not want to see government spending as the engine of growth during the recovery. The difficult task is saying, "When has the recovery started and when are we out of difficult times?" The problem will be that it will be the end of the business cycle before you feel that times are normal, let alone unsustainable. That is what happened to the last government, and that has typically been the case. No one stood up in 1988 or 1989 and said, "These are the good times," just as no manufacturing organization stood up in 1986 and said, "Thank you for a 70-cent dollar." They were bickering and complaining about something else. I do not remember what, but I guarantee you that they were. So what we need to build into the base plan is much more substantial declines in the deficit during the recovery years, which I suggest will be 1993 and beyond. I would suggest that a good place to start would be a 0% or 1% real increase in spending. It cannot be a number like 3% because that is just keeping its share of the overall economy.

In terms of the type of help to provide now, I offered one with this vehicle scrappage program, which is a revenue-neutral one, which might have a small positive effect on auto sales, which are particularly important to the Ontario economy. There of course is not scope to provide programs that will make a really significant difference in the short-run performance of the economy. What we need to focus on, and I think what will please the citizens of Ontario most, is not throwing quick fixes at the problem, that we are addressing long-run issues. I do not want to repeat them ad nauseam because I think we all know what they are. These include more spending on research and development, job training, better education system, etc. The list is long, and frankly, I think we know what the list is.

What would be even better is to see initiatives in those areas that come as a result of spending smarter and spending in a more streamlined manner, because one of the issues that is bothering the public most is not just the government spending per se, but it is really the efficiency of government spending. If they can be told that we are being smarter about our spending, that is something that I think will boost their spirits considerably.


We have come several years with persistent deficits and business cycles over the last 20 years that -- the average consumer knows that building new bridges and so on is a temporary thing. I agree that it is better than providing simple income support because it allows capacity so that when the economy does grow, it can do so in a more inflation-free way because you have a larger infrastructure to handle the situation. But I think spending smarter will be the key and getting the deficit down during the expansion.

You can tell from my comments that there is an element of simply having to tough it out during this period, and the reason for that is that we are pretty near to the wall, if not at the wall, where we are now, and there simply is not the scope to undertake major programs that will make a cyclical difference. I noted earlier that the federal government was in that situation in the mid-1970s, and the major mistake that was made there was that they had a deficit that doubled during the recovery of 1976 to 1979 and it was totally as a result of their own initiatives, because spending, in a sense, was declining. It was purely as a result of policy measures that decreased revenue growth, and that is the type of situation we clearly want to avoid. So I think a lot of confidence would be gained by seeing a sharp reduction in the deficit profile during the recovery years. We will have to grit our teeth a little bit longer.

The emphasis should be on long-run programs as a result of smarter thinking, and one of the benefits of all this may be that consumers then place more realistic demands on government and more appropriate demands on government and do not have the view that they should be here to bail them out when the crunch comes.

With that I will conclude my remarks and be happy to take any questions.

The Chair: I will give you a chance to have a glass of water. You have been talking for 55 minutes.

Mr Vasic: That is longer than I had planned.

The Chair: Is it okay with the committee that we extend 10 minutes so that each party has five minutes? Okay.

Mr Carr, I know you had a question already on the first slide and I imagine you have a whole lot. We have five minutes.

Mr Carr: I just put my hand up early in anticipation that I might have one or two.

Thank you very much for your presentation. One of the problems we have is that when economists look at it, they look at some of the numbers of isolation from the policies. The previous economist and yourself looked at it and said, "There isn't reason to panic," but if you look at the situation -- I will give you a couple of examples I talked about earlier this morning.

The Canadian Federation of Independent Business poll of small business groups said that as a result of the previous budget 57% of the members scaled down capital investment and 63% reduced hiring. They asked what some of the reasons were. They said: the total tax burden, the Ontario budget, the Ontario government's apparent bias against business, and the proposed changes to the Labour Relations Act.

An economist looking at it says: "That's crazy. Why would an individual scale back because of the Ontario government's apparent bias against business?" There are no quantifiable data, but when you look at it -- and it was not just the small groups; the other ones list some of the initiatives, saying they are scaring them out of this province. So here you have economists saying you should not look at it like that. The reality is that individuals, being the way they are, interpreting things rightly or wrongly, are saying, "Policy initiatives are scaring us out of this province and that's what's killing us."

I look at a poll I did in my own constituency, and we all, through our newsletters, asked people, "Should the Ontario government pass a law limiting government spending?" Ninety per cent -- now, there are not 90% of the people in there who are Tories, so that means Liberals, Conservatives, NDP, Green Party, CoR -- everybody associated with that said the government should not be spending money.

Mr Sterling: Do you mean the NDP has more than 10% in your riding?

Mr Carr: They occasionally do very well.

Mr Vasic: Are you cutting into my answer, by the way?

Mr Carr: No, you had 55 minutes. I am going to take about 4 or 5.

The Chair: You are not going to get an answer here if you make a statement.

Mr Carr: Very clearly, what we have is a situation where, notwithstanding what economists are saying, policy initiatives of the government do scare revenue away. If you were to make a recommendation to the Treasurer, knowing these policy initiatives -- the last chap who was in said one of the things you can do, if you look at page 12, is that corporate taxes are only seven cents out of the dollar, very insignificant. If you raise them, nothing is going to happen. You would send a really clear signal if you eliminate it. For Mr McCracken to say that, I was quite surprised, quite frankly. Initiative like that will do nothing to the revenue side, but it will send a very clear signal.

Do you have any other concrete recommendations? Maybe you could comment on the corporate tax, whether you think we should get rid of it. To spur, for example, investment in the auto industry, could we reduce the provincial sales tax? Would that be something you recommend? Could we do it to the tourism industry, to selective industries that we see as fundamental? Could that spur recovery, rather than what we talked about before where the government does it, where we whitewash picket fences and when the fence is finished being whitewashed we are done?

Mr Vasic: No, yes, maybe.

Mr Carr: Thank you very much. That wraps it up.

Mr Vasic: I think, first of all, the reduction of the sales tax, or elimination temporarily, has in the past worked to spur car sales. But again, that is going to be a drain on revenues. I think frankly that is not a realistic objective, given the likely cost of it. Of course, it is a very temporary one, largely borrowing from the future and bringing into the present.

I find this issue of whether Ontario is a hospitable place to work and invest not as clearly cut as surveys and so on would lead one to believe. I think the issue I see most is really a fear of what might be done. It is not the taxes per se, but it is legislation, regulation and impediments to getting on with business. There will be financial implications, of course, but it is the potential erection of those that are seen as the barriers or the hurdles to not making Ontario as hospitable.

The hard part for anyone sitting in any particular room is to look around elsewhere. I would agree that Ontario maybe is not as hospitable as it once was perceived to be, but relative to other areas, other countries, other states, we still do have a lot to offer. I think that should not be forgotten. It goes without saying that if there is not much corporate tax collection, there must be not much corporate tax paid, so maybe that will not make as much of a difference as you think. Certainly you are not going to eliminate the corporate tax with a higher tax on consumers or something else. I think at this stage we should clearly focus on initiatives. If we are going to focus on initiative here, it should be funded somewhere, because certainly that $14-billion deficit should be the ceiling from which significant improvements can be made. But I do not believe one should finance these things just out of larger deficits.

Mr Sutherland: I have two quick questions. You talked about inventories staying lean. Last year when the economists came in they said, "We're going to have a much quicker recovery this time because we have had much better inventory management than we had during the 1982-83 recession." Mr McCracken -- I think you were here when he said this, when he was talking about the slow decline in employment figures -- did not seem to support that because he said it takes a while for employment to get going again. If inventories are lean and generally the economy is sound and things are looking somewhat optimistic, should not unemployment figures by going down more substantially?


Mr Vasic: I hear what you are saying. The short answer is that, if you look at the chart, there was not an inventory cycle. Inventories were lean. You can be simply thankful they were because otherwise the recession would have been that much worse. You could come back --

Mr Sutherland: No, I just wanted to move on to one other thing: the automobile cycle. If we look at the auto sales business cycle, is part of the problem not that that cycle has really been lengthened by the change in automobiles? Are they not supposed to be much better built and longer lasting, so that the natural turnover that people would have in their automobiles has been lengthened, and all the incentives during the good times that were given to support unsustainable growth has really helped to extend the recession?

Mr Vasic: Yes, but that is more of a trend than it is a cyclical phenomenon. What you are saying is true, but you have to remember that whenever people do buy a car they are spending more dollars per car because they are getting so much more quality and so many more features. But what you are saying is the average lifespan is increasing. That is a trend. That will change the trend of auto sales more than it will the cyclical ups and downs. In fact, if there is one single indicator for folks to look at it in this room, it is that US one-day car sales figure, which is relaxed to the lowest levels they have seen. We have revisited recession lows in the US, although we feel that will come back. That is only a trend thing; that is not a cyclical thing.

Mr Sutherland: We have not really changed the length of the cycle? If so much of our manufacturing is stimulated by the auto industry, and you have a much longer-lasting cycle in terms of how long people are hanging on to their new cars because they are supposed to be built better and last longer, does that not have an impact?

Mr Vasic: Yes, it does, but you have to remember that even so there is a great deal of discretion in keeping a car one more year or one less year. A lot of that has to do with how you feel and what your income and financial situation are at that time. You can repair your car and so on to keep it another year, if you are apprehensive. You find those are essentially the scrappage rates. Those vary quite a bit with the economic cycle. So while what you are saying is true, it is not part of the -- if you think of two things, of a trend line and an amplitude around it, that shifts the trend line. The amplitude is determined by cyclical economic factors. That is the easy way to think about it.

Mr B. Ward: I have a quick question; it may have been asked while I was out of the room. Are your projections for future growth in the short term based on the American economy recovering? I realize it is very short term in the sense that President Bush made his statement yesterday, but will that have any impact on pulling the American economy out of the doldrums?

Mr Vasic: In short, his speech, I believe, was a small plus, in terms of what it meant for the American recovery. As I mentioned earlier, the US economic growth prospects have been revised down. Ours have been cut in half. But US import growth has actually been revised up. The areas of strength in US import growth are, (1) automotive and (2) other capital goods, business machines, telecommunications equipment, aircraft and so on. That is the thing that matters most to Canadians because that is what we feed into. We do not feed into US GNP; we feed into specific US end markets.

One thing that would clearly be of benefit of course is if the US consumer came back and bought some cars. All I can say there is that we believe that will occur. Right now, they are about as low as they can get and they have now twice visited the recession floors. As a result, the US recovery per se that we are looking at is only 1.7% growth next year, which is totally anaemic. But the import growth, which is what matters, has actually been strengthened. As I was mentioning earlier, our competitive position is not as some people would have you believe, for some of the reasons that I mentioned.

Mr Phillips: Just to confirm, you are saying economic growth in Ontario this year, 1992, will be in the 4% range.

Mr Vasic: From the fourth quarter of 1991 to the fourth quarter of 1992. The annual average we have for Canada, doing it that way, works out to 3.3%, but above average, a year where you can see the unemployment rate stabilize and perhaps come down a wee bit.

Mr Phillips: I am pleased to meet you; I think you have been the most optimistic economic forecaster in the country.

Mr Vasic: Our forecast is not the most optimistic, actually. In fact, if you look back six months ago, consensus has more or less come up to meet where our forecast has been sitting.

Mr Phillips: My concern is a bit like Mr Sutherland's: Last year we sat here and most economists were more optimistic than we were.

Mr Vasic: That is scary.

Mr Phillips: To every business person I run into, I say, "How are things going?" They have a more pessimistic view than the economists do. They have proven to be right and the economists in the last year have proven to be wrong. I hope the economists are right and I hope the people out there are wrong.

Do you build into your forecast any of the emotional side? Business decisions are made on judgement based on some factors, but then they say, "Just how does it feel?" Do you build that into your forecasts as well?

Mr Vasic: That was the purpose of my whole discussion at the beginning on consumer confidence and expressions versus actions. We can build that in. We have measures of confidence that do affect the key areas of spending. You have to remember that what you are basically suggesting is that people can be totally irrational for a prolonged period of time with reality never really sinking in. They can certainly do that for short periods of time, but it usually does not work out that they can be irrational for long periods of time.

There is also the issue of the individual versus the group. You or I, one morning, may decide to go out and buy a VCR, or not buy a VCR that we were planning to buy, but when you collectively add it up you do not see these big swings the way you would expect. Given what you know individually to have is a great discretion in terms of, "Well, when am I going to buy that car? I was going to buy it last fall, but I am waiting now," you would think that a lot of people are doing that. It does not seem to work out that way. With the laws of large numbers you do not see that happening in such major fashion.

As far as business being more pessimistic, I ask you, when was the last time they were optimistic? I do not recall that in the postwar era.

Mr Phillips: I do. You are not out in the world that I deal in, then.

Mr Vasic: Actually, I remember in the late 1980s when they were optimistic about $60 oil prices and planning on that basis.

Mr Phillips: I think through the mid-1980s people were -- you and I must deal in different circles, that is all.

Mrs Sullivan: Yes, I'll say.

Mr Vasic: I do not think so. Business is always very cautious. They are always, in a sense, in a prepared-for-the-worst, hope-for-the-best mode. You very rarely hear great expressions of optimism. To me, things seem to ebb between normal and disastrous. When the good times are rolling, that is how it should be. That applies to the consumer equally well. I think business is taking a Missouri attitude: They want to see the recovery, and when they see it they will say, "It's here."

The Chair: Mrs Sullivan, you have one minute to get a quick one in.

Mrs Sullivan: I am fascinated with the last response. I am interested that you are placing as much of the impact on the automotive sector as you are in forecasting the 4% recovery. Basically you are saying that if people take advantage of low interest rates and if there is a place for government incentives, it would be in the automotive field, to induce the purchase of new cars. With the number of our cars being manufactured outside of our own domestic economy, is the automotive sector in fact, the continuing place for stimulus that it was, say, in years past?

Mr Vasic: No. As a share of the economy, it is clearly on a secular downtrend. The issue is, what is the swing factor for the recovery? Often it is sectors that are not the largest part of it. If I took the other four fifths of consumer spending, that is, fuels and shoes and haircuts and so on, that is much more important than housing and automobiles put together. But the fact is you are not going to go out and get your hair cut twice a week just to stimulate the economy. The swing factor in this very short-run sense is the auto sector; that is a very important one.

Second, I raised that because it did not seem to be so well known that housing is not doing so badly but autos are, so there are elements of durable spending which are presumably impacted by the same things, the same interest rates, the same consumer confidence, the same consumer incomes, but are acting quite differently. It suggests to me that this problem is not as black and white as has been suggested.

The Chair: Thank you, Mr Vasic, for your presentation. I imagine, if you are out in the hall for a few minutes, committee members can get a chance to ask you a few more questions.

Mr Vasic: Sure. Thank you very much.



The Chair: I believe there is some other business for this committee. A subcommittee meeting or a whole committee meeting?

Mr Carr: No. The question I was going to ask throughout was the whole direction on the pre-budget hearings -- what we want to do. We talked with the clerk before Christmas about the process of having people come in. We will have three days on pre-budget hearings. It was my understanding when we met with Todd that the reason we did not have any more hearings is that the whips and House leaders decided against it during that break, after we decided on the 19th. I understand that is not the case, that there had not been a request from this committee to have any hearings. I am just looking for some type of guidance.

We are going to go into a situation where we come up to a budget, during the economic crisis we are in, having had only three days of public hearings in this committee. If the Treasurer is having his own hearings, with direct input to the Treasurer, then I suspect we will not need any more. I am just looking for some type of guidance so that this committee will at least have heard from the public when we put some ideas and recommendations together. I just throw out this question for both sides; I think Monte last time talked about not feeling there is need for any more hearings, but I just throw it out for the committee to look at. What we should be doing is three days and up and then closing the door on pre-budget hearings. It may be that the Treasurer is having extensive round tables, though I am just not clear on that. So I throw it out for discussion.

The Chair: Any comments?

Mr Sutherland: My only comment would be, I guess, that we have been able to get that extra day. We also said, though, that if any group was not able to come forward and make a formal presentation, we would accept their written presentation on their comments. I am not quite sure what the consensus is of members of the committee, whether they would like to have the committee make a request, if we can, to the House leaders or to the whips that we want an extra week. I guess we could discuss that. We would need to have, and I would hope would have, close to unanimous consent in terms of members of the committee, if they wanted to do something of that nature.

The Chair: I would like to comment. The clerk says there is an open period at the end on Tuesday, the week after next. On Wednesday, February 12, there are two hours in the morning and an hour in the afternoon. On Thursday, February 13, there is committee debate and draft report preparation from 2 to 5, but there are open periods of time in that.

Mr Carr: The reason they are open is because historically what has happened is that some groups have come forward. We did not advertise because we did not have the time slots. I suspect that because of what happened a couple of Tuesdays ago, people realize there is a big problem in this province with the economy. Are we content as a committee to say we are only going to have three days of pre-budget hearings before the budget comes down? If the Treasurer is doing extensive hearings, the government can then say, "We were doing it outside the finance and economics committee," and that is fine. From the public perception, we are saying there is an economic crisis and yet this finance and economics committee will only spend three days hearing submissions from people.

The reason there are not enough people is because, as you know, we were only asked to have five people. Last year I think we heard 60, although that may have included some of the municipalities and universities and so on. So we are talking about two things. I just want to make sure everybody is confident that this committee has done everything for our report. I do not know if David wants to comment. That is my only concern and I just throw it out.

The Chair: David, did you want to comment on this?

Mr Christopherson: I do not know that I have a lot to offer, except to say that I think we need to bear in mind that we have already done the MUSH sector, which is different from what we did last year. You would almost have to include that into our totals, if you want to look at how many groups we met with.

The Treasurer is doing a lot of round table discussions. It is a new process. It will involve a lot of groups. Again, in most cases you are talking umbrella-type representative groups, as opposed to individual groups. We were fairly loose in the past about individual groups. Even local community groups in some cases found their way here to the committee.

If the committee feels we should have more, then by all means we ought to talk about that. As was mentioned by our whip, the public is quite welcome to put in submissions, so they would still have the opportunity to get their messages to us. I was disappointed, quite frankly, that we did not get a chance to follow up on some of your suggestions from last year about doing at least one sectoral visit somewhere onsite. While recognizing that is somewhat symbolic, I agreed with you that there was an important symbolism in going out.

I would just say that if other members of the committee feel we have not got enough time lined up, then by all means let's look at expanding it, but I would add one caution. Recognize that at no point will we ever have seen enough people to satisfy both ourselves and the public, that everybody whom we should and could hear from has the opportunity. That just will not happen. I am open to suggestions or comments from members of the committee from other parties.

Mrs Y. O'Neill: Mr Chairman, I am going to be on this committee for the next few weeks. Mr Carr keeps talking about three days of meetings. I do not understand.

Mr Carr: Three days with the public.

Mrs Y. O'Neill: Well, these people are not considered public who were here today. These are the experts.

Mr Carr: No, these were the economists giving us a macro versus micro.

Mrs Y. O'Neill: So it is three days next week you are talking about, Monday, Tuesday and Wednesday. Is that correct?

Mr Carr: Yes.

Mrs Y. O'Neill: Okay. I just had to pull myself up to speed.

The Chair: We have not got that list as yet. I was unfamiliar with some of these items also, just coming in as Chair today.

Mr Sutherland: I believe the clerk had indicated there were still three or four organizations that have been asked to come forward but have not confirmed yet that they are going to be coming forward. Correct?

The Chair: Yes. Actually, the schedule would be filled if everyone comes forward who had been asked to come.

Mrs Y. O'Neill: They will be coming in next Wednesday.

Mrs Sullivan: I was going to suggest that the parliamentary assistant may want to take back to the Treasurer a suggestion. Depending on the nature of the interventions made at these so-called round table consultations, if there are formal presentations from the groups which are appearing before the Treasurer and which are not appearing before this committee, perhaps those presentations could be made available to this committee.

As you know, this committee was in fact set up in 1985 by the then-Treasurer to participate in the discussion and deliberations surrounding the creation of the budget. It was intended that this committee should have open access to materials that were put on the table, so far as that was possible, so that its advice could be formulated with full information.

If groups and organizations are continuing to meet the Treasurer behind closed doors, albeit in a different session -- and I frankly believe that the Treasurer has to proceed in that way, that there have to be closed-door meetings -- but given that he is changing the process, making a big deal of the change in the process, let's see what access we can have to the material he has that the committee, because of a changed format, is not likely to have.

Mr Christopherson: I would just respond that, given the announcement by the Treasurer of the statistics and facts and dollar figures that were released in the recent fiscal document, I think that is evidence of his willingness to put his actions where his words are. I will speak to the Treasurer about that.

I think it needs to be said that one of the reasons the current Treasurer wanted to make these changes was that there was an awful lot of duplication, where people came to this committee because this was the public arena and they had their chance to talk directly to this very important committee, but also there was this feeling that if you did not get in and talk to the Treasurer at one of those behind-the-door meetings you really were not in the inner loop. When I sat here as a member -- and I would also sit over there because Floyd would be scheduled elsewhere -- I would be receiving from many groups exactly the same document on behalf of Floyd that we got here. Even the groups acknowledged they did not know if they were really doing anything, but they did not want to risk losing ground if they did not do it.

So there was an attempt, a sincere attempt, on the part of the Treasurer to have this committee doing meaningful work that would add to the work he was doing, as opposed to duplicating it or running a parallel process.

To answer the question directly, I would suggest we send a letter from the committee directly to the Treasurer. I will speak to him, but let's formalize it. I know that he is very sincere in his wish to have this committee as up to speed as he can possibly keep it vis-à-vis the information he is receiving and the kinds of exchanges that are taking place.

The Chair: The thing is, David, that if they appeared before this committee rather than before the Treasurer, the Treasurer would still have the written report and the documentation and the pre-budget consultation. So maybe it is an item to talk to the Treasurer about: coming forward before this committee.

Mr Christopherson: I agree with what you are saying, Mr Chair. My sense from the question by Mrs Sullivan was that perhaps we would be receiving briefs that the Treasurer would not, whereas they would indeed be forwarded as part of our background, or at least be made available to him. However, the question was: Are there briefs being received by the Treasurer that perhaps we may not be getting in the course of our business? That is where I think we ought to address our letter. I am just saying that I will complement that request with a personal discussion with Floyd.

Mr Carr: I agree with David. The one thing we do not want to do is to duplicate. The only thing I am saying is that by trying to say we might not duplicate, some people might slip through and the perception might be that we do not get them. So I think that is a perfect idea. We may have even made that request when the Treasurer was in here. We said, "If you want us, could we have the dates of the round tables?" If I remember correctly, he said, "If you want to participate and come in and sit in, you may." If we could just formally tie that up a little bit -- I know his officials were scrambling to write things down that day. My point is that when we do not formally ask for things, sometimes they can slip through. Let's not duplicate. Let's formally ask the Treasurer what some of the dates would be. If he could forward the information, then everybody will be covered.

The Chair: Fine. I will see that a letter is sent from the committee here. Okay, that is all..

The committee adjourned at 1623.