Monday 6 February 1995

Pre-budget consultations

Ontario Teachers' Pension Plan Board

Dr Leo de Bever, vice-president, research and economics

Royal Bank of Canada

John McCallum, senior vice-president and chief economist

Carlos Leitao, regional economist

Provincial Auditor

Erik Peters

Ministry of Finance

Hon Floyd Laughren, minister

Bob Christie, associate secretary of treasury board, controller and assistant deputy minister

Steve Dorey, assistant deputy minister and chief economist

David Trick, assistant deputy minister, office of the budget and taxation

Peter Wallace, director, expenditure management and reporting

Harriet De Koven, director, intergovernmental finance policy

Barbara Stewart, director, capital and crown corporations


*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/

Prince Edward-Lennox-Hastings-Sud ND)

*Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)

Abel, Donald (Wentworth North/-Nord ND)

*Caplan, Elinor (Oriole L)

*Carr, Gary (Oakville South/-Sud PC)

*Haslam, Karen (Perth ND)

*Jamison, Norm (Norfolk ND)

*Johnson, David (Don Mills PC)

*Kwinter, Monte (Wilson Heights L)

*Lessard, Wayne (Windsor-Walkerville ND)

*Phillips, Gerry (Scarborough-Agincourt L)

*Sutherland, Kimble (Oxford ND)

*In attendance / présents

Substitutions present/ Membres remplaçants présents:

Larry O'Connor (Durham-York) for Mr Abel

Clerk / Greffière: Mellor, Lynn

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1004 in room 151.


The Chair (Mr Paul R. Johnson): It has been brought to my attention that the members of the committee are anxious to get things under way on this very cold February 6, and there are some matters with respect to the committee generally that we should deal with.

I understand that our first presenter isn't here yet; however, there are a couple of things that we should go over. One is with respect to our researchers and the reporting done after the committee and the record that will be kept with respect to the notes -- other than Hansard, of course, but the report that we're going to make back to the committee by the researchers. I just want to know if the members had any concerns that they wanted to raise with respect to the way in which the researchers report their findings to us and how they develop the ultimate document that we present.

Mr Gerry Phillips (Scarborough-Agincourt): I don't.

The Chair: Because from time to time it has been brought to the attention of the Chair at least that sometimes they would like to see more detail in the researchers' reports and sometimes people are happy. Before we start, I just wanted to be sure that we were all in agreement.

Mr Kimble Sutherland (Oxford): If I could just make a brief comment here, I think we've developed a pretty standard format for these reports on the pre-budget hearings and I would sense by the fact that there aren't a lot of comments that people would appreciate as much as possible going through that. Obviously, each year some different themes develop and there will have to be some note of that in the report.

The Chair: Thank you. Ms Campbell, you wanted to make a comment with respect to that?

Ms Elaine Campbell: We will have a proposed outline ready for the committee before instructions are provided a week from this Thursday.

The Chair: That's very good. Thank you very much.

Mr Phillips: On a different matter, I see the Provincial Auditor is scheduled to be here for half an hour today and I wonder if we shouldn't allow perhaps another 15 minutes just in case there's more discussion that we should have and a half-hour may be not enough time. I guess the alternative is to schedule him later to come back, but that may not be the most efficient use of his time. I wonder if I mightn't move that if need be, we extend the discussion with the auditor to 12:15 today.

Mr Sutherland: Mr Chair, the committee had agreed that the economic forecasters coming in would be given 45 minutes, and then obviously a special amount of time would be given to the Minister of Finance, and then of course Finance officials, a couple of hours granted to them, and the rest of the presenters would be provided 30 minutes. Those were the terms that were agreed upon.

The Chair: And therefore, Mr Sutherland, you are suggesting?

Mr Sutherland: I guess what I'm indicating is that since those were the terms agreed upon, I'm not supportive of Mr Phillips's suggestion.

Mr Gary Carr (Oakville South): Notwithstanding what has been agreed, as you know, this committee can agree to do anything it wants. It is unprecedented that an auditor has taken this step, and I think giving him 15 extra minutes isn't going to cut into anybody's time. It's at a lunch-hour, which means we can forgo a little bit of lunch or do it a little bit faster. I think it is important that we have the time, given the fact that he is coming forward. For us to say to the Provincial Auditor, "No, you can't have an extra 15 minutes before the committee of the Legislature looking at a very important issue," is absolutely a disgrace.

Mr Larry O'Connor (Durham-York): Did he ask for it?

Mr Carr: We should, if need be, in terms of questions from this committee, be able to give him more time. He may come and take five minutes, but I suspect that we could take the remainder of the 45 minutes or hour asking questions. I know I could take the full time doing it myself to him and I think we should. I think 15 minutes is very little extra time and I would hope the government would reconsider because, as I said, it would be a disgrace if he came in here and we would not give him 15 extra minutes. To try to play politics with this and not allow him to say --

Mr Jim Wiseman (Durham West): You already started.


Mr Carr: You know what? You have one opportunity, folks, to go out and talk to the Provincial Auditor and you're not even going to do that, and you come in here and you en masse, en bloc, are going to vote against giving 15 extra minutes to the auditor.


The Chair: Order. Mr Carr --

Mr Carr: I thought I had the floor.

The Chair: I just want to bring to the attention of the committee that as we continue to debate this, it would become evident that as our time slips by, inevitably we'll be already at some time after noon.


Mr Carr: Is Mr de Bever here?

The Chair: Yes, he is. I'd like to resolve this before we continue.

Mr Carr: Well, obviously it's resolved: They don't want it. They've got the votes.

The Chair: I'm in the hands of the committee. If there is a motion, Mr Phillips, and --

Mr Carr: Let's take a vote.

Mr Phillips: Yes, I moved it and I just think that if we don't do it, it raises more questions than you really want to. There are alternatives if that doesn't happen that are less helpful to the auditor, I think.

The Chair: Thank you. All those in favour of Mr Phillips's motion? Mr Johnson.

Mr David Johnson (Don Mills): It's obvious that we have the time today. Looking at this afternoon, the last scheduled deputant is at 2 o'clock. So looking at the course of the day, unless there's somebody else scheduled after that that I'm not --

The Chair: We've got the ministry officials for the afternoon.

Mr Carr: We don't bump anybody at 11:30 is what he's saying.

Mr David Johnson: I'm sure it'll be most interesting to listen to the ministry officials for about four hours this afternoon. That will, I'm sure, be a great source of amusement. Their viewpoints are obviously more supportive of the government, perhaps it's perceived, than the Provincial Auditor, but anybody looking at the schedule today would see that there's lots of time.

The Chair: Thank you, Mr Johnson.

Mr David Johnson: The Provincial Auditor, Mr Chair, is a very special circumstance. I think we could all agree on that.

The Chair: And indeed it's unprecedented that he's come before this committee for this. Mr Kwinter.

Mr Monte Kwinter (Wilson Heights): Mr Chairman, can I make a suggestion? We're talking hypothetically. We don't even know whether Mr Peters is going to take the half-hour, so can we wait until he makes his presentation and at that time, if we feel we want to extend it, we'd make a motion at that time?

Mr Carr: Good idea.

The Chair: Is everybody agreeable to that? Yes. Then Mr Phillips will withdraw his motion? Agreed? Okay.

Mr Sutherland: The point is, if the decision is going to be made, it's going to be made. I don't think we're going to make -- I won't be changing my position anyway in terms of what is going to occur. So if we're dealing with procedural issues or a few things to clarify right now, let's just do it now and be done with it.

Mrs Elinor Caplan (Oriole): What are you afraid of, Kimble?

Mr Sutherland: I'm not afraid of anything. Let's do it now.

The Chair: In that case, I think it's clear that I'd like to know if it's the agreement of the committee that we extend Mr Peters's time beyond half an hour and I'd like to see a show of hands.

All those in favour of extending his time beyond half an hour? All those opposed? It would appear that Mr Peters has half an hour.

Mr Sutherland, you raised another issue.

Mr Sutherland: I just wanted to clarify that, for this afternoon, the Finance minister is here from 1 to 2 and then the Ministry of Finance officials are here from 2 to 4.

The Chair: That's how I understand it.

Mr Sutherland: Okay. Thank you.

Mr Phillips: Again, I assume we are dealing with something fairly fundamental. If we're right in the middle of some questions -- I mean, last year they came back later.

The Chair: The Chair has always been flexible at the end of question period for extra time.

Mr Phillips: Say that at noon.


The Chair: At this time I would like to call forward Mr Leo de Bever, vice-president, research and economics, Ontario Teachers' Pension Plan Board. Please make yourself comfortable. You have 45 minutes within which to make your presentation and field questions, and whenever you are ready, you may proceed.

Dr Leo de Bever: Good morning. I think the easiest way to paint you a picture of where I think this economy is and where it's going to go is to turn to the graphics page in my five-page pamphlet that was just handed out. I'd like to give you the headlines on that and then go into the details that are indicated in the text.

The top graph on the right shows you what GDP has been doing and what I think it will do over the next couple of years. I don't have to tell you that we've gone through some pretty bad times, perhaps worse than they should have been, but in any case we came through them.

Recovery has been very slow, about half as slow as it was last time. We're currently experiencing growth at a running rate of around 4%. It's going to slow down to around 3% to 3.5% for Canada. Ontario will do slightly better and Canada will do slightly better than the United States. That again is a typical profile that you find at this stage in the cycle. Canada is a provider of cyclical goods into the US market. Ontario is the province that's most closely tied to the US, so as a result you find that Ontario does slightly better than Canada, which in turn does slightly better than the United States.

That's the good news. I think past 1996 you might run into some head winds, for reasons that I'll get into later.

On the top left you see two things. One, inflation has been pretty low. Even if you take out 1.5% on the CPI due to tobacco tax cuts, 1.5% inflation is fairly minimal. I think that's going to pick up over the next two years and probably reach around 3% by the end of 1996.

You see quite a difference between producer prices and consumer prices. A lot of that is exchange rate driven. The rest of it is cyclically driven, meaning that during good times producer prices tend to run ahead of CPI inflation; during bad times the reverse is true.

I think that the PPI is starting to crest. What that means is that the impact on profits from rising prices is probably going to crest over the next year as well. Profits were hit harder than in any recession since the 1930s. They're now recovering, almost 70% of normal. During 1995 they'll probably get close to normal.

The reason I'm mentioning that is that it has a direct impact on the middle-right picture, the employment growth picture. Statistically, historically, people are not hiring when they don't make any money. The fact that they are making money and that the money is getting better means that employment growth will start to pick up. We'll have probably a 3% average employment growth for this year in Canada. That also means you're going to draw some people into the labour force, so the unemployment rate is not going to drop as fast as that number would suggest, because your labour force is growing as well.

Again, note the rapid drop in employment during the 1991 recession. I think there's something structurally wrong with Canada, and if policy should do one thing, it's to try to dampen a recurrence of that during the next recession.

The interest rate picture has been front and centre over the last few weeks, particularly after the Mexico affair. It shows how fragile the financial environment is and how nervous people are about what's going on in Canada, not just fiscally but also in relation to Quebec. Historically again, crises surrounding Quebec have caused Canadian rates to rise as much as 200 basis points. I could see that happen again. That is, again, relative to US rates.

The only good thing is that I see US rates close to peaking, which means that any increase in Canadian rates from that source should be minimal after the middle of this year. The impact on interest rates on the long end from political crises will be smaller than for short rates. Again, that's because of the interaction between interest rates and the exchange rate.

The fundamental problem with Canada is on the bottom-left chart there. We're running a current account deficit of about 3% of GDP. I don't see that improving a great deal, even though we're doing better on trade, because the interest on the debt that we've run up over the last 10 years tends to offset all or part of the improvement we're making on the trade side.

To put it in perspective, if we were to solve this particular problem, we would have to run a $50-billion trade surplus, mostly with the United States. We've never done it. I could see the political problems of doing that being quite significant. Even though you could say, "Well, we're paying you Americans most of the interest we're shipping out," it still, I think, is going to be a formidable task.

The dollar has been weak, probably will stay weak. There's a lot of feeling that after the Quebec issue gets settled, presumably with a No vote, the dollar would rebound sharply. There may be periods during this year that the Canadian dollar will rebound. I don't think it will be very sharply. After the federal budget you might see a bit of a positive impact, almost no matter what happens in that budget, because there's been a fair amount of discounting of what might be in the budget. But then, as we get into the referendum campaign, I think the dollar will start to have its problems again.

Those are the headlines; that is the picture I'd like you to have in mind when I go through the reasons why some of these things are likely to transpire.

First of all, why are we not going to have more than two years of strong growth after 1995, say? Why are we going to have a recession? Well, there really is no objective reason for it that any economist could point to as saying, "It has to happen at that point." The fact is, business cycles usually don't last more than five years. This one has been pretty tame so it might last a bit longer, but the US is already fairly close to capacity and I think within two years they'll run into some problems and we will probably get dragged along with that. Now, we could get a second leg, but for that you need something very extraordinary. In 1986 we almost had a recession. We didn't get one because oil prices collapsed, which was pretty bad for taxes in Alberta, but it was pretty good for everyone else and it kept the recovery going for a while.

The expanding economy is giving you some cyclical improvement in your fiscals. I'm sure that all governments, provincially and federally, are going to take credit for that, but just be aware that it's temporary, that it's not structural. There is a very severe underlying problem that remains, and if you want to be in a position to help the weak in the society during the next recession, I think fiscal reform should be right on the top of your agenda.


I understand you're going to have the auditor in later on today. I think trying to convince someone else of a reality that does not exist is one way of going; trying to delude yourself is something else. I strongly urge you to take the auditor's view of the way the books look because to almost anyone in the financial community that is a more accurate statement of the way things are going. In fact, it probably still understates how badly things are in the sense that there are lots of contingent and unrecorded liabilities that we have run up in various pension programs, in the WCB and a number of other quasi-government institutions, liabilities that we have essentially put the government name to without putting numbers on the books to reflect that.

That's why I think that with the situation the way it is, and given that we're running out of time in terms of fiscal reform, by the second half of the next government's term there will again be this clash between declining revenues and increasing pressures from the usual countercyclical programs on the government's budget.

I would be very surprised if the provincial debt were under $115 billion by the year 2000. I think we're right now around $90 billion, so that would mean we're adding another $25 billion over the next five years on average, even if you assume that we make some headway in terms of reducing spending or finding some other sources of revenue.

We've already gone into why Canada can grow faster than the US at this stage. I'd like to focus for a moment on a paradox that seems to exist between the way workers look at this economy and the way producers look at it. If you talk to an employer, he will argue that his costs are still incredibly high. If you talk to a worker, he will tell you that his standard of living hasn't gone up in the last 15 years. The fact is that both are right.

If you look at what we have been selling our products for in world markets relative to the prices of the things we like to buy domestically, the difference is astronomical. It's been consistent and it has been happening since 1975. Basically, what's been happening is that what we are selling in world markets and what we're buying from the world in world markets has not been going up in price nearly as fast as the increase in domestic prices. As a result, we have had imposed on us a decline in our standard of living that most of us have not taken account of.

In other words, we don't control the fact that relative prices have shifted in world markets. For reasons beyond our control the rest of the world has gotten better at making the kinds of things we are making and as a result the prices for those goods are going down. The implications are inescapable. The implication is that we will have to work much harder than we have done before to generate the same amount of revenue that we want to spend domestically.

There's nothing you're going to be able to do about it. You can't abrogate free trade. You can't pretend that the world doesn't exist. This is just a fact of life, just like in the 1950s, 1960s and 1970s we were lucky enough to have the reverse happen to us: Commodity prices and manufactured goods prices were going in our favour.

To show you how traumatic it is, if you sort of, as a cartoon, think of Ontario exporting cars and consuming restaurant meals and haircuts, it now takes twice as many cars to produce the equivalent bundle of haircuts and restaurant meals that we used to buy in 1975. That's a very, very dramatic shift in relative terms. It affects our standard of living, and to not take account of that in the way we think about how much we can afford in various places is just not realistic.

I'd like to turn to the four sources of risk that I can see -- at the last page of my text -- in the next year that you should be aware of.

We've already alluded to the fact that the disturbances coming from the US are likely to get weaker this year. The Federal Reserve just moved 50 basis points. They may go up another 50 basis points some time this year, but I think what is going to materialize is that people are going to realize that the inflation risk is probably overstated, just like it was in 1985. In 1984, we saw inflation picking up. There was a fear that inflation would go from 3%, 4%, 5%, 6% back to 8% and 10%. It didn't happen, and after rising three points, interest rates dropped three points. I'm not sure the decline is going to be quite as strong as it was then, but I think you're going to see at least some stabilization, barring some of the domestic factors that could impact on interest rates.

I would like to point out to you that this behaviour is not because they're trying to be simply cantankerous. The Bank of Canada has done some research that shows that indicators of inflation are very unreliable eight months out. As a central bank you have to be vigilant, and as a result you sometimes are shooting at targets that later on turn out not to be there. There are some reasons to be watchful, particularly in the United States, but in the end I think that inflation in the US will probably stabilize around 3% to 4%.

On the federal budget side domestically, that's obviously the next source of disturbance in financial markets, and the reason I'm focusing on that is that really is the most direct impact you as a government have on consumers. The government borrows at the cheapest rate, the lowest rate of anyone in the economy. If for whatever reason government causes its debt to be priced at a very high interest rate, then the rest of us, in our mortgages and consumer loans, are going to have to go along for the ride. On a $200,000 mortgage, a 1% hike -- simple arithmetic -- is $2,000 after taxes. That's quite a bit of an implicit tax hike, or not a tax hike but at least a burden on consumers.

The problem with the federal budget and financial markets is that no one sees 3% as a solution. It shows you how far we've moved the goalpost. There's no economic theory I can think of that says that 3% of GDP as a deficit target is adequate. We should be targeting for cyclical balance. That's what we used to do up until 1975.

Again, the federal cyclical improvement in finances will be short-lived and I think the direction of change will have to be some form of decentralization and some paring down of commitments to the future. The same thing is going for Ontario. I know what's going to happen when the feds are going to release their budget. I think there's going to be a hue and cry in Ontario along the line that the feds are offloading on the provinces. Before that reaction comes out of the government chambers, I would like to say that no economist would blame you for the offloading. If you take the view that there is only one Ontario taxpayer and that this taxpayer really doesn't care whether he gets dinged by the feds or by the province, in that case having the feds offload on the provinces in itself is not a problem or is not a change in his situation. What might be a change is the reason why the feds may be offloading.

A lot of economists believe that particularly education and health care are probably better administered at the provincial level. If that's the case, decentralization in those areas is actually a good thing, and although it's an inconvenience from the standpoint of the provincial Treasurer, from the standpoint of overall efficiency of the system and burden on the taxpayer it could be a very positive development. So I don't think that any offloading that results should necessarily be criticized without looking at the reasons behind it.

Of course, the biggest thing in the financial markets this year is going to be the Quebec referendum, whether we like it or not. The thing I would warn about this time is that the assumption in financial markets in particular is that ultimately this thing is going to get defeated. There is no plan B. There has really been no coherent discussion of what we do if there is a Yes vote and I'm really concerned that the risk of a Yes vote in financial markets is at this point much bigger than most people assume simply because they haven't thought about the possibility.

We know that last time in the referendum the francophone vote was 50-50 and as a result, the referendum was voted on mostly because of the immigrant and allophone vote. If that doesn't happen this time, we haven't really considered the implications of that.


Now, we know that there is a possibility of negotiating separation without upheaval. Belgium split itself into two. The reason you haven't heard about it is probably already one indication of how well they did it in terms of negotiating things beforehand. They also had the advantage that they didn't have a current account deficit, which meant they didn't have to go to market to finance their quite substantial financial problems.

What all of this means is that at the end of this year, if the referendum gets voted down, you'll be left with interest rates that probably will be below where we are now. If that isn't the case, they might be substantially higher. That's one more reason why as a government and as a province we should pay much more attention than we have so far to what we may want to do if this were to go the wrong way.

I think that's the gist of the comments I'd like to make. My understanding is that you prefer to have a lot of questions, so let's do it that way.

The Chair: Thank you very much for your presentation. We have about seven minutes per caucus. We'll start with the Liberal caucus.

Mr Phillips: Just to sort of make sure I've got the fundamentals from you, your feeling is that the GDP in Ontario for the next couple of years could be at around the 4% rate?

Dr de Bever: It might be pushing that. Depending on how fast the US goes down, I think 3.5% to 4% is quite possible. We could get lucky and get even higher, but if you were to do a planning scenario, 4% is a good, robust -- well, at 4% I think your risk would be even. It could be higher; it could be lower.

Mr Phillips: Interest rates: You feel the US interest rates may begin to back down a little bit, but Canadian interest rates continuing to be high and the spread therefore widening versus the US?

Dr de Bever: At least in the first half of the year, assuming we're going to have a Quebec referendum in, say, June or somewhere thereabouts, I would think spreads, particularly on the short end of the yield on the maturity spectrum, would widen out to probably over 200. They're currently somewhere around 160, 170. It's easy to see that widening considerably to over 200.

This comes back to, why can't we have rates closer to the US? We could if we didn't have the political uncertainty, if we didn't have quite the severity of the fiscal problems that we have. We do have lower inflation risk. By rights, we should have interest rates that are fairly close to the US. I think the main reason it isn't happening is that a lot of financial experts still feel queasy about the potential of currency depreciation, which would detract from those higher yields.

Mr Phillips: The US inflation rate you think may run at 3% to 4%, and the Canadian inflation rate somewhat lower than that?

Dr de Bever: Right.

Mr Phillips: So our real interest rates in Canada will be --

Dr de Bever: Very high.

Mr Phillips: What premium versus the US is your feeling?

Dr de Bever: If you look at the real rates using -- this is, by the way, an exercise you can't do. You can't look at 10-year rates and use the current inflation differential. But our rates would be one or two points higher than in the US, minimum, in real terms, and most of the pressure from that will come from two sources: the ongoing need to go into international credit markets -- we have already seen how that's starting to become more constraining. We used to be able to do that in Canadian dollars. Because of the currency risk, we now do it mostly in yen, US dollars, Dutch guilders and Deutsche marks. I think the problem there, that consistent current account deficit I was talking to you about that's been around since 1982, is starting to impact on our ability to finance externally and that's what's driving the rates.

Mr Kwinter: In your written presentation you talk about the fact that the "party platforms published to date are unrealistic." Could you comment on that?

Dr de Bever: Yes. By the way, I feel like I'm sort of walking between two solitudes. In the financial community there is this notion that no politician has any financial acumen, and in the political community there seems to be a feeling that we're all money-grubbers in the financial community and that we don't have any heart for people.

When I look at the budgets, I think the government's budget ignores the fact that we probably can't sustain the kind of deficits that are being projected there. We just can't keep on doing this. If you're worried about interest rates, that's one reason you should be worried about it.

If you look at The Common Sense Revolution, I tried to make sense of that. I'm told by someone within the party who thinks I'm wrong that I just don't have enough data, but from what I've been able to gather, and in talking to some of the people involved in it, I think it understates tremendously the amount of real sacrifice that will be needed to get to the kind of bottom line they're talking about. I'm not saying we shouldn't do it; I'm just saying we should be a bit more up front about discussing what is needed to get the government back to a normal level, and this is where I think we have a ratcheting problem.

In 1990, we went from close to zero budget to $10 billion, in one year. If we're going to bring that down by $10 billion, there has to be some real pain somewhere. Even if you do that over three or four years, it's not insignificant. I guess my view, with the information I have on how this thing was put together, is that it understates the amount of pain that's needed to get to it. At the very minimum, I would forget about a tax cut. I would say that in the current environment you probably shouldn't raise taxes, that's probably political suicide, but to talk about a tax cut when you're running an $11-billion deficit I think is just not responsible.

The Chair: You have just a little less than two minutes, if you'd like to go ahead, Mr Kwinter.

Mr Kwinter: Mr de Bever, very quickly, because we only have a couple of minutes left, I notice that when you talk about the economy and you talk about it growing because exports and manufacturing will keep it growing to the 4% GDP that you're talking about, in discussions I've had and readings I've made, the automotive sector seems to be in a very, very difficult position in North America. How do you think that's going to impact, particularly in Ontario, which is so dependent on the automotive sector for its export-generating funds?

Dr de Bever: This is why this period gives us this false sense of security, because the automotive sector is one of the strongest sectors in this economy right now. It operates in a very cyclical market, as you point out, but it also is essentially a replacement market. In other words, the reason the market is strong now is that for four or five years people haven't been buying any cars, so now that they have a bit more income the car market is reasonably strong. But most of the growth in this market is going to occur in Mexico, because that's where people are still increasing their standard of living quite rapidly and that's where the number of cars per household is relatively low.

So even in North America we're going to be in a disadvantageous position. But it's not the only industry where we have that problem. I would argue that the financial sector is in a similar strait, that there's going to be a lot of consolidation and a lot of collapsing of entities as the banks start to go into the insurance industry, for instance, and that there's going to be a lot of emphasis on generating efficiencies. All that means is that for a centre like Toronto it's probably going to imply job losses over time, because the industry will be able to do with fewer people what it's doing with now.

On the manufacturing end, by the way, and this is true for both Canada and the United States, and I think I've said it in this forum before, to count on job growth in manufacturing over the long haul as a driver of employment growth is just not possible. The United States had 24 million manufacturing jobs in 1970 and it has roughly 24 million now. We had 1.8 million manufacturing jobs in 1970, and barring some blips from the recovery, it's going to be 1.8 million or 1.7 million again at the end of this cycle.

The employment growth in this economy is coming from services. If you want standard-of-living increases with employment growth, the only arithmetic that makes sense is that you're going to have to find a way to grow that service sector and at the same time increase its efficiency. If you're just growing jobs without improving the efficiency of that sector, you're not going to increase your standard of living, because you can't pay out more than you're producing. So if you're producing the same per worker year after year after year, you can't count on a standard-of-living increase. Given that the bulk of the economy is now services, that means the service economy will have to carry a bigger share of the improvement in productivity that's going to give us the standard-of-living increases.


Mr David Johnson: Mr de Bever, you've indicated that you expect economic growth to be in the 3% to 3.5% range.

Dr de Bever: For Canada.

Mr David Johnson: For Canada; a tad higher for Ontario.

Dr de Bever: Right.

Mr David Johnson: Over the next couple of years?

Dr de Bever: Yes.

Mr David Johnson: And then the United States economy perhaps may turn sluggish in, what, 1997, something like that?

Dr de Bever: Well, it probably will already start to slow down by the middle of this year, but 1996-97, yes. They have much less excess capacity than we do.

Mr David Johnson: Let's say 1997-98: What sort of economic growth would you forecast for Ontario?

Dr de Bever: Well, you're starting to look at 2%, and maybe by 1999 and 2000 no growth or recession.

Mr David Johnson: So over the next four or five years, an average of 3% growth would be a pretty good target, would it?

Dr de Bever: It's a pretty good target.

Mr David Johnson: In Ontario?

Dr de Bever: Right.

Mr David Johnson: The government's forecast is about 4.3%, as I can recollect, for economic growth over that period of time. In your view, what would be the likelihood of that being achieved?

Dr de Bever: Well, we could get lucky, but I wouldn't want to use it as a planning scenario.

Mr David Johnson: What would your view be on a forecast, an approach, that relied on an increase in economic growth of closer to 5%?

Dr de Bever: Well, it's happened before.

Mr David Johnson: So if you were to assign a probability to that --

Dr de Bever: If I were in your shoes and had to do the responsible thing from a government point of view, I would not count on 5% growth. I'd go with something like 3%.

Mr David Johnson: So if you were in our shoes and running for an election, for example, and you were to have to put out to the people of Ontario an economic forecast, a plan for the future, you would not put out a plan that had economic growth in excess of, what, 4%, 4.5%?

Dr de Bever: I think 4%, you're pushing the envelope, if you're doing it for more than --

Mr David Johnson: At 4.5% you're getting into the ridiculous?

Dr de Bever: Never say never, but it's not what's happened in the past.

Mr David Johnson: So if a party was to put forward a plan that relied on balancing the budget purely on the basis of growth of --

Dr de Bever: You can't do it.

Mr David Johnson: -- in excess of 4%, it can't be done?

Dr de Bever: No.

Mr David Johnson: It wouldn't have a chance?

Dr de Bever: I don't think so, no.

Mr David Johnson: I agree with you. I think you're absolutely right. So you would agree that expenditure reductions are necessary to balance the budget.

Dr de Bever: They are, and again, coming back to part of my presentation, I think we got into the wrong frame of mind around 1975, and when you look at a lot of economic indicators, that's where it seems to have happened. We still had in our minds 4% or 5% consistent annual rates of growth till infinity. Because of some of the factors I've pointed out, the relative price shift in particular, that just isn't quite feasible. Or even if the growth is feasible, the standard-of-living increase implied in it and the ability to finance the promises that were put in place around 1975 just isn't feasible. So you're going to have to go to the electorate and say: "Look, this is all very nice, but hey, we were wrong. We can't sustain these kinds of programs. We're going to have to cut back and now it's all a matter of what's the best way to do it."

Mr David Johnson: You've obviously read The Common Sense Revolution, because that's exactly what it says. In terms of your estimation of what sort of expenditure reductions would be required over the course -- let's say to the year 2000. Keeping in mind you've forecast perhaps over that period of time average economic growth of 3%, what sort of expenditure reductions would be required to balance the budget, in your estimate?

Dr de Bever: Well, it depends on what you do on the tax side. If you start with --

Mr David Johnson: Well, okay, let's just look at that as something. Can we agree that the residents of Ontario are taxed at least as high as if not higher than most jurisdictions in North America?

Dr de Bever: Well, it depends on what part of the range you're looking at, but particularly in the middle to high end of the income scale, yes.

Mr David Johnson: So a reasonable assumption would be certainly not to put it higher, but to make Ontario more competitive, that would have to mean a downward adjustment in taxes. Wouldn't that make Ontario more competitive?

Dr de Bever: It would make you more competitive but it would also make it more difficult to achieve your balanced budget objectives. In other words, you couldn't do it to any significant degree without jeopardizing your target of deficit stability, deficit reduction -- deficit removal, if you wish. I think you'd probably have to start with spending cuts and then see how they come along, how quickly they actually transpire, because I think there's also a timing problem, and this is no matter what political stripe the next government is going to have.

I think The Common Sense Revolution underestimates the inertia in the system, the amount of time it takes to get certain things going and the time it takes for them to have an impact on the books. If you started on day one, which you probably won't be able to do, it probably will take you a year to a year and a half before you see any significant impact on government finance.

Mr David Johnson: Do you believe it's possible to balance the budget in the province of Ontario by the year 2000?

Dr de Bever: It is, but you're going to have to be brutal with the population and say: "Look, we're going to have to do it. It's going to cost all of us. There's no sense in denying we can solve the problem on somebody else's back. Right now, we're borrowing $1,000 a head on your behalf every year that we don't have. If you don't want us to do that, then you're going to have to tell us or help us think where you want us to cut." That's a big amount of money. If you do that and then you get the population on side, you can do it.

I'm just a little nervous when I read The Common Sense Revolution. It seems all so matter of fact and so easy and I don't think it is. I have some concerns, frankly, about how the growth assumptions and the revenue assumptions and the spending assumptions tie together. I'm willing to be convinced, but from talking to the persons allegedly having a big part in this and talking to the people at the U of T who allegedly have vetted this program, I'm a little nervous that they're more willing to make the assumption that things would go the right way.

Mr David Johnson: If you talk to the government, Mr de Bever, it will say that it has cut program spending and it's been tough, that we've had the social contract, and with the kind of cuts in spending that we've had over the last year or two and with economic growth, the budget can be balanced in four or five years. If you look at the actual fact, total spending has gone up each and every year.

Is it your view that with the kind of approach, the kind of "spending constraints" that we've had over the last couple of years, the budget could possibly be balanced by the year 2000?

Dr de Bever: With the approach that they're taking in the budget?

Mr David Johnson: Yes.

Dr de Bever: I don't think so. Again, it comes back to a question of ways and means. I find it very difficult to justify that a province like Ontario, which is the richest province in one of the richest countries in the world, has to rely on other people's savings, meaning outside of Canada, to maintain its standard of living. Most of the reason it's doing that is because within the fiscal environment we're not able to tax for the spending that we do. I think there's just no ethical justification for continuing to do that.

Once you reach that point and you start saying, "Okay, what can we get away with, what can we remove?" you come in for some tough choices and I'm not denying that they are tough choices. But just because something in principle is good, it doesn't mean that you necessarily can afford it. There are all sorts of things that I desire because I find them implicitly good, but I'm not buying them because I have a budget constraint. Governments can sometimes ignore budget constraints, but they can't do it for 10 years in a row.

The Chair: Thank you. We've got to go on to the government.

Mrs Karen Haslam (Perth): I've been listening very carefully. I always like to look at finances in a more pragmatic way, looking at how it affects people and looking at the consumers out there. I've kind of starred a few things that you said.


One of them is that you said that the "slow recovery" is "directly linked to the severity of pre-1990 excesses," and that's the word I'd like to deal with, when you looked at excesses pre-1990. On the next page you talked about, "Canada consistently consumes 3% more than it produces." You say there is excess consumption.

All of those things seem to show that we're going to have to change our standard of living and I wondered if that's where you see us going, lowering everybody's standard of living in order to reach what you call a balanced budget. I have another question later. I wondered if you'd comment on that particularly.

Dr de Bever: Well, first of all, we are not entitled to a standard of living; we earn it, okay? What we've done is essentially elevated our standard of living by 3% by consistently borrowing $30 billion a year out of other people's savings.

Now, there are lots of people in the world, lots of nations in the world, that have fiscal problems like we do. There are very few nations in the world that have both the fiscal problems we do and also the shortage of national savings. For instance, again, Belgium: Belgium has the same kind of political environment we have -- you know, the fighting over the constitution -- and it has a big fiscal problem. Its debt is even worse than ours, but it borrows internally, because internally there's enough savings to cover the foibles of government, if you wish. We don't have that luxury. Basically, we're not saving enough. In other words, we're not saving enough to offset that excess public consumption.

Mrs Haslam: By "we," are you saying that the consumer is not putting enough away in savings? Is that what you mean?

Dr de Bever: Well, consumers, by American standards, save a lot more than they do down there. But when you look at the aggregate, what business saves and what individuals save, it's not enough to make up for the dis-saving of government, the deficits of government. That's basically our problem. Between the feds and the provinces, we're running, on a good day, $50 billion in deficits. It's probably more than that. And about $30 billion of that is borrowed abroad, so only $20 billion of it is covered by a transfer of domestic savings from the individual and the corporate sector to the government sector.

Mrs Haslam: That brings me to what you were just commenting on in the -- you were saying that "party platforms published to date are unrealistic." The Tories are talking about a 30% reduction to overall ministries, 20% in some cases, a balanced budget in four years -- unrealistic. The Liberals are promising a tax reduction -- unrealistic. We have forecast a reduction of our deficit by 30% and a balanced budget by 1998 -- unrealistic.

What is being realistic? Would it be more realistic to extend the time and keep the grade going down, which is what we've started, bringing the deficit down on a slow grade? Would it be more realistic to say that we could reach it in 10 years? Would that be a more realistic way of looking at the economy and how we can bring that about?

Dr de Bever: If you did it over 10 years, you'd be adding another $50 billion, roughly -- I have to do my quick arithmetic, but I think about $50 billion -- to the provincial debt. That would substantially increase the ratio of provincial debt to GDP. It probably would cost us more in the interest rate we'd pay on the provincial debt.

Mrs Haslam: So the shorter time is more realistic. And is it about educating the public; is it about -- you're saying what we've said is unrealistic. I'm asking you what would be realistic.

Dr de Bever: What I see as the fundamental problem, and this is a problem with democracy, I suppose, is that there are inconsistent expectations out there.

Mrs Haslam: Yes.

Dr de Bever: When politicians go out on the campaign trail, they always promise better tomorrows, more of this and more of that. The fact is, you can't do that unless your economy grows to finance all of that. If you want to force people back, that's not nearly as attractive a way to go on a campaign trail, but that's the reality. You need the support of almost any you can get your hands on to say, "Look, we do have to cut." If you listen to a politician who promises you the moon, he can't be telling the truth, because the money isn't there. You're going to have to educate people to the fact that they're going to be willing to take a cut in government services somewhere. You can't do it all through waste or fraud.

Mrs Haslam: No, I agree, and my concern, like yours, is the brutality to the population and just where that line is, but --

Dr de Bever: But there's a tradeoff: Is the brutality now or later? If you want to be a government by the year 2000, when, say, the next recession rolls around, and be in a position to help the poor, the weak and so on instead of being glorified debt managers, you have to take measures now. If you don't, you will be looking over your shoulder with every dollar you spend about how financial markets are going to take it, because the higher that debt level goes, the more nervous they will become.

Mrs Haslam: I think my colleague has a question.

The Chair: We are very short on time. Mr Wiseman.

Mr Wiseman: With all that's in the media, I'm getting just a little bit confused on what is driving the interest rates. In the United States, the federal open market committee met on January 31 and decided to raise the interest rates by 50 basis points, and maybe they'll do it again in the next little while. The reason that they're doing it is because they want to lower the number of people who are working in the United States. That's their primary reason. They believe that their non-accelerating inflation rate of unemployment should be around 6.5% of the workforce out of work. We have Paul Martin, who is going around the country saying, "Isn't the Federal Reserve doing a wonderful thing putting all these people out of work and curbing inflation?"

Dr de Bever: I don't think that's a direct Paul Martin quote, is it?

Mr Wiseman: It's almost exact; it was in the weekend -- and then we have Thiessen, who's also praising the Federal Reserve and being allowed to get away with it, saying that Canada's unemployment rate should be around 9% unemployment. How are we ever going to get out?

You said earlier that the target that they aim for they often miss. But they don't miss them at all. The target that they hit is the workers of this country who are laid off and put out of work so that the inflation rate can be brought down. That's been the policy since 1975 under both the Liberal and the Tory governments.

Dr de Bever: Let me play a devil's advocate view and look at the other side. In all this discussion about monetary policy, there seems to be no role for individual responsibility, okay? What tends to happen on the individual side and on the worker side and on the company side is that when recoveries get into their mature stage they start miscalculating how far they can push things. That's how the jobs get lost. It's not that the Fed has some nefarious pleasure in throwing people out of work; it's that it's well shown that if you let inflation become imbedded, ultimately you don't gain any jobs out of that.

Mr Wiseman: But if you look at our economy in Canada right now, our capacity for production is still way lower than it is in the United States.

Dr de Bever: That's right.

Mr Wiseman: We can still grow in a non-inflationary way in terms of our productivity and we can still employ an awful lot more people before we get to what the monitors would call an inflationary situation. So why are we pushing our interest rates through the ceiling to 8% or something like that when the Fed's interest rates are still I think around -- oh, what are they? -- 5.5% or 6% and driving it on the pretext that you're doing it to curb inflation, when inflation doesn't exist by your very own numbers?

Dr de Bever: I think the reason our rates are rising, aside from the political and fiscal situation, is that we are a small country next to a big one. That's just a fact of life, okay? So our spreads have to be positive for the political and fiscal reasons relative to the US. If people had confidence in our currency, in our politics and in our fiscal policy, our rates probably would be close to those of the US; I'm not sure they can over any period of time be significantly lower.

But the other part is that part of the reason you're not getting the employment growth that the US is getting is that when you look at Canada and the United States our labour market has been much slower to adjust to the recession than theirs. If you look at why business is trying to avoid hiring, it's exactly that: Labour costs are still, by their calculation, very high. So you have a choice: You can have a lot of people unemployed and high wages or, if we had been smarter in 1989 and 1990, not taken that last 5% raise, we'd have 2% more employment at a somewhat lower wage.


Mr Wiseman: My last --

The Chair: I'm sorry, our time has expired. I want to thank Mr de Bever for making his presentation before the committee this morning.


The Chair: The next presentation this morning is by the Royal Bank, Mr John McCallum, senior vice-president and chief economist, and Carlos Leitao, economist.

Mr John McCallum: It's a pleasure to be here. I think you all have this document that was passed around. I'll take certainly no more than 15 minutes to briefly go through it, and then we'd be happy to answer any questions.

I'd like to begin with how we see the Canadian and Ontario economies evolving over the next little while, and then go on to the questions of first the federal finances and then the Ontario finances.

Basically, we're quite optimistic about the next couple of years in the Canadian economy, but not without certain caveats. As you can see from the first page, we think inflation's likely to stay low, we think interest rates may be close to their peak but with some possible nervousness leading up to the federal budget and the referendum, and we think the dollar may be close to its low but with some similar nervousness for the same reasons.

But there are three major caveats attached to that rather rosy outlook: the first, that Paul Martin produces a credible budget, that he at least meets his deficit targets; the second, that there's no major change in Canada's political arrangements; and the third is that the US economy achieves that elusive goal of a soft landing, slowing down but not too much and not too little, just right. I'll come to them, particularly the first and the third assumptions, later on, but those are the three key points that underlie our forecast.

If you turn the page, you see that we're suggesting that Canadian economic growth will stay strong this year but that it will slow down in 1996, primarily as US growth slows down quite significantly. We think that the Federal Reserve's tightening is going to have an effect; there's already some evidence that it's having some effect. We think the US growth rate in 1996 will slow down to a level just below 2%, so that's pretty slow, and that Canada will slow down not as much because we have certain fundamentals propelling our economy forward, but still slowed down compared with 1995. I might say that Ontario tends to be more cyclical, more dependent on the US economy than the rest of the country, so that while we don't have a precise forecast for Ontario, we'd say it's likely to be close to the Canadian average but perhaps more sensitive to a slowdown in the US.

As has been the case in the last couple of years, we think that this expansion, albeit moderating, will be led by exports. You can see there's been a lot of progress in bringing down Canada's current account balance. For Ontario, cars are key, and you can see that North American light vehicle production we think will be high in 1995 but gradually coming down, but still remaining relatively strong over the next two or three years.

Housing investment we think will be relatively weak largely because of these higher interest rates. Business investment has been leading the expansion along with exports, propelled in part by the low dollar, which makes us a low-cost producer and highly competitive, propelled also by higher profits and high levels of investment confidence. So the expansion will continue to be led, in our opinion, by exports and investment, with government clearly exerting a drag, particularly at the federal level, as we expect expenditures will come down.

On the one hand, strong employment growth should bolster consumer confidence, and that's positive. On the other hand, real incomes have been growing relatively slowly and household debt burden is quite significant. On balance, we think consumers will not lead the recovery, but they will continue to increase their expenditures at a moderate rate.

All of this implies some continuing increase in employment. You can see on page 6 what I've said before, that Ontario tends to be more volatile than the rest of the country, that employment grows faster during the boom and comes down faster during the downturn. You can see that in those employment numbers for Ontario and the rest of Canada. But for both Ontario and the rest of Canada we see some relief in terms of the unemployment rate continuing to come down, albeit not at a very vigorous pace.

One advantage Canada has over the United States is that inflation is essentially a non-problem. We expect it to remain a non-problem over the next couple of years, well within the Bank of Canada's target range.

Interest rates: Subject to those assumptions I made at the beginning, we see the three-month treasury bill rates coming down over the next couple of years. We think that if we can get over these hurdles of the national unity and the budget situation, we should have declining spreads between Canada and the US because our inflation is lower, our economy is at a weaker phase of the business cycle. You can see there's been a trend since 1990 of a decline in those spreads. So we see rates coming down moderately even though there will be some increase in rates in the US because they are at a very different phase of the business cycle than we are with inflationary pressures, which really don't exist in Canada.

In terms of the dollar, the positives, as we say here, include low inflation, improved competitiveness and, by any long-term measure, the Canadian dollar's undervalued. In part, that's why our exports have been booming so much. We've become one of the lowest-cost places to produce in the western world. If you travel abroad, you'll discover that Canada is a relatively low-cost place and the direction of transborder shopping seems to have reversed in some cases with Americans coming here. In a sense, that's great for our exports and for jobs. It's not so good for our living standards. We think that once we clear these problems in the next six months or so, if we do clear them, then we should see a tendency for the Canadian dollar to move upwards to the mid-70s, let us say. That will reduce our competitive position but not by an unbearable amount because we're starting at a very low-cost position today.

We see, as I said before, the US economy slowing. We see some increase in inflation in the United States which will induce some further tightening by the Federal Reserve, perhaps another 100 basis points as from where rates are today. We think that will cause this slowing down of growth in the United States and that this will be relatively successful in the sense that it will be a pre-emptive attack on inflation, the Federal's slow growth, as has been often the pattern in the postwar period, tipping the economy into recession. But that's a delicate act. History doesn't inspire great confidence in soft landings. So it is a risk in the forecast that the Fed might overdo it and lead to a sharper downturn in the United States.

Let me turn now to the fiscal issues on the last page, beginning with the federal case because it's coming sooner, I assume.

We think it's extremely important that Paul Martin should at least appease the markets, if not please the markets. I think in order to appease the markets, he will at least have to put concrete evidence in place that he's meeting his targets and that this is based on realistic assumptions and not rose-coloured spectacle assumptions. I have every confidence that he will do that. I don't have inside information, but from listening to people, reading the paper, I think the public is in the mood to accept these things, whereas the public wouldn't have been some time ago, and so I have confidence that he will at least do that.

I think to really please the markets and to set us on a path to lower interest rates, he'd have to go further. By that, I mean set in place a set of credible policies to take us beyond 3% of GDP deficit in 1996-97, but towards a balanced budget some years after that. Whether he'll do that, I don't know.


If I may turn now to Ontario, Ontario's fiscal plan, as you know, calls for the total budgetary deficit to fall from $10.2 billion to $6.3 million in 1996-97 and $4.2 billion in 1997-98. Now, we know that it's extremely difficult to bring deficits under control, obviously, but we think for a number of reasons that this plan is a bit too optimistic. The first point on that I'd mention is interest rates.

We're not really in a good place to criticize on this point because we were too optimistic on interest rates in October, federal Finance was too optimistic in October, and I think Ontario assumptions were made even earlier, but clearly the interest rate assumptions look too low today and so an adjustment would have to be made. We think the interest rates should be maybe 200 basis points higher than assumed. We've made some very rough estimate of what that might do to the deficit situation in 1995-96 and 1996-97.

The other thing is that we don't think it's realistic to assume 4.3% per annum growth of GDP more or less forever, or at least until 1998. Our own forecast would call for something closer to 3%, and we wrote that before I heard Mr Johnson. It's a pure coincidence that he said something similar. Great minds think alike; fools seldom differ.

In any event, we don't know when the next recession will be, but history suggests that there will be a recession and this recovery has been going for some length of time already, so I think from the point of view of what you might call a prudent government, one should assume a number less than 4.3. If one assumes the number 3, then our rough calculation suggests that the deficit in 1996-97, taking into account the interest rate and the slower growth, might be something like $9 billion instead of $6.3 billion. That's a very rough number, but that's the sort of order of magnitude that we calculated.

The other point I'd make is that other provinces, some of them under much less favourable circumstances than Ontario, like Saskatchewan, have made much more substantial progress in getting deficits down. I think it's important to say that this doesn't have to be an ideological issue. Saskatchewan has an NDP government and emphasized more the fairness, did more on the tax side, for different reasons from Alberta, which is obviously Conservative and acted more on the expenditure side. But both of those governments, coming from very different ideological starting points, are approaching a balanced budget. Alberta had an oil windfall but Saskatchewan, as far as I know, didn't have any windfalls. So it seems to me that in comparison with other provinces, Ontario's progress in terms of getting the deficit down has been rather limited.

All in all then, it seems to us that further actions will be needed just to hit the targets and that if one wants to make greater progress in bringing down deficits, one would have to go further still.

Finally, I might say that our projections for growth are relatively optimistic and that at some point there is going to be a downturn, and the best time to take these difficult actions is when the growth is good, as it is today, and the worst thing to be stuck with is when you get into a recession and are forced to make the cuts at that point. So we think that while it's difficult to get deficits under control at any time, now is as good a time as ever, when the economy is relatively strong.

The Chair: Thank you for your presentation. We have about nine minutes per caucus. We'll start with Mr Carr.

Mr Carr: We've had an opportunity to meet before. Coming from Oakville, it's great to see you here and we welcome you.

You talked a little bit about the approaches between Alberta and Saskatchewan. As you know, before Alberta got involved in its program to balance the budget there were a lot of cries that people were going to be thrown out on the streets and so on, and that hasn't really happened. In many regards, as you know, that Premier probably is at 61% approval rating and has done it based on making spending cuts. Alberta is lucky in that it doesn't have a tax rate that is as high as ours -- personal income tax rates in Ontario are 30% higher -- plus they do not have a sales tax like we do. So therefore, if you look at it, you would see that we have more revenue coming in, but obviously we have more expenditures.

My question to you is this: Looking at other jurisdictions, Alberta and Saskatchewan that you used, as you look at the books here in Ontario -- and I recognize that as an economist, you're looking at different things -- how would you size up what we have here in the province of Ontario? Do we have a revenue problem or do we have a spending problem?

Mr McCallum: You have a deficit problem -- or we have a deficit problem, because I live in Ontario too. I made something of the Alberta-Saskatchewan comparison because to me it's a positive point, that this can be non-ideological. I think the approach that one takes will depend on the political ideology of the government in power and it will also depend on the political ideology of the population, and that's quite different in Saskatchewan from Alberta. Albertans are more conservative than Saskatchewaners, on average, at least if you judge by the governments they've elected in the past.

So I think it's a deficit problem. I think increased taxation always has a cost and I think Canadians are particularly opposed to major tax increases at this time, if one reads the polls, but I wouldn't want to, as an economist, particularly one with a major financial institution, say that it has to be done one way or another. I think Saskatchewan did it its way, given the ideology of the government and the people and the perceptions of what the priorities were, and that worked in Saskatchewan. Alberta did it a more conservative way, focusing almost exclusively on the spending, and that seems to have worked for Premier Klein. Even though it's true that there are costs involved in higher taxes, there may also be costs involved in program cutbacks. So I wouldn't want to pronounce on that. I think it has to depend on the ideologies and the circumstances and the preferences and the political choices of the jurisdiction in question.

Mr Carr: The good news is there will be a decision made by the public this year and they will get to choose.

I want to talk about some other jurisdictions. I think you're right; I was asking your opinion and I understand that as an economist you're more interested in explaining rather than giving your personal opinions and what you would do if you were Premier. I guess you would have run for elected office if you wanted to do that, and I appreciate that. You've hit the nail right on the head of the options.

Other jurisdictions, for example, New Jersey, with a Republican governor down there, Christine Whitman, Governor Engler in Michigan, have also cut taxes at the same time and they said you can't cut taxes and still balance the budget. Well, you can as long as the spending cuts are greater. That's just the logic. In terms of balancing the budget -- let's put this in very simple terms -- you can do whatever you want in terms of cutting taxes as long as the spending cuts are greater than the tax cuts that are proposed. I'm right in that assumption?

Mr McCallum: Yes, that's a question of arithmetic. Clearly, you're right in that assumption, yes.

Mr Carr: And right now, what we're saying in terms of the taxes -- and I made the reference to Alberta -- our tax rates are 30% higher, our personal income tax rate, provincial, and many people don't even understand where the personal income tax goes; they think most goes to the federal.

We don't have a sales tax, and that's why we're saying -- and again, I appreciate you're not going to comment -- our rationale is that we don't have a revenue problem. We have more revenue coming in in this province than Alberta does, but we have a spending problem, and there can be major spending cuts in this province of Ontario. We've listed $6 billion of them that I think can be made and quite frankly I think we could even go further without having the dire crisis that some people are predicting.

So my question to you is this: You may have had an opportunity to look at other jurisdictions, the New Jerseys, for example, where tax cuts have come in and they have been able to go down the road to a balanced budget because they've really taken a hard look at spending cuts.

Again, I'll ask you, looking at it as an economist and notwithstanding the fact that you may not want to comment, if you were in charge here in the province of Ontario and you had the approach of cutting spending or cutting taxes and it was open to you what to do, let me really put you on the spot and ask you, what would you say to the Treasurer, the Minister of Finance, in the next budget? What should he be doing with regard to the taxation and the spending and how would you do it percentagewise and where would you cut?

Mr McCallum: That's a simple question.

Mr Carr: You're from Oakville, so I'm sure you'll be able to give us a great answer.


The Chair: I'll remind you that you only have five minutes for the answer.

Mr McCallum: It's clear from my opening statement that we think the targets could be made more ambitious, so either a spending cut or tax increases relative to the current plans. My own predisposition would be to have more reductions on the spending side than are currently in the budget, because I think that compared with what other jurisdictions have done, the spending action is relatively modest and more could be done.

But whether one would go so far as to have tax cuts, spending cuts so big as to generate room for tax cuts, it's really a political issue. It depends, as I said before, on the political culture and on the degree of pain of those spending cuts. If you really push me for a personal view, I don't think I'd go for tax cuts, but I would focus more on the spending side than the cuts side in terms of trying to get this deficit under control.

Mr Carr: Let me ask about the tax cuts. As you know, so much of our economic activity is related to consumer spending. Consumers are not spending. They are still very leery for a lot of different reasons. Even when the interest rates went down they were very fearful. So let me ask you from a technical standpoint -- tax cuts, I believe, will have a big psychological advantage.

There are two options. Governments can do like the federal Liberals did. They promised government spending to create jobs and they won the election based on that. Or you can say to the people of the province, "We're going to give you the money, in terms of tax cuts, to spend the way you want," to buy refrigerators or stoves or whatever for themselves, as opposed to the major infrastructure program like the federal Liberals have done.

Let me ask you this: If we had a tax cut in the province of Ontario, if the personal income tax were cut by about 30%, what would that do to economic activity here in the province of Ontario for consumers, what would it do for consumer confidence and would it change the growth rates of 3% that you're projecting?

Mr McCallum: Taken by itself, yes. If all you did was lower taxes and everything else stayed the same, then people would have more income and they'd spend more. But presumably what you're saying is if you cut taxes by X dollars you'd also have to cut spending by X dollars, and then you'd have to balance off the employment effects of one against the employment effects of the other, and that's an empirical question. I guess my own personal view would be that the deficit problem really is the most important thing one should focus on and then maybe one should not have the luxury of lower taxes until one has made more progress on the deficit.

Mr Carr: But if you were to cut spending, say, for argument's sake, by $6 billion, as we've called for, and cut taxes by $4 billion, so the spending cuts are 33% higher, and I'll give you the figures again -- cut spending by $6 billion and cut taxes by $4 billion -- doing that and applying the $2 billion in the deficit would be better than what we're doing right now.

Mr McCallum: I think that is a question that depends a lot on one's ideology. It's not a purely economic, technical question. You could say, which would be better for society? It's not the place of an economist to answer that.

Mr Carr: How about better for the deficit?

Mr McCallum: Which would be better for the economy? Again, it depends on how consumers react; it depends on where those government spending cuts occur and what happens to the spending by the people who are hit by them, so one would have to look in more detail. I can't give you an answer off the top of my head. But clearly it's true the way you framed it: If you cut the spending by $6 billion and the taxes by $4 billion, again, by arithmetic you're going to improve the deficit. I'd agree with you on that.

Mr Carr: And also the growth rate, I would assume, because of the economic activity in the tax cuts.

The Chair: Mr Carr, we have to move on to Mr Wiseman.

Mr Wiseman: You were in the room when I was pursuing my interest rate questions with Mr de Bever.

Mr McCallum: Yes.

Mr Wiseman: I'd like to take a different tack with you but in the same general area. Let's stop using these sanitized words that the Tories and Liberals are using about spending cuts. Let's talk about what that means. That means increased unemployment, people being laid off, because 80% of the money that's being spent is being spent on wages. If you're going to cut $6 billion, you're going to have to cut a lot of people's wages and put them out of work and put them on the unemployment rolls in order to do that.

The Conference Board of Canada, when it was before this committee last year, indicated that there's a fine line and it's very difficult to determine at what point your government spending cuts will send the economy back into a recession prematurely. So my question is, at what point would the spending cuts that are being advocated increase unemployment, become detrimental to sustained economic growth, and at what point would they throw your projected figures of growth completely out the window?

Mr McCallum: Our projected figures of growth do take account of the spending cuts at the federal level promised by Mr Martin in order to meet his target. So we already do take account of that. I think it depends a little bit on what your alternative is.

If you posit a world in which there are no spending cuts at the federal level, let's say, and then you say, "Cuts, what will that do?" clearly the direct effect of the cuts is to reduce jobs, but if you don't cut, then you might be on to a totally unsustainable path and you might have some kind of financial crisis if you totally ignore your deficit, and that would give you much higher interest rates and even less jobs.

You see, it depends what you think the alternative to the cuts is, and I believe, at the federal level at least, that the situation is such that we have no alternative but to at least hit the 3% target, even though I know and we all know that this will not be painless at all. But the alternative to that is to go in an ever upward spiral of debt which would bring the financial markets down on top of us, bring ever higher interest rates and less jobs than under the cutting scenario. That's the dilemma in which we find ourselves, which is as a result of at least 20 years of rising debt.

Mr Wiseman: Just one quick question, because I know my colleagues would like to ask some questions: If the scenario is that you cut greatly or that you cut your taxes and increase the amount of money that is in the economy, that could be inflationary by increasing the amount of demand for certain goods. It could create an inflationary spiral in the economy by switching some of the purchasing power.

I'm just wondering if given that the Bank of Canada has said that a 9% unemployment rate is the unemployment rate that is non-inflationary in Canada -- it wouldn't intervene in order to increase interest rates in order to take the money out of the economy -- who better should have the money, the banks or the people spending it? The impact on keeping unemployment high: How do you then move towards a lower deficit if you continue to have massive numbers of people unemployed like the Liberals and the Tories have done when they've been in government for the last 10 or 12 years in Ottawa? You can forget the political part -- that was my addition -- and just deal with the economic.

Mr McCallum: If I understood the question, it's to do with inflation being a problem if taxes are cut. If we were close to full employment already and taxes were cut, it would add to the spending and that would be inflationary, yes, but I think our unemployment is quite high today.

Mr Wiseman: Not according to the Bank of Canada; it's going down too low.

Mr McCallum: No, the Bank of Canada, even if the natural unemployment rate is 9% -- that's at the high end of the estimates, I would say, and it's still --

Mr Wiseman: No, Paul Martin said in his budget that that's --

Mr McCallum: But it's still above 9%. So we believe, and it's on this piece of paper, that over the next couple of years, even though Canada has decent growth, we're not going to have an inflation problem. If you say we are, you're kind of more conservative than we are. We think inflation is under control in Canada.


Mr Wiseman: No, my whole point is that I think that what the federal bank is being allowed to do in Ottawa is counterproductive to what needs to happen in the country to bring the deficit down. What they're doing is putting more people out of work because they are projecting that a decreased unemployment rate is inflationary so they have to put people out of work, and I'm saying that --

Mr McCallum: You could make that argument for the United States, because their unemployment rate is well below 6%. But I don't think anybody would argue today that Canada's unemployment rate is too low and creating an inflation problem. If we have vigorous growth over the next couple of years, then maybe we will have that problem down the road, but I don't think we have that problem today.

I don't think Canadian inflation is a problem. We're not cutting the deficit in Ottawa because we have an inflation problem; we're cutting the deficit in Ottawa because we have a debt problem and if we don't get serious about it, then, as I said, these international markets will descend upon us and we'll have higher interest rates and then we'll be really in the soup. We're cutting the deficit in Ottawa and possibly in Ontario because of this accumulation of debt which has got to the point where there really isn't any alternative. We're not doing it because of inflation; we're doing it because of the debt.

Mr Wiseman: But my only point was that the interest rates are going up by the Bank of Canada in response to the federal reserve in the United States that is increasing their interest rates because the unemployment rate has dropped below what they consider to be a sustainable --

Mr McCallum: Right. Well, that's the problem of being the mouse living beside the elephant. Their policies are not appropriate for us, but we are their neighbours and we have to import them to a degree. Now, in fairness to the Bank of Canada, it has resisted this to the point of letting our dollar sink to whatever it is, 70 cents, 71 cents, close to the all-time low, and that has offset to a degree the higher interest rates so that the overall monetary conditions have not been all that bad, because the lower dollar which they've allowed has offset the higher interest rates. Clearly we're having strong growth now and we think this current year as well. The Bank of Canada has been reacting to these events south of the border over which it has no control, and I think overall the balance it has chosen has been not inappropriate.

Mr Sutherland: Coming back to the point raised about the tax cut stimulating consumer spending, based on the information you've presented here about rising household debt burden and also the low saving rate, there's no guarantee that consumers would necessarily be out spending automatically, that they may be increasing their saving rate or reducing their household debt burden.

Mr McCallum: Right.

Mr Sutherland: Thanks.

Mr McCallum: Those are clearly the negatives in terms of consumer spending. The major positive is the strong growth in permanent jobs which are helping to bolster consumer confidence, so one weighs one against the other and on balance, in our view, that means moderate growth in consumer spending.

Mr Sutherland: I guess what I was just trying to say is, if you reduce the taxes by X amount, that doesn't mean X amount is automatically going to be spent by the consumer, given these two other factors that you've pointed out.

Mr McCallum: Right. But a part of it would.

Mr Sutherland: Yes, somewhat.

Mr McCallum: One would have to get into a debate of how much.

Mr Sutherland: Sure.

Mr Wayne Lessard (Windsor-Walkerville): You identified one of the deficit problems as the fact that a lot of our debt is financed outside of the country and Mr de Bever mentioned this as well, that we don't have the ability to finance the debt internally. Do you agree with that and do you think it may be possible for us to finance more of our debt internally?

Mr McCallum: It's a fact that Canadians save less than we spend, that we have an imbalance and this is reflected in the large current account deficits, which means that we borrow a lot net from the rest of the world. We've done this over many years so that our net foreign debt is up very high, at close to half of our gross domestic product. So, yes, we've got into the habit, mainly because of excess government borrowing, of borrowing from abroad much more than we lent to abroad.

I don't think you can solve that problem by, let us say, the government of Canada or the government of Ontario simply borrowing more domestically and less from abroad, because then you've just changed the mix. That would just force the private sector to borrow more from abroad if governments borrow more domestically. It just shuffles things around. You can't solve the problem in that cosmetic way just by the government borrowing more domestically.

The only way you can solve the problem is if Canadians as a whole save more, and the way in which that can be done is if governments reduce their dis-saving, ie, reduce their deficits, or if households increase their saving. So the fundamental is to get this dis-saving down or the saving up, and shifts from foreign to domestic won't really help unless you tackle the fundamental issue. I know there have been some schemes proposed to borrow more domestically, as if that would solve the problem, but that in itself won't solve the problem, in my opinion.

Mr Phillips: You've given us some indications on the finances of the province that are far more pessimistic than the government's estimates. I'd just like to discuss it a little bit, because as I look at it you're assuming the deficit could be as much as $3.5 billion higher than the government has been projecting for 1995-96.

Mr McCallum: No, $1.5 billion -- the difference for 1995-96.

Mr Phillips: The government, in the paper they produced, said the deficit would be $6.5 billion in 1995-96. You're saying it's going to be $9.9 billion.

Mr McCallum: Yes, but our base is $8.4 billion. I think this might be the difference in how one measures the deficit. We had the total restated budgetary deficit at $8.4 billion in 1995-96, and as a result of our adjustments it goes up $1.5 billion.

Mr Phillips: I understand. I'm just saying that the government is saying the deficit in 1994-95, this fiscal year, is going to be $8.3 billion. Your belief is that we should be saying it's more like $10.2 billion. Is that correct?

Mr Carlos Leitao: That's their restated deficits.

Mr Phillips: Okay, so that's how you --

Mr Leitao: -- spending added back.

Mr Phillips: Right. You look at it that the real deficit in the province is $10.2 billion, and next year, because you feel that the interest costs are going to be higher than predicted -- and I gather on the revenue side you're assuming that the taxes stay exactly as they are. Is that correct?

Mr McCallum: Tax rates, yes.

Mr Phillips: The tax rates stay exactly as they are and the deficit will be almost $10 billion in 1995-96 if the spending is as the government says. Is that a fair characterization of your numbers?

Mr McCallum: Yes. I think another way of putting it is that the differences between us and the government arise entirely from two sources. One is lower revenues because of lower growth, and we're just reducing them proportionally to the growth, and second, higher debt service costs. As I said in my opening remarks, our numbers are rather crude in that area. It's a ballpark estimate. You may want to ask people who have more information in the government what the true numbers are.

Mr Phillips: The true numbers, yes.

Mr McCallum: Given those assumptions.

Mr Phillips: Because as I say, you're far more pessimistic, I think, than the government numbers at almost a $10-billion deficit for 1995-96.

Just a question in terms of advice we can be giving to the Minister of Finance: There is one school of thought of a fairly substantial cut in personal income tax, of perhaps up to $5 billion of reduced personal income tax revenue. If we were to look at that over, let's say, a two- to three-year period of $5 billion less in personal income tax revenue, do you have any thoughts on the implications that might have in terms of our creditworthiness in the province and whether we could sustain a $5-billion reduction in revenues?

Mr McCallum: It depends what you do on the spending side. What are you assuming on the spending side?

Mr Phillips: I assume if you cut $5 billion off revenue and the deficit's $9 billion, you have to cut $15 billion or something like that to balance it. Is that right?

Mr McCallum: I don't think anybody, so far as I know, is calling for a balanced budget in 1995-96. I don't think that would be --

Mr Phillips: No, I was looking ahead at 1996-97, because I assume -- if you took $5 billion off the revenue that you have for 1996-97 and got it down somewhere around $44 billion, what sort of reduction in expenditures would one need to kind of sustain our creditworthiness? Have you any feeling on that?


Mr McCallum: I think you're all trying to draw me into this tax issue.

Mr Carr: Remember where you're from, what your riding is.

Mr McCallum: Well, you know, I don't think many people think it's appropriate for banks to take partisan issues in upcoming elections. Certainly we tried to avoid that in Quebec and I imagine we will in Ontario.

Mr Carr: Just tell us who you're going to vote for in Oakville.

Mr McCallum: My basic point is that we have a big deficit problem and we think it would be prudent to tackle that more vigorously than we see here. Now obviously, given that initial view, to the extent that one cuts taxes, one's going to have to have that much more reduction in spending. There's a huge amount of spending reduction required without any cut in taxes, so whether it would be prudent or desirable or possible to have tax cuts in this environment, requiring even larger spending cuts, I don't know. I'd say that's more in the realm of politics and less in the realm of economics.

Mr Phillips: Just so I know the bank's numbers, I guess you're saying right now that if taxes stay exactly the same as they are, no change, if the economy grows at what you think the economy will grow at, if spending goes up at the rate of 1% a year, there will be a deficit of roughly $9 billion two years from now, 1996-97.

Mr McCallum: If spending goes up as projected by the government, yes.

Mr Phillips: Which is at the 1% rate.

Mr McCallum: Okay, well, then the answer is yes.

Mr Phillips: Then to deal with that $9-billion deficit, in your mind, requires I guess your suggestion: heavy on the expenditure reduction side. I gather, in theory, if you were to do it in 1996-97, although you're saying it would take longer than that, you've got to somehow or other cut $9 billion out of the $47 billion, and that assumes no reduction in taxes.

Mr McCallum: I am not offering you any particular target, like zero, by any particular year. I'm just saying this is much too high. Other provinces have gotten to zero. Maybe over four or five years it would be possible to get to zero. Whether you choose to do that entirely or more than entirely on the spending side, that is in large measure a political judgement.

Mr Phillips: I guess the new piece of information you've brought to us today is that your feeling is that debt-servicing costs will be substantially higher than previous estimates.

Mr McCallum: And revenues lower; more than half of the adjustment comes because of the revenues.

Mr Phillips: Right. Thank you.

The Chair: There's about a minute and a half left, Ms Caplan.

Mrs Caplan: Do you want another minute? Go ahead.

Mr Phillips: Yes. Just so I'm clear on what you feel the gross domestic product will be over, let's say, the next three to four years in terms of real growth in Ontario, I didn't see it in your charts here, but what's the bank's view?

Mr McCallum: We only go to 1996 and we haven't yet got our revised Ontario figure. For Canada for 1995, we say 3.8%; for 1996 we say 2.6%. We don't think Ontario would be that much different, but we're still working on Ontario. We haven't got our revision out yet, but it'll be in the same ballpark as Canada.

Mr Phillips: Somewhere just slightly above 3%. Is that fair to say?

Mr McCallum: Yes.

Mr Leitao: We used 3% on the nominal GDP growth.

The Chair: I'd like to thank Mr Leitao and Mr McCallum from the Royal Bank for making your presentation before the committee this morning.


The Chair: The next presentation this morning is by the Provincial Auditor, Mr Erik Peters, if Mr Peters would like to come forward, not one who's unfamiliar with committees. If you could identify for the members of the committee and for Hansard who your associates are with you today, you may proceed when you are ready. I might remind you too that you have 30 minutes to make your presentation and field questions.

Mr Erik Peters: Just to introduce, Ken Leishman is the assistant Provincial Auditor, and Jim McCarter is an executive director in my office and he looks after the public accounts.

I'd like to thank you very much, as a committee, for giving me the opportunity to make a brief presentation in your budget consultations. I'd also very much like to thank the Minister of Finance for developing the budget consultation process and for the steps he has taken to reconcile the convention of budget secrecy with open consultation. That is a very positive initiative which allows input before final decisions are taken on the budget.

Very few government documents have the potential to affect the lives of Ontarians more profoundly than the budget. The budget is a fiscal policy document which I should not, do not and do not want to audit, because I should not, do not and do not want to examine and provide opinions on government policy.

What I can do, and what I'm doing again today, is to urge the Ministry of Finance to improve the financial information presented to the legislators with the budget. Simply put, tell it how it really is, tell it when it counts and tell it to whom it counts.

The debilitating impact of public debt resulting from deficits has been much discussed and is well known. Most of the key financial decisions by the legislators are based on the financial information presented with the budget. It is, therefore, very important that the hard decisions necessary, and I quote here the Minister of Finance, "to reduce the deficit, and to keep it going down," be based on reliable financial and operational information, including a realistic comparison between planned and actual financial performance.

The reason I'm here for your budget consultations is to strongly advocate that, beginning with the 1995 budget presentation, an end be put to the confusion which exists, due this year to the potential difference of about $2 billion, between the current year's deficit to be reported with the 1995 budget to the Legislative Assembly and the real 1995 deficit determined by using the financial discipline applied in the Public Accounts of Ontario.

That financial discipline I'm referring to is used by the Ministry of Finance in preparing, and by my office in auditing the public accounts, and those public accounts, as you all know, are published in the fall, several months after you have the interim, unaudited results. This financial discipline is also used by financial analysts and bond rating agencies at budget time in the spring, and the same financial discipline is used by Canadian and provincial governments with which Ontario competes for funds in the market. Advocating an end to this confusion is totally consistent with my 1993 and 1994 annual report.

Specifically, I'm making the following suggestions:

There are about $2 billion of so-called capital or capital-related financial events planned for the year ending March 31, 1995. These financial events should be included in the deficit for the fiscal year presented with the budget. This must be done to reflect financial reality. This is not a matter of accounting rules; this is a matter of financial reality.

The second suggestion pertains to accounting rules. The accounting rules, and the financial discipline used for financial information in the budget, should be identical to those used in the public accounts.

Some good news on these proposals was provided by officials of the Ministry of Finance who told the public accounts committee in November that the presentation of the 1995 budget would include a reconciliation between the budgetary modified cash accounting basis and the new accrual and consolidation accounting basis, not only for the 1995 "actual" interim unaudited deficit presented with the budget but also for the upcoming budget itself.


I call this only "some" good news because what the officials of the Ministry of Finance also said may be summarized as follows: The budget presentation will not be identical to that used in the public accounts, and I underline "not." The most important difference, they said, is the treatment of the province's capital investments. They say it is important to illustrate to the public the magnitude of capital investment that the government is making. Full disclosure means that the important role played by capital in the government's economic and fiscal plans needs to be a central part of the budget presentation. This is what they said.

I am all for full disclosure, but to exclude very sizeable capital grants alone, which amount to $1.6 billion, from the deficit is neither full disclosure nor would it be correct to explain their exclusion as a difference in accounting rules. These grants are part of the deficit under any accounting rules. To include the grants in the budgetary deficit would be consistent with the way Ontario has presented its budgets from 1985 right through to 1993.

Therefore, notwithstanding the disclosures offered by the Ministry of Finance, I continue to urge that both the budgeted and the actual results, currently deficits, be determined based on the same financial discipline and on identical accounting rules and thereby reflect the same financial realities.

We should all look forward to the day when such confusing reconciliations are no longer necessary so that legislators such as all of you can at budget time better assess where the government has been, is and will be financially, and better assess differences between the planned and the actual financial reality. The Minister of Finance has said, "The not a set of accounting books." I agree with that statement but I say that the budget must reflect financial reality because the budget is fundamental to sound financial and fiscal accountability.

I would like now to address my suggested improvements in financial information about capital.

It is the inclusion or exclusion of what the government calls "loan-based capital investments" that has the greatest potential for distorting the 1995 estimated deficit reported to the Legislature with the 1995 budget. Specifically, such capital grants are recorded in the budget as loans rather than as expenditures, even though the government is responsible for giving the recipient organizations the money to make their annual loan repayments. It is also a matter that the Ministry of Finance has identified as unresolved, and if you read the budget very carefully this year, you found that there is $83 million indeed budgeted for repayment of loans made in the previous year. The ministry includes these items in the public accounts deficit later in the fall, but excludes them for the budgetary deficit which it presents in the spring. I say include them in both deficits.

At this point, you may find it helpful to refer to the handout that Lynn has been kind enough to give everybody.

When the 1994 budget was presented, the Legislature was told by the Minister of Finance that the 1994 deficit was estimated to be $9.4 billion. Shortly thereafter, this was adjusted in publications to $9.278 billion. They told us that the 1995 planned deficit was $8.5 billion, adjusted thereafter to $8.3 billion in one of the later publications. This was presented with a footnote which said that the $8.5 billion for 1995 excluded $1.6 billion in "alternative capital financing."

In subsequent publications by the Ministry of Finance, the footnote disappeared. It did not appear in the booklet, Ontario On the Job and Looking Ahead, page 18; it's gone. It's gone in the latest statement of Ontario Finances, although the $1.6 billion remained on page 3 as one item that will be expended.

Yet people in the know, financial analysts and rating agencies -- you heard one preceding me earlier in the morning -- immediately added the $1.6 billion mentioned in the footnote to the deficit. Not only that, they added other kinds of capital-related transactions and stated publicly that Ontario's 1995 deficit would be over $10 billion; some went as high as to say it would be over $11 billion, actually.

These transactions were added to the budgeted deficit by the financial analysts, and the actual amount of these transactions will be added to the deficit in the 1995 public accounts, not because of the application of differing accounting rules but because adding them to the deficit simply reflects financial reality. Capital grants are a current expenditure which should be included in the current deficit. A grant is a grant and a current expenditure, even if it is called -- these are the government's words -- "non-budgetary loan-based capital," and even if intragovernmental loan agreements are actually made. Substance must prevail over form.

I digress for a moment. I had a very interesting letter from one municipality that looked at the grant that it normally received to run its clean water plant. They pointed out to me in that letter, and the letter was copied to the Minister of Finance incidentally, that previously capital grants involved two parties: the granting ministry -- Municipal Affairs, most likely -- and the grant recipient. Now the same transaction involves up to four loan agreements and five parties. The effect remains the same, and in fact the Ministry of Municipal Affairs has, according to that letter, advised the municipality that it still should treat it like a grant.

The major financial realities applying to these capital grants, which you see in the handout, are as follows: The capital loan recipient must rely on future grants by the Legislature to repay the loan and, secondly, the capital is owned by a grant recipient and not by the government whose deficit is reported. I advocate that the actual amount of these capital grants be included in the 1995 deficit presented to the Legislature with the budget and that these items not be explained away as an accounting difference.

To the second item: The interim unaudited 1995 deficit presented with the 1995 budget should also not be reduced by $250 million for provincial land and buildings turned over to the Ontario Realty Corp unless that corporation actually sells those properties to independent third parties outside the government. The financial reality is that only the sale of the properties to parties outside the government or outside its agencies generates real revenue, and it's only that real revenue that would be included in the public accounts of the province.

As well, proceeds from debt resulting from the sale and repurchase of capital assets should also not reduce the deficit, especially if the transaction makes the government directly liable to fund the repayment of the resulting debt. According to the 1994 budget, refinancing of this kind is envisaged to increase borrowing by $165 million.

This item is not on your list, but I've also a number of significant questions about the $349 million of capital expenditures relating to projects such as Highway 407 and the Metropolitan Toronto Convention Centre which were planned according to the budget for 1995.

In conclusion, the key benefits of implementing what I advocate are:

(1) An end would be put to the confusion which exists about the size of the deficit reported to the Legislative Assembly at budget time and the size of the deficit determined by financial analysts and rating agencies, and later in the year in the public accounts.

(2) The credibility of the budget would improve.

(3) The difficult financial and program decisions which you as members of the Legislative Assembly have to make to cope with debt and deficit will be based on a clearer picture of where the provincial government has been, is and will be financially.


I hope that you find the matters I've brought before you useful in your budget consultations and we'll be pleased to answer any questions you may have.

The Chair: Thank you very much. We have five minutes per caucus. We'll start with Mr Sutherland.

Mr Sutherland: Mr Peters, you've raised this issue again today and I guess my question to you is -- and I guess before I ask that question, I appreciate you taking the time to note what the government has done in terms of the finances, in terms of the public accounts. You've noted in the public accounts committee the difficult challenge of an organization as large as the provincial government changing over from a modified cash basis to the new accrual basis and the work the ministry did and how it cooperated in doing that.

You've also indicated what the Minister of Finance has indicated, that in the budget he will do a comparison of the budget forecast with what it may look like in the public accounts. But I do think it is important to note here today too, though, that there are at least six provinces whose budgets are presented on a different accounting framework than the public accounts and including, I guess in some ways surprising, the alleged new messiah of how government finances and how governments operate, Ralph Klein in Alberta.

The question to you is, there must be some reason why seven of the 10 provinces are doing this, and is some of it having to do with the fact that the Public Service Sector Auditing and Accounting Board is still trying to come up with specific guidelines on how to deal with capital, how capital should be treated, how issues of depreciation of capital should be treated, as to whether it should be only expense in one year or whether it should be, as is done in the private sector, over several years?

I guess what I'm saying to you is that this sense somehow that what Ontario is doing is unique is not unique in terms that many other provinces, whether it be Conservative governments, whether it be Clyde Wells's Liberal government in Newfoundland, are doing this and part of that is because there's still a bit of uncertainty as to how to deal with capital in terms of the public finances.

Mr Peters: Thank you very much for that question. Indeed, there is some uncertainty as to how to deal with capital finances, but there is absolutely no uncertainty in any government in Canada, nor by the financial analysts, nor by the Public Sector Accounting and Auditing Board of the CICA, that capital grants are to be expended in the accounts as they are done. It is not a matter of accounting rules. This is a matter of simple financial reality, and it's a matter of financial reality recognized by the current government. We have the Ministry of Municipal Affairs telling municipalities, "Treat it as a grant, even if we treat is as a loan."

But to get back to your second part, the valuable contribution that capital represents and the disclosure, I have absolutely no problems with. But what has to be done, and I also said that in my 1994 annual report, you have to put the necessary policies in place, how to do it, and you have to put the business right. There is a lot of legislation involved. For example, how the government deals with hospitals to which they make the grants is governed by the Public Hospitals Act and that has certain things. So it is a long process to get there.

I have indicated frequently to officials at the Ministry of Finance and also to the Minister of Finance directly that we would be happy to cooperate in that effort to put the business in place so that the valuable contribution of the capital can be recognized in the accounts. We are just not there. Nor is Alberta there at the moment. They're still wrestling with it. They think they may come up with a budget this year, but other governments are nowhere near there.

There are of course certain assets which we are already recognizing and have agreed to recognize last year. We have recognized, for example, capital assets which the province holds and wishes to resell and they are taken into the accounts, capital assets which create, actually, revenue outside the consolidated revenue fund; for example, the toll road 407. We are actively pursuing how that can best be displayed. So we are very actively working towards this goal.

But the point I'm making here is, those capital grants that are called loan-based capital grants would be excluded by any government under any accounting rule. And never mind accounting rules; it's just financial reality. Even as your Ministry of Municipal Affairs says, these are grants; these are not loans that we can recognize.

Mr Sutherland: But I do want to clarify, you have stated today that all the financial information is presented in the budget, that the budget is a planning document and the budget is not a second set of books or a second set of the accounts.

Mr Peters: The budget is not a second set of books, but the budget does disclose these items. The problem that I have, and I'm pointing it out, is it's not reflecting them correctly. It's not relating the impact correctly. It says, "Yes, we have additional capital financing," and it says, "We exclude them from the deficit," but it is then left to the reader to make a decision whether to add it in. What I'm saying is that the people in the know automatically add it in. That, I think, is disclosure that can be improved.

Mr Phillips: This is very, very helpful and very, very important, because I'm afraid we're dealing with two totally different numbers. The government put out its document saying the Ontario deficit is down by 30%. Today, I think we've heard from the independent Provincial Auditor, whom the Legislature relies on for its advice, that the deficit for this year is not what the government's reporting. When you finally audit the books and you reflect financial reality, are you saying to us that based on what's in the budget right now, the deficit would go up by $2.015 billion, according to financial reality?

Mr Peters: These were the numbers as taken out of the budget. The actual numbers may differ. But yes, this is one set of amounts and the other one that I mention in my text was the other $349 million of capital projects on which there's uncertainty, and I didn't want to include them in that statement, because these amounts I'm relatively sure of.

Mr Phillips: I honestly think we're dealing with a bit of what I call a fairy tale budget that we're preparing, which does not bear -- this is the budget that the government is going to present -- a relationship to financial reality, as you say. I just want to confirm that if they proceed with these transactions, and according to the third quarter results, the ones we just got a week ago or so, they are planning to proceed with them, the deficit is not going to be $8.3 billion this year, but it will be $2 billion higher than that number. Is that a fair characterization?

Mr Peters: Mr Phillips, it could be higher by that much. I do not know what the actual transactions will look like --

Mr Phillips: But if they proceed with these transactions --

Mr Peters: -- but that gives you an indication of the rate if they proceed as budgeted and proceed in the way it was budgeted, that it will be reality.

Mr Phillips: You're also saying that, in your mind, the investment community already does these transactions and takes the government numbers and then adds these to it in assessing the finances of the province. The problem is that the public rely on the budget for their numbers and the Legislature relies on the budget for its numbers and we are not getting financial reality when we don't include these numbers.

Mr Peters: What I'm saying is that the people in the know seem to be putting different information together from the budget that is presented, and what I'd like to do is have the financial information have that quality. If you look at clippings that we took -- for example, the Globe and Mail reported immediately on budget day that, for example, the $1.6 billion should be included. That was right in their text and assessment of what was there. The Financial Post did the same thing. The bond rating agencies did the same thing. So what we're saying is, why are these people putting out different numbers than the ones that are presented to you in the Legislative Assembly? That is the concern for me as a legislative auditor.

What my real concern is, and why I'm before you today, is really the true concern of a professional auditor who finds himself, by the time he has to audit the public accounts, confronted with the fact that the management of the client, if you will, has already gone public with different numbers than what I'm going to look at. That is virtually a professional duty of an auditor, to come forward to the client and say, "Can something be done about this particular situation?"


Mr Phillips: If I can paraphrase that, you're saying your client is the Legislature and the public.

Mr Peters: That's right.

Mr Phillips: And that currently we are not getting the information we require to deal adequately with the budget, that we're not getting what you would call the real deficit number. Therefore, at the time we're dealing with this, which is right now, the government is saying, "Listen, the deficit's gone down 30%," and our independent Provincial Auditor is saying: "No, it's not. We have a completely different set of numbers."

Mr Peters: Two points. Let me just be abundantly clear. Firstly, there is good news, and the Minister of Finance has told the public accounts that what you find at the bottom of this handout I have, the $15 million that it amounted to last year, that reconciliation will be prepared.

What I hope to achieve with today's appearance is to urge them to look after the other part, because last year that did not happen. Last year that may not have happened because of the tremendous task that was successfully completed of changing the accounting for the first time in 25 years. What I hope to achieve here, in answer to your question, is hopefully that will be done with this year's budget, that the adjustment will be made. So I can't speculate that they haven't. They haven't last year but there may have been good reasons for not doing so. I hope that problem will be overcome this year.

Mr David Johnson: Mr Auditor, you look a little bit exasperated. It's sort of like banging one's head on the wall for three years in a row. I can only say, keep up the good work. I tend to believe your numbers and I think the people in the province of Ontario do as well.

The concern perhaps that you're explaining dovetails with some of the information that we heard this morning before you, that the forecast for the deficit this year is $10 billion, from the Royal Bank, and the forecast for the following year is $9 billion. If one extrapolates those numbers through to the end of this decade, another $40 billion could well be added to the debt of the province of Ontario, which would bring the total debt from $90 billion today to $130 billion and would mean at that point in time that probably over 20 cents of every dollar from the budget would be spent simply to pay interest.

When you talk about information flowing to the elected representatives, proper information on the deficit, is that the kind of concern that you have and the kind of information that should be flowing so that when we make financial decisions, we understand the implications in terms of what the future debt could be in the province of Ontario?

Mr Peters: That is a fair question and a fair assessment. Indeed, though, the government has very clearly disclosed its borrowing requirements. In fact, that is what stirred the financial analysts into the range. If you look at the budget itself, it shows a fairly consistent borrowing well in excess of the $10-billion range. Actually, if my numbers serve me right, and don't hold me to it, I think it's a little over $11 billion of new debt in each of the years that they go forward. What the financial analysts have problems with is how to reconcile going to borrow over $11 billion and having a deficit of only, say, $8 billion. What's happening to the difference? Then they put two and two together and they write to newspapers and say, "But the real number is," or something like that. So there is a direct linkage, but there is absolutely no doubt that the amount of new borrowing is clearly disclosed in the budget.

Mr David Johnson: Do you express concern with regard to the level of debt in the province of Ontario? I think it's flabbergasting what we have incurred over the last few years, such that the debt now is over $90 billion. From an auditor's point of view, looking at the $90-billion debt today, looking at the kind of deficits that we're going to incur unless we take a different course of action in the future, is that of concern to the Provincial Auditor?

Mr Peters: It would be of concern to me maybe on another basis, but it's not of concern to me in my professional capacity as the Provincial Auditor because the amount of spending, the amount of forecasting the revenues, all these policy issues -- how much of the expenditures are going to be coming in through borrowing, how much is going to come from revenue -- those are all policy decisions on which I simply cannot and should not comment.

Mr David Johnson: The word "deficit" then is essentially meaningless, I guess, as it stands today, $8.3 billion. If you had to define what that $8.3 billion means in terms of the context within the budget when in actual fact we'll be borrowing $10 billion, perhaps $11 billion, what does the word "deficit" mean today from the context of the budget?

Mr Peters: It's an interesting question, and in the public accounts it certainly has a very clear meaning of just being the net difference between the revenue generated by the government in any one given year as a reporting entity and its expenditures in any one given year. That difference is the deficit.

Mr David Johnson: And that's what it should be.

Mr Peters: That's right. It's an excess of expenditure over the --

Mr David Johnson: But in terms of the budget what does it mean?

Mr Peters: Well, it seems to have at the moment a somewhat different meaning.

Mr David Johnson: What would be the purpose in putting out a different deficit, from your point of view? Why would the government put out a deficit that doesn't reflect the true borrowing requirements of the province of Ontario?

Mr Peters: From my perspective, it's merely a matter of concern, but to answer why it is being done really, I hear that the Minister of Finance will be here and ministry officials will be here afterwards. I think it would be better for them to answer that question. I wouldn't get into that realm of speculation.

The Chair: Our time has concluded and I want to thank Mr Peters for making his presentation before the committee this morning.

The committee recessed from 1217 to 1307.


The Chair: Our next presenter is the Ministry of Finance, which includes most certainly the Honourable Floyd Laughren, Minister of Finance; Simon Rosenblum, chief of staff to the minister; Jay Kaufman, deputy minister and secretary of treasury board; and Bob Christie, associate secretary of treasury board, controller and assistant deputy minister.

At this point in time I think the minister would like to make a slide presentation. I understand this is about a 25- to 30-minute presentation and I would ask the committee members if they would allow the Finance minister to complete the presentation and, if there's a need to, we can certainly refer back to the slides during the time of questions. Mr Laughren, perhaps you would like to proceed.

Hon Floyd Laughren (Deputy Premier and Minister of Finance): I am pleased to be here again. I enjoy the committee and I appreciate very much the work that the committee will be doing as it sets out on its own pre-budget process. I look forward to whatever advice you might choose to present at the end of your deliberations.

I'll try and go through the slides quickly, because it's a lot more fun having exchanges with colleagues in the Legislature than it is going through the numbers on the slides, so I will try very hard to move quickly and not cut into the time for exchanges any more than is necessary. I'm almost halfway through the pre-budget process myself, travelling around the province and listening to people, and it's the first time I've been through the exercise when there was any sense of buoyancy out there at all. It's there now and it's a much more pleasant task than it has been in past years, as I move around the province.

Why don't we get right into the slides, Mr Chair, if that meets with your approval.

The Chair: By all means, Mr Laughren.

Hon Mr Laughren: I'll give very short explanations of them in the interests of time.

Ontario's economic growth, you can see, going back to 1991 and working up through to the year -- this is the counteryear, in 1994, and you can see the turnaround quite dramatically. In the years that are ahead of us, we will have -- and this is not just Ministry of Finance's projections but a consensus projection that Ontario will have the highest real growth in Canada through 1998.

Also, Canada will lead the G-7 countries and, as I just said, Ontario will be leading the country in growth as well. That just simply makes a comparison with the other G-7 countries. If I'm going too fast, let me know, please.

On the jobs side, it is the strongest growth in six years, and you can see that January 1994 was a blip where we lost jobs, but ever since then it really has been a substantial increase and there have been about 186,000 new jobs since the beginning of February last year. None of this, as you will see later, is meant to pretend there are not challenges ahead of us still, on the jobs side as well as in other areas, but at least the numbers are very positive and the strongest in growth that there has been, as I say, in six years.

If you break that down by industry, you can see that manufacturing, which is quite reassuring, is leading the pack, the service industries, construction etc, and that's important because it was manufacturing that took such an enormous hit during the recession that began in 1989-90. It's good to see that climbing back up on the manufacturing side.

The capital investment that we've insisted on maintaining despite all sorts of pressures does help and certainly supports literally thousands of jobs. You can see that the solid blue part of the graph is capital investment projects and the yellow part is the Jobs Ontario Training, which didn't start until 1992-93 -- you can see why it's so small at the beginning -- and then any other initiatives on top of that to give us the number of jobs that are supported by capital investment. For 1994-95 it's of course projected, as the year's not ended yet.

This is projecting ahead, of course, but you can see that if we average 142,000 jobs per year, that will mean 570,000 new jobs by 1998, which is certainly encouraging, to see that job creation, when you compare it to the dismal numbers in the early 1990s. It's refreshing to see that number going the way it is, and we think that's a sign that the recovery is not tentative so much as permanent.

We've tried to create the climate for business growth by helping businesses compete, by having government play an active role in creating jobs. This one probably needs a word of explanation because, as most of you would know, government is downsizing and the numbers of employees directly working for the government will be fewer, not more. But that doesn't mean the government can't be there, whether it's on capital investments or whether it's in job training, to help and play a role in creating jobs as opposed to going out and hiring everyone ourselves.

Maintaining the high quality of services also makes business more competitive in this province. I've said it before at this committee hearing: One message we get loudly and clearly is that the quality of our infrastructure and the quality of the workforce in this province are what make us competitive. If you look at the investment that's come in here in the last couple of years and the projected investments in the next couple of years, I think that speaks for itself, that it simply isn't a case of having the lowest wage possible or the fewest services that makes an economy competitive any more.

One of the ways in which we've maintained our competitiveness has to do with the tax levels. If you look at payroll taxes -- this one's for a new employee -- and keep in mind that we did provide a holiday, if you will, for new hirees by eliminating the employer health tax for the first year, you can see that the solid blue is the effective tax rate. Even if you include the EHT, it takes it up a little higher, but we still have lower payroll taxes than Quebec or the US average, and payroll taxes -- I don't know whether you can read what it says there, but that includes not just the employer health tax, which I mentioned, but other payroll-related deductions. So we are very competitive, more than competitive, on the payroll side.

This is the effective corporate tax rate for small and medium-sized manufacturing firms, and you can see that once again we're not the lowest. Quebec has a lower corporate tax rate than does Ontario, but as you saw in the previous slide, they have higher payroll taxes, and when you compare us with the competing American states, you can see that we are indeed very competitive.

We have tried to do what we can, while respecting the need for revenues, to cut the cost of doing business. Back in 1992 we lowered the manufacturing and resource industries' taxes; we lowered the small business rate of taxation. We are implementing what we call Clearing the Path, which is to reduce red tape for business, and we're into the first phase of that, which is for helping businesses start up, and then we move into the next stage, which is what we call unified reporting of taxes that must be paid.

That's not in place yet, but we think it will be later this year, because we get a lot of complaints, and I've never known a government that didn't promise to reduce red tape for particularly the small business community, and this is our attempt to do that. As you know, we have frozen the average assessment rates at the WCB and with Ontario Hydro the rates have even been cut for large users, all to help us maintain our competitiveness and even improve it, particularly as we've gone through some very difficult years.

We've had, and I do get this from time to time as I move around the province, from the chambers of commerce saying that we should not provide any assistance whatsoever, full stop, for business, that that's it; we should not provide any assistance to business. On the other hand, my own view is that we should make exceptions and there are times when you do need to provide assistance to the business community, and there are all sorts of examples in this province where there are thousands of people working now who would not otherwise be working if we hadn't done that.

We have supported Ontario firms during the very, very difficult time of the recession and we have what we call an Ontario innovation and productivity service where there have been 345 firms assisted across the province. Those firms employ 18,500 and within three years that'll be up to 30,000. So that's an example of moving in and strategically providing assistance to the private sector.

When it comes to partnerships, we talk a lot about working in partnerships with the private sector and with others, and those are examples: Jobs Ontario Training, which I think is probably the most outstanding example; Jobs Ontario Capital; Jobs Ontario Community Action; Jobs Ontario Homes; the Ontario Training and Adjustment Board, OTAB, as it's known as; and then of course the sector partnership fund, which assists firms in one sector that agree to work together on projects.

Ontario's quality of life: I mentioned earlier that we do get those comments from investors about our workforce, the high education levels, generally speaking, of our workforce; the universal accessibility of our health care system; the multicultural and multilingual society that we have in this province and our support for that; the low crime rate -- I think Toronto has the lowest crime rate of any major city in North America -- and the relatively low cost of living. I'm trying to remember who did the survey now, but Toronto was judged to be among the least expensive major financial centres. Obviously you can find small communities, but as a major financial centre, Toronto is considered one of the least expensive.


This may be a bit hard to read for colleagues, but our major automotive investments in Ontario: I think we all understand and appreciate the role of the auto sector in this province. It really is enormous and investments have been kept up even during the recession and it has been most gratifying.

You can see that this goes back from 1992 through to projected or announced expansions going through to 1997 and it comes to $5.5 billion of investment in the province. That is a huge investment, and I think we should all take pride in the fact that that's a statement of confidence in the province of Ontario to make those kinds of investments here, because they could easily be made south of the border but they're not.

The investment in machinery and equipment is at an all-time high in 1994. These are the last numbers for the first three quarters of 1994, but you can see that it is very healthy. That's a good sign as well because most of us want to see that part of our economy growing: not just the service sector but this part as well. This is private and public investment in machinery and equipment. This is the growth in machinery and equipment investment in 1994 compared to other provinces. You can see that British Columbia is a little bit higher, but then Ontario is number two at 10.1, and then going down in the other provinces. So we had the second-highest growth rate in 1994 in machinery and equipment investment.

The consumer confidence is climbing steadily, and that's reflected, for example, in our retail sales tax revenues, although we don't have all of our numbers in yet. But certainly consumer confidence is climbing and it's the highest level it has been in five years.

I thought we should take a look at the fiscal plan because there's always some interest in this subject matter. Our goal is to have a balanced operating budget in 1998 -- not 1999, 1998 -- and you can see from 1994-95 through 1996-97 the numbers on the deficit side, with the darker area being the operating deficit and then adding on the capital to give the total number at the bottom. You can see that for 1994-95, 8.3; next year, 6.5 -- and we're talking about the total now -- and then 4.4; and then moving in 1997-98 into a very small deficit on the operating side and a surplus the following year, 1998-99, on the operating side. For many of us, that really is a critical year, when we start paying for the groceries without a credit card, if you will. We'll still have the mortgage there with the capital side. But I think that is critical, to get to that point while at the same time not decimating all of those services that we talk about in the province. So that's the plan as we now see it.

On program spending, I know people in the Legislature have a finely honed sense of history and would need to be reminded from time to time, though, just what the history is on program spending. On the left-hand side you see the 1980-81. Now, the left-hand side is nominal, which means that we haven't taken the rate of inflation into consideration. You can see 1980-81 to 1984-85, 11.5; and then 1985-86 through to 1989-90, 9.7. But, you know, it's not always fair to put numbers out there when we haven't taken inflation into consideration, so we thought we'd better take the rate of inflation out, and, lo and behold, not too much changes. For 1981 to 1984-85 it's 2.9, and for the following years, 1985 to 1990, it's 4.5 in program spending, and for 1990 through to this point it's 1.0. That's real dollars with the rate of inflation taken out. So we have worked extremely hard on getting our operating spending down, because basically it was unsustainable at the previous levels.

The deficit -- and I hasten to add, no matter how you measure it or who measures it -- is going down 30% in the last two years. The program spending will be down for the second year in a row, for the first time since I think it's 1942, so it's over 50 years. No other government has done this. And government overhead costs, which are all those direct operating expenditures of running government, are down 16% in the last three years. Now, obviously the recession has made it extremely difficult, and we've had high deficits -- no question about that -- but while we were doing that, we weren't simply allowing program spending to run away with us. We've worked extremely hard on getting program spending under control without at the same time decimating essential services.

This shows that we've done that while at the same time providing more services to more people. You can see that the number of people in 1994 increased over 1990. For example, the number of people in colleges and universities is up 14% over 1990; hospitals -- this is the number of hospital services, inpatient or outpatient -- up 9%; pay equity up 117%; subsidized child care spaces up 47%; training programs 20%; and in-home long-term care up 45%.

The point of all this is that we have managed to control program spending while shifting priorities of government into these areas, and doing them more efficiently, such as the health care system. I'm not exaggerating when I say that during the 1980s health care costs went up 11% each year over the previous year. If we allowed health care to go up even 10%, that would be $1.7 billion, which would be like two points on the retail sales tax in one year. It was simply unsustainable, and we've managed to get the operating cost down, obviously a struggle, and at the same time serve more people in the health care system and hospitals that provided more services.


Part of the problem in all of this is the declining federal support for services in Ontario. You go back to 1979-80, and you can see that for social assistance it used to be flat-lined at 50% for all provinces. That was changed in 1989-90, and it's now down to under 30%. That's under the Canada assistance plan, of course. Under EPF, the established programs, you can see that it started going down in 1979-80. It was 50% as well. That was the condition under which they were originally set up. You can see that that's down now to a little over 30% as well. So, as a proportion of the cost of providing those services, the federal government has not been there.

I appreciate the fact that the federal government has its own set of problems, but I want to tell you, don't tell me that Ontario hasn't assumed more than its fair share of the burden of the problems of the federal level. You can see just using social assistance as an example, the federal contribution was 50%; now it's 29%. At a time when the recession hammered us, at a time when they made changes in UIC which meant more people were coming on to social assistance earlier, it was like a double whammy to us, and the costs of course went up considerably.

This is in 1994-95, and if this doesn't point it out graphically, nothing will. There are the other provinces getting 50% of social assistance dollars, and BC and Ontario are getting 31% and 29% respectively. So you can see why it causes us a problem. That's become an equalization program, and we don't think it should be an equalization program.

There are many fiscal challenges in the federal budget. One is, will it support jobs and growth or will it undermine Ontario's economic recovery? Will it help maintain health care, education and social services through its national standards and support? Will it end the unfair treatment of Ontario and provide Ontario's fair share?

I know that they have their own problems in Ottawa with the federal deficit and so forth. I also know that the problem that we faced in 1993, when we were staring a $17-billion deficit in the face, we rolled up our sleeves and we took some very difficult measures, extremely difficult.

(1) We raised taxes by $2 billion.

(2) We took $4 billion out of committed expenditures for that year and ongoing years. As a matter of fact, it's annualized into a higher number than that.

(3) We imposed, tried to negotiate but ended up imposing, the social contract, which saved $2 billion.

That's $8 billion that we decided we would wear along with the public servants in the province and the people who pay the taxes. But we didn't ask the municipalities, the school boards, the hospitals. As a matter of fact, the social contract saved them that problem. I'm not saying everybody liked it, I'm not saying it was popular, but we did it. We did it, and we faced proportionally as big or bigger a problem than Ottawa is facing today. So I can tell you that we're going to be watching very carefully.

At the end of the day, I think we took the balanced approach. You might expect me to say that, that's fine, but I really think we took the balanced approach. We didn't zero in on any one of our transfer partners, and we expect that Ottawa will deal with its problem fairly and proportionally, because if you look back, Ontario has made a major contribution to the Confederation in the last few years with what's been done to us on the Canada assistance plan and established programs.

So we feel very strongly, as we head into the spring of 1995, that the federal government -- and we assume that the federal government understands this. Mr Martin mentioned it in his budget of this year, and I think Mr Axworthy mentioned it in the fall, that whatever is done has to be done fairly. I think there's an acknowledgement that Ontario has paid a disproportionate price in the years gone by. We'll be watching carefully to make sure that doesn't happen, because that would be unacceptable.

We've opened up the consultations. The first year that we formed the government we conducted the pre-budget consultations the way it had always been done, where a lobbyist group came into the treasury boardroom and sat down with the Treasurer of the day and said, "This is what we think you should do," and that was it. They'd leave and somebody else would come in. It was always one on one.

Now we've said, "No, that's wrong; that doesn't make sense." First of all, people coming in don't have to listen to what other people's problems or demands are. So now we have a group around the table almost as big as this group. They listen to each other and make their case, and I think that's very positive. And we move around the province. We're going this year to eight regional forums and four in Metropolitan Toronto, not all at Queen's Park either. The MPPs are doing some consultations as well, and of course this committee is holding an important set of hearings and will be bringing forth recommendations as well.

We are seeking advice on some of the challenges, and I'd appreciate your advice on this either today or later when you are doing your report at the end of your deliberations.

The whole question of the youth unemployment rate being double that of people over the age of 25: That's troublesome and we need to work harder on that. I don't pretend there's an easy answer, that government's got all the answer on this. We really are looking for help and advice on this.

The better distribution of hours of work: Perhaps some of you followed the Arthur Donner report to the federal government on distribution of work. What is the solution there? People are divided on this, and I don't think it's a particularly partisan issue. I know that some labour people think differently than other labour people and some management people think differently than other management people, but is there a better way of distributing hours of work? Right now it's 44 hours, above which you have to pay time and a half in Ontario. Is that the right level? Is time and a half the right amount? So those are the kinds of things I'd appreciate your advice on.

We need to break down the barriers for those who want to work. There are still too many people on social assistance who don't want to be there. How do we get them back into the workforce? We think that the Jobs Ontario Training was a beginning. There are about 65,000 people on Jobs Ontario Training programs now and 80% of those stay in that job at the end of the first year. After the end of the first year they're still there, which is very good, but there is a lot more to be done.

Finally, getting workers the right skills: How do you do that? How do you anticipate what the right skills are?

On the deficit and services, once again seeking your advice, there are still some very tough fiscal choices remaining. Pressures are still there in the system, believe me. How do we restructure the broader public sector while delivering high quality of services? We all know that the social contract ends on April 1, 1996, and the $2 billion that's saved from the social contract isn't coming back into the system so there needs to be some very thoughtful work done, and I would hope quickly done. We'll meet our targets on the social contract savings next year, but we're not the employer in the municipalities, the universities, school boards, hospitals and all those other agencies out there. That's going to happen.

How do we meet the increased demand for services? I live in a community where health care is always an issue. How do we meet the continuing demand for expansion of health care services with limited resources? How do we do that? That's just one example; you've got education as well.

How do we cope with the federal budget? I'd appreciate your views on that. What do we do if the federal government reduces transfers across the board? How would you handle it? If you've got some advice on that, I'd very much appreciate it. Some of you may have better contacts in Ottawa than I; who knows?

So all of this is within the context of meeting our fiscal targets and, like anyone else, we're under a lot of scrutiny on our numbers. I'm sure that the Provincial Auditor this morning had some comments to you about how we deal with capital. I understand that. He thinks we should deal with capital a different way, and I can understand his sense of frustration, not just at us but at the Public Sector Accounting and Auditing Board. Their principles are not yet, I gather, very well defined as to how capital should be dealt with in the public sector. I believe we're doing it the way it should be done, by amortizing it and reflecting the worth of an investment over the number of years that it provides value and wealth to the province, but I understand that he would do it differently.


On the public accounts, I think you would acknowledge that he signed off on our public accounts which he audits; he signed off without reservation this last fall. He would wish that we'd do the budget differently, I gather. He doesn't audit the budget, of course -- we all know that -- but at the same time we've agreed with him that there needs to be a comparison and we fully intend to do that in the budget, to make a comparison of the way in which numbers are reported.

At the end of the day, it's these other challenges, I think, that will determine what kind of job we do and not how you fit it into a certain set of accounting principles. At the end of the day it's how we meet those challenges out there to get our young people back to work and keep them working and keep investment coming into the province and providing the appropriate level of services.

So we have been making some tough choices. All the numbers are moving in the right direction, no matter how you measure them. We've put billions into public and private investment. The quality of services: I think most people would acknowledge that we've maintained the level of essential services. We truly have a highly skilled workforce. The quality of life in this province is rated as one of the best in the entire world. We have a competitive tax system and we have both consumer and business confidence at close to all-time highs.

That's the picture of where we're at now, and I would very much appreciate your advice on some of these challenges. I do look forward to your report and I appreciate this opportunity very much.

The Chair: Thank you, Minister Laughren. We have about seven minutes per caucus and we'll start with Mr Kwinter.

Mr Kwinter: Mr Treasurer, thank you very much for your presentation. Each year that you come I raise the same question that I'm going to raise now. In your first budget you showed your five-year projection of where you thought you would be on the deficit. You did not meet one single target of the years. My major concern is that the figures that you use are always on the small-l liberal side in that. To give you an example, in your projections you say that over the next couple of years the growth in the economy is going to average about 4.3%. Today we had representatives of the Royal Bank come in and say that they think it's going to be 3%.

The problem I have is that this year we've only heard from one financial institution that's given an estimate of where it thought the growth was going to be, but in the past we've had several and they range. I understand it's not an exact science, but they do range. But invariably the treasury office is at the very high end, not sort of in the middle, not near the high end, but absolutely at the high end. You're always the most optimistic, and unfortunately the reality does not meet your optimism. The same thing on interest rates. So when you show your projections you show the best-case scenario and invariably we don't have a best-case scenario. We have somewhere below that.

It would seem to me -- and again I make this statement every year -- that you would act in a more small-c conservative way and say: "Here is what the range is. In order to be fair and in order to give us a chance to show truly what we expect, we're going to be in the middle. We're not going to be as low as some project; we're not going to be as high as some project." But you're never there. You're always at the very high end, far exceeding anybody else's projections, and you never meet them. Could you comment on that?

Hon Mr Laughren: Yes. First of all, we tend to be in the middle of the forecasts out there, not at the high end. That's simply not the case. I just saw the Royal Bank numbers this morning and I don't think they're that different. Also, our inflation rate is projected to be a little lower than what they think it'll be, I believe, and that, if anything, is on the cautious side when it comes to what our projected revenues will be because if the inflation rate's higher, presumably our revenues will be higher too.

Secondly, I think you're being a little unfair, I'm sure not deliberately. We did hit our budget target last year, as I recall.

Mr Kwinter: Depending on whose books you read.

Hon Mr Laughren: No, no. It really is not accurate to say that we're always at the high end. That's not the case. We really do tend to be in the middle of the private sector forecasters out there. We don't play that game of being at the high end. What does that get you at the end of the day if you do that deliberately? That doesn't make sense. You just look incompetent, God forbid, when you do that, and that's never the intention.

Mrs Caplan: I'd like you to answer a question that I think anybody who's been watching the proceedings will want to know. The Provincial Auditor said this morning that by insisting on maintaining two sets of books or two different ways of reporting, you were adding to the confusion, and I'll use his words, that the credibility of your budget was in question and that it was important, for better accountability, to present a clear picture.

He said, and we all heard this morning, that you've changed the way the books have been done and that this took quite an effort on behalf of the Treasurer, and you worked very closely with him, that your reporting to public accounts last year reflected the better approach that the Provincial Auditor recommended. The Provincial Auditor said you could report your budget in a way that was consistent with your reporting to public accounts, and he said that you were going to be doing a reconciliation but that this was not sufficient and wasn't the best way to do it.

The people of the province of Ontario look to a number of indicators for confidence in the government. One is what the Provincial Auditor is saying to you, the advice he's giving to you, and frankly a second one is your credit rating, how the bond agencies and so forth see you.

What the Provincial Auditor said is that you are adding to the confusion. You're not fooling the bond agencies because they all add back in the numbers that the Provincial Auditor suggests. So the question is, why are you doing it the way you're doing it? Why are you insisting on having a set of books that the Provincial Auditor says is not the best way to give the people of Ontario the accountability that the Provincial Auditor believes is in their interests?

Hon Mr Laughren: I think that's a most appropriate question. First of all, we need to keep in mind from time to time who changed what. The Provincial Auditor has changed the way in which he wants our books reported. I'm sure you would agree with that, that he's asked us to move off the way in which it was done by previous governments --

Mrs Caplan: That's right.

Hon Mr Laughren: -- and our government. We've said okay, and in the financial statements that were tabled in the fall that's exactly what we did and he had no reservations whatsoever. The rating agencies, forever, just do a global number. I think they even throw in the WCB and Ontario Hydro, because we guarantee Hydro's debt. They look at the whole picture. If you were to ask a rating agency official, he'd say that's no problem. There's no confusion at the rating agencies. They just have their way of judging us and that hasn't changed.

I've got no problem with the Provincial Auditor seeking that this be done, but I would remind you that one of the differences is what they call consolidation and accrual. It would be hard to be terribly precise in the budget on the accrual part because you don't know the final numbers when the budget would be brought down, I wouldn't think. But more important I think is the reporting of capital. I believe that what we do with the capital is the appropriate way in which to report capital. The private sector's done it forever, as far as I know. I'm not an accountant, but that's how the private sector does it and that's how we do it.

I appreciate the fact that he said the comparison that we'll do in the budget will be helpful. I think that's what you said he said; I didn't hear him. That's what we intend to do, so I don't think there'll be any problem.

First of all, the one set of books he audits is in the way he wants it done. The set of books he doesn't audit because it's a planning document, the budget, he doesn't audit anyway, but we're going to do it the way we've always done it and we're going to put a comparison in there to put everybody's mind at ease if they might have uneasy minds.


Mrs Caplan: He says you're doing the opposite. Rather than putting --

The Chair: Your time has expired, I'm sorry.

Mrs Caplan: He says you're adding to the confusion by not doing what he asks you to do; you just present it in a way that nobody will understand.

The Chair: Mr Johnson, would you like to pose your questions?

Mr David Johnson: The auditor is simply saying, "Tell it like it is." He's saying that there are grants to the crown corporations, grants that you're making for educational purposes, perhaps water purposes, real estate purposes, that you're calling loans, but in large part the auditor cannot see these loans being repaid. In fact, they're grants and he's saying to call them grants. If they're grants to education, to universities and colleges, call them grants. That seems to be the prime source of difference. He's saying that the real deficit in the province of Ontario this year will be $2 billion higher than your forecast. I guess the question is: Why not reflect the real situation in the budget of Ontario? Why not reflect that these are really grants?

Hon Mr Laughren: I guess there are a number of reasons why I think we're doing it the right way. One is that we are isolating the operating side of the budget. I think it's terribly important that for the first time we say, "This is the operating deficit." As I said earlier, I think everybody understands why a family has a mortgage; what people don't understand or don't appreciate is when you start buying your groceries on a credit card. The Premier has used this analogy lots of times and I agree with that. We're isolating the operating side.

Other governments haven't done this. As a matter of fact, Mr Johnson, you did us a service and you made me scratch my head. We went back and we got some numbers that go back a few years and show what the difference would be if you went back and tried to roll things in together the way the auditor's doing it.

You can see, for 1993-94, $10.8 billion. Now, this includes the reported, the top line -- I'm sorry, I should back up a bit. The top line is the reported deficit or surplus, the next line is the adjustments for accrual and consolidation, which he's asked for, and the bottom line is what it would be then with that adjustment.

You can see how for 1993-94, it goes from $9.3 billion to $10.8 billion, up $1.5 billion, and work all the way back and you'll notice a remarkable thing: In 1988-89, it almost doubles the reported deficit, $1.5 billion to $2.9 billion, and go back even further.

So you can spin out the numbers -- this was in your question, Mr Johnson, that you wrote to me. You can see that any time, if you wanted to go back -- now, there's a caution on those numbers because it's not always easy to be scientific about accrual, as I said earlier, particularly dealing with the pensions issue, pension liabilities. That's the kind of thing it shows.

It really is a case of us following exactly what the auditor wants on the audited books of the province, and the planning document known as the budget -- even the word "estimate" should tell you something -- as we head into the budget process, is something that says, "These are what our intentions are for the forthcoming year."

The auditor doesn't audit the budget, but nevertheless, in order to provide some comfort to the auditor, we are going to put a comparison in the budget in the spring. That should remove any problem at all.

Mr David Johnson: The auditor is simply saying, "Reflect the real situation." What he's saying is, "Why not set the deficit at the amount that is borrowed in the current year, the amount that is added to the debt of the province of Ontario?" That's what people understand. The deficit figure you put forward has no relation to that, it's considerably lower than that. I look at one of the slides --

Hon Mr Laughren: But you would agree the budget has all the numbers in it?

Mr David Johnson: Well, yes, if we go through --

Hon Mr Laughren: No, no.

Mr David Johnson: -- but it's not a clear picture, and that's what the auditor is saying. Sure, if you want to weed through all the information you can find it, but the picture that's being put forward to this committee, to the members of Parliament and to the public is not a true reading of the deficit.

I look at the slide you've given us with regard to the budget and balancing the budget by 1998 and it won't work; it clearly won't work. First of all, the deficit that you have indicated for this year at $8.3 billion is not $8.3 billion; the auditor says it's $10.5 billion. The deficit for 1995-96, next year, the Royal Bank said this morning will be $10 billion.

The problem, and perhaps you could comment on it, is that your deficit numbers are too low to start with, that they don't reflect reality, and secondly, that the growth of 4.3% that you have estimated over the next four years, I guess, is unrealistic. We have yet to hear one forecast of growth in the province of Ontario -- I count the Royal Bank, I count the other deputation this morning, the Canadian Manufacturers' Association -- you won't find anybody who's forecasting 4.3% growth; 3% is about the average that is being estimated for growth.

Your spending has gone up every year, so how are you possibly going to balance the budget? Your spending continues to go up in total. I'm not talking about some portion of your budget, but the total bottom line portion of your budget. Your spending has gone up each and every year. With the economic growth at 3% and where we start here today, at a $10.5-billion deficit, you cannot balance your budget in four years with that program.

Hon Mr Laughren: I think we can. Be fair about the private sector. I think they're just now starting to ratchet down some of their projections, and we're not at the budget yet. Because of interest rates, the problem with interest rates going up, they're starting to say, "Perhaps this could cause a reduction in the growth rate." I don't know. I still think we can achieve our numbers. Our numbers this year have been higher than people thought they were going to be as well this year.

Mrs Haslam: I'm going to ask a couple of questions and I'm going to start off with something that means a lot to me, and that's the youth of the province. I have two concerns. When I look at the new jobs, 570,000 new jobs, 1995 to 1998 -- that's in your slides -- one of the questions I have is that you're saying an average of more than 142,000 jobs per year, and I'm asking, is that a good estimate and can we maintain that 142,000 jobs per year? That's number one.

Then I go back to your back page, where it says youth unemployment is double the rate of those over age 25, so in other words youth unemployment is actually double what adult unemployment is. That is of concern to me. I want to know why that is, what went wrong. I think it's critical to concentrate in those areas, because rather than a lost generation, we should be looking at a generation going into challenging and useful jobs. That's my first question, and I have a second question.

Hon Mr Laughren: Can we achieve the job numbers? If we don't achieve the economic growth and are not able to sustain the healthy economy, no, of course not, but we think we can. I've always said that there are clouds on the horizon. You'd never know it by this year. We've had really tremendous growth this year and we're all very excited about that. But there have always been clouds on the horizon, called interest rates, called the US economy -- the US economy's just clicking along very nicely, thank you, a much lower unemployment rate than we have -- but there's no question that if interest rates get too high and if the ghost of John Crow is still stalking the halls of the Bank of Canada, then that could cause us some problems at the end of the day. But we're hoping that this is not the case.

Youth unemployment: You're quite right that if we have an unemployment rate now in Ontario of 8.4%, it's about double that for young adults. "Youth" is probably a misnomer; it's 16 to 24. That is something I put on the screen as a challenge, because I don't think we've got the answers there yet on youth employment. We can do what we can to try and encourage money on training, to encourage people to stay in post-secondary institutions, to try and make better links between post-secondary institutions and the workplace through any number of possibilities, none of which is free, of course, but I think we're paying and will pay a big price for high youth unemployment. I'm telling you, if I had to prioritize challenges, I think that would be number one. A 17% unemployment rate for people up to the age of 24 is really unacceptable. We've got a lot of work to do on it. I really hope the committee will think about that. I don't expect an immediate answer, anything like that, because if it was easy, we'd all have the answers, federally and provincially.


Mrs Haslam: I'm glad to see you've got that under challenges as number one because I really am concerned about that.

My second question: When we had Mr Leo de Bever in today, I picked up on some of the things in his presentation and one of them was, "Slow recovery directly linked to severity of pre-1990 excesses" in spending. Then he goes on to talk about, "Canada consistently consumes 3% more than it produces," and he talks about excess consumption resulting in the current account deficiencies and eventually a lower dollar. I clued into this in your report because you had something called, "Meeting increasing demand for services with limited fiscal resources."

The question I asked him and the question I may ask you is, do we have to lower our standard of living? This seemed to be what he was indicating. He said, "Party platforms published to date are unrealistic." I asked him what was realistic and I'm asking you what is realistic when you look at the demand for services. Do we have to educate more or what is it that we have to do to be sure we're getting the message out about those services and how they're tied to tax dollars?

Hon Mr Laughren: That phrase does have a certain ring to it. "Pre-1990 excesses" -- was that the phrase he used?

Mrs Haslam: Not my words.

Hon Mr Laughren: No, no. I know you wouldn't say that.

Mrs Haslam: No, I wouldn't say things like that.

Hon Mr Laughren: I'm not a professional economist, I should reassure you, but at the same time I think we do not need to lower our expectations or our standard of living if we do things smarter than we've done them in the past. But at the same time we can't just, every time there's a new demand, a legitimate demand for a program, simply layer it on top. I'll give you an example, if I might.

The other week Mr Silipo announced more money for people who have to live at home with disabilities. He announced $6 million more. Who would quarrel with that as a priority? I don't know of many people who would quarrel with that. But we've got to find $6 million in the health care system to pay for that, or somewhere else in the system. That increasingly has to be the mentality of people in government and the population at large, because the day is gone -- it'll probably sound like a partisan comment but it's not really how I mean it -- we simply can't continue what we were able to do in the past. I think any government would have done it, so this isn't a finger-pointing exercise on my part, but it was if you had a problem and the money was there, you threw money at it. That day really is gone. We've got to do things smarter if we want to maintain the same quality of services.

The other example, and then I'll stop talking, is the move to long-term care from institutionalized care in the health care system, because that's such a big portion of our budget. Moving there, you get better service and you get more affordable service and do things smarter than we've had to do them in the past.

The Chair: With that comment, I'd like to thank Mr Laughren. We've concluded our scheduled allotment of time for the minister before the committee. Thank you very much. I understand that ministry staff will remain to field questions from committee members.

Hon Mr Laughren: Thank you. I appreciate that.

The Chair: Could I have the attention of the committee members? At this point it might be appropriate if we proceed with, let's say, blocks of 20 minutes per caucus and see where that takes us, and revisit that in an hour. Does that sound suitable to everyone?

We have a new group of representatives of the Ministry of Finance. I'd ask you gentlemen, as you are all gentlemen, to please introduce yourselves for the purposes of Hansard and the committee members so we'll all know who you are.

Mr Bob Christie: I'm Bob Christie. I'm the associate secretary at treasury board.

Mr Steve Dorey: I'm Steve Dorey. I'm the assistant deputy minister of economic policy.

Mr David Trick: I'm David Trick. I'm the assistant deputy minister for the office of the budget and taxation.

Mr Peter Wallace: I'm Peter Wallace. I'm the director of expenditure management and reporting, with the treasury board division.

The Chair: Thank you very much. We're going to proceed now with the Progressive Conservative caucus.

Mr Carr: How much time? Would it be better to break it up so we can listen to them?

The Chair: I think you were shaking the minister's hand when I explained that we were going to go in 20-minute blocks of time and after about an hour we'd revisit that and see how we would like to proceed from there.

Mr Carr: I apologize. You're right. I was shaking his hand and wishing him luck.

The Chair: That's okay. Please go ahead.

Mr Carr: I'll throw my question open to whichever of the gentlemen wants to answer. In the discussions this morning and from the economists who came in, they said we've done a poor job, in the province of Ontario, dealing with the deficit, relative to other provinces. They used two examples. He didn't make any judgement, but he said that in Alberta they took an expenditure-side approach where they believe -- you would also probably not be surprised -- that we don't have a revenue problem, we have a spending problem, and that cuts can be made to get us closer to a balanced budget through spending cuts. But to be fair, he also contrasted Saskatchewan, which has done it with increased taxes.

I'll take the approach of somebody who may be in support of the New Democratic government, who believes all we need to do is increase taxes on the rich and on corporations and we would have all the money out there to pay for all these programs. I don't know who the expert is among the four of you on taxation, but let me ask a question from the standpoint of an average person, maybe part of the New Democratic Party, who believes, "Why don't we just tax the rich and tax corporations and there'll be enough money out there." Why can't we do that?

Mr Christie: I think there were a couple of things in the question that perhaps I ought to address. One is to comment upon the experience in Ontario versus, say, Alberta, or for that matter Saskatchewan, and then to comment a little bit on business taxation and the role it's played in Ontario deficit planning. I'll ask Dave to make some comments on that as well.

One of the main things I would flag for your attention is the impact of the recession of 1989-90, and moving a little bit into 1991, on Ontario versus other parts of the country. If you look back at the figures from that time, and this is I think indicative of the different fiscal circumstance that Alberta faced from what Ontario faced over the last couple of years, that summary statistic is that roughly 80% of the jobs lost, from the employment peak to the trough of the recession, were in Ontario. Of course, that has consequences in terms of the impact of the recession on personal income tax revenue losses. It has implications in terms of social assistance costs. That, coupled with some of the federal payment developments which the minister highlighted, which were focused on Ontario and which did not affect Alberta, led to quite a different situation in terms of the sort of deficit track the two provinces were able to undertake.


On the second part of the question, which I believe had to do with the role of business taxation, to the best of my knowledge, business taxation has, by and large -- and I'll ask the tax expert on my right to follow up and correct me where I'm in error -- played little or no role in deficit reduction in Ontario over the last few years. The slides the minister showed earlier summarize the business taxation moves that have been undertaken, and they have been primarily in the form of tax reductions. Both small and large manufacturers' income tax has been reduced; the employer health tax was reduced last year. So rather than those taxes having been increased as a revenue-raising measure, I think overall the direction has been to moderate those in terms of creating a competitive climate.

Mr Trick: Bob's exactly right on those points. Let me just add a couple of things about what has been done on taxation over the last several years.

As Bob said, the general direction has been to try not to increase taxes where there is no good reason to think that that would support economic growth. The starting point of the discussion has to be that not only do we have a deficit problem, we also have a jobs problem and an economics problem, so there's a certain balancing act in terms of what you can do on business taxation.

Mr Laughren's slides were showing that the sort of benchmarks we use on business taxation are not just other provinces but also in the United States, where we compete for investment locations. That's a somewhat different situation from, say, Alberta or Saskatchewan, where much of their corporate revenues come from resource industries, which typically are not going to relocate right across the border.

Mr Carr: Only about 12% of our revenue comes from corporations in the province, as I look at our figures. Is that correct?

Mr Trick: It would be about that.

Mr Carr: Where about $3.9 billion out of $33 billion comes from corporations. So you can increase: You could increase 100%, 200%, and you would get very little revenue on the corporation tax side. Isn't that one of the reasons you probably didn't do it?

Mr Trick: As a matter of arithmetic, that's correct. Any --

Mr Carr: That's right. Sorry for interrupting, but I won't get my 20 minutes in if I don't; I don't mean to be impolite. And isn't that the same in the personal income tax rate, the old theory that we'll just tax the rich? If you look at the revenue of $14.3 billion, the bulk of that comes from the middle class, the average person. Is that why you couldn't increase the tax rate for the rich people and pay for all these programs? Wouldn't I be right in saying that?

Mr Trick: Clearly you do have a problem if you define "rich" as being a very small share of the population.

Mr Carr: Say over $50,000. Use that as a cutoff.

Mr Trick: Fifty thousand is roughly the average for the tax filers in Ontario. What Mr Laughren has basically tried to do is that on the one hand we have increased personal income tax rates, and on the other hand --

Mr Carr: And a surtax on anybody making $50,000 --

Mr Trick: A surtax in particular.

Mr Carr: -- which is the average income.

Mr O'Connor: Let him answer, Gary.

Mr Carr: I'm clarifying what we're talking about, because I left it open-ended.

That's what I'm saying. The original theory is that you put a surtax on the rich. What we had to do to get the revenue we did is put a surtax on anybody as low as $50,000, right?

Mr Trick: The surtax starts at that level and then there's a second tier that starts at about $64,000 or $65,000.

Mr Carr: And we did that to get the revenue we needed, right? That's why we did it.

Mr Trick: Right.

Mr Carr: Right. So what we're saying here is that where our revenue comes from right now -- I think we've clarified that you can't tax the corporations any more, there are no more rich to be taxed, so wouldn't that lead to the assumption that now, if we have to hit the middle class, which does not want a tax increase, there is no more room for increase in taxes in this upcoming budget? Would I be safe to say that to you gentlemen right now?

Mr Trick: I think Mr Laughren's already on record as saying that he doesn't want to see tax increases in this budget.

Mr Carr: And you'll be recommending that to the minister as well?

Mr Trick: Well, that's his decision, but yes.

Mr Carr: I've had a chance to meet with you, and you're rather intelligent. I hope for the last few years you've been telling him that, but he just hasn't taken your advice. But I won't put you on the spot.

In terms of expenditure, I'll give you an example of welfare reform. I'll ask you this open-ended. How much will we spend on welfare this year in the budget? What are the numbers we're at in terms of billions? Does anybody know that figure, for social assistance? It was 6.2, probably heading to 6.7. Any idea, ballpark, what we're looking at?

Mr Wallace: It's 6.3, I think.

Mr Christie: Yes. Peter indicates that social assistance itself would be around $6.3 billion.

Mr Carr: One of the things the Minister of Finance didn't talk about is how we've increased the rates, and in all fairness, it wasn't even the NDP government, it was the previous government that did that. Our rates are 30% higher than any other jurisdiction.

One of the things we've said is if you take the seniors and the disabled out, and the people with small children, and reduce the rates to 10% higher than any other jurisdiction, the savings would be in the neighbourhood of $1 billion. So instead of $6.3 billion, we'd be at $5.3 billion. Why wouldn't we do that?

Mr Christie: I'm not familiar with that calculation.

Mr Carr: Do you have your own? What would your calculation be? If we reduced the rate from 30% to --

Mr Christie: I haven't done the calculation. I'm not clear on what's happening to shelter allowance in that calculation. My understanding of the figures is that because the cost of housing in Ontario is quite a bit higher than that, on average, in the rest of the country --

Mr Carr: But not 30% higher.

Mr Christie: Certainly higher.

Mr Carr: Even if we went to 10% higher in that group, the amount would be substantial. So you're saying you don't know those figures, whether they could be correct and so on?

Mr Christie: No. I haven't seen that calculation.

Mr Carr: So I take it nobody in your ministry is looking at any reform of the welfare system in that regard, if you haven't looked at the figures.

Mr Christie: We haven't looked at those particular calculations. We're certainly tracking the social assistance costs.

Mr Carr: Would Comsoc be doing that? Would it be their responsibility to say, "If we reduce the rates, this is how much we could save," or would it be you guys in Finance?

Mr Christie: Typically, the policy around that is done at the Ministry of Community and Social Services, the Ministry of Finance will deal with fiscal issues around that, and we'll work with the ministry where both fiscal and policy matters come together on something like social assistance.

Mr Carr: I want to talk a little about Alberta as well. I mentioned this morning that Alberta has done it on the side of spending. As you know, their provincial portion of personal income tax is much smaller. I say about 30%; it's probably a little lower than that. Their provincial personal income tax rate is lower and they do not have a sales tax. So isn't it true to say that our problem of revenue offloading from the government can't really stand up when you look at a province like Alberta? Sure, they get some money from the federal government as well, but their income tax rate is about 30% lower and they don't even have a sales tax, which for us represents -- what? -- 27% of our revenue comes from the sales tax, 8.9% out of 33% if my quick math is good, rounded off. So they have 27% less revenue than we do by havibg the sales tax, and they've been able to balance it on the spending side.

Some people on the other side would argue, but their major expenditures to get the deficit down have not created problems any more than they it has here in Ontario. You can argue that Ontario has it, but we have not seen the crisis. That would lead me to believe that we do not have a revenue problem in this province but that we have a spending problem.

As people involved in the government, I guess you can't go out on a limb against the government, but as I've outlined it -- which I may not have done clearly, but hopefully I have -- looking at it from that standpoint, how can we say in this province that we have a revenue problem? I don't believe we do; I think we have a spending problem. Where in my argument am I wrong, or am I wrong?

Mr Christie: If I could add perhaps one dimension to the comparison with Alberta, while income taxes are lower and sales tax non-existent in Alberta, their access to resource revenues provides a very large portion of their budget. I don't know, offhand, how large, but it's certainly very substantial, perhaps the single largest revenue source in the province and one that in Ontario really doesn't exist at all.


Mr Carr: But we've got corporation taxes, with the major manufacturers. As you know, you can't have it both ways. We have the major manufacturers, so we get a higher corporation tax.

Mr Christie: Alberta has a corporate tax that's quite similar to Ontario's, so we don't differ all that much in that regard. In terms, for example, of the revenue calculations used in the equalization program, where the federal government measures the revenue-raising capacity in each province, Alberta tends to come in at about 120% to 125% of the national average and Ontario's just 101% or 102%. So Alberta, largely because of the oil and gas, has a revenue-raising capacity that is substantially in excess of that of Ontario. Some of the ways in which they deal with that are to have no sales tax and to have a lower income tax, and that's in a way a kind of dividend, or reflects the presence of oil and gas revenues in that province.

So an element-by-element comparison of personal income tax and retail sales tax in the two provinces I think is a little difficult because the situation is so different on resource taxation. That's the only point.

Mr Carr: Of course, as you know, many provinces, including Newfoundland, are now taking the tax route to attract people; you pick up the Report on Business and you see the premiers. I think the feeling is that in other jurisdictions, regardless of whether it's a Liberal, like him, and Frank McKenna down in New Brunswick, who's a Liberal, they're realizing that lower taxes mean more jobs.

I want to get back a bit to the spending issue. From 1985, if you look at where spending has gone versus the rate of inflation, and I think the minister talked a little about it, in the mid-1980s to late 1980s we spent double and triple the rate of inflation when the economy was expanding and the revenues were coming in. That isn't to fault anybody. The Liberals were the government, but I think the Treasurer or the Minister of Finance would be the first to admit that he sat in the House and pushed them to spend more and more and do even more.

Mr Wiseman: So did the Tories.

Mr Carr: Not like the NDP; I can tell you that much.

If we look at where we were spending in 1985, adjusted for inflation and the increased population -- with inflation put in because, as you know, when you put the figures down for real growth versus inflation and so on, it goes up and down when interest rates in the early 1980s were 21%. But if we'd kept on the track of 1985 when our government left office, we would be spending, for the same amount of services, probably $8 billion less than we're spending today. That would take up a big portion of our deficit.

I think if you ask the average person, "Were you better off in 1985 in health care, education," whatever, they wouldn't see a great difference from what was happening in 1985; some would even say worse, but let's for argument's sake say it was the same. So how can we say to people that all this spending has helped when in fact, if we had kept to the rate of inflation and had been spending at 1985 levels, we would have a deficit significantly less and we would still have the programs there? How come we spent all this money and ended up worse off 10 years later?

Mr Christie: I'm not sure what the question is.

Mr Carr: How come, in 10 years of all this spending, things have gotten worse?

Mr Christie: If the real level of spending, say in 1995, were at the level it was at in 1985 --

Mr Carr: With inflation and the population growth, we'd be $8 billion less.

Mr Christie: I can't do those numbers off the top of my head. If it's $8 billion -- obviously, demand for services, particularly the impact of the recession, has meant that some of the pressures, particularly in the health care area where demand tends to grow more rapidly than the rate of population growth, and certainly through the recession when social assistance costs and caseloads grew at 15%, 20%, 25% per year versus 1% to 2% per year in population growth terms, I think it's reasonably safe to say that a constant real spending per capita profile through that time period would have meant a significant and visible reduction of services, particularly in health and social services, given the demographic drivers in those two areas.

Mr Carr: If you look at welfare even during the period of rapid expansion in the late 1980s, number one, the caseloads went up. If you look at the graph, the problem wasn't the caseloads, it's the amount we spent because of the increase we gave them. If you look at it, and we'll take 1987 as a year, the caseloads, even during the period when you think they would go down when we had the largest economic expansion of any of the industrialized world during the late 1980s, actually went up and of course the amount we spent on it went up dramatically. So again, it's a case of not having a recession. The amount of our welfare cost went up dramatically, and then of course when you did hit the recession and more of them went on, again it skyrocketed.

But isn't it the case that our problem with the social assistance isn't the fact of the number of people on there but the fact of the rates that we are paying people that has made the increase go from where it was to $6.3 billion? Isn't that the reason we have the increased costs that we have, not so much the caseload but the amount we are spending on the individuals?


Mr Carr: Be honest. If I'm wrong, say no. The others are saying it isn't that. I want to hear from this gentleman. Be honest with me and tell me what you think.

Mr Christie: Certainly over the last five years I think it's safe to say that a significant portion -- probably more than half of the growth in cost certainly has been caseload.

Mr Carr: Half has been caseload and half has been --

Mr Christie: More than half.

Mr Carr: Okay. What percentage?

Mr Christie: I have a figure of 70% in my mind. I don't know where that's from. I can't point you to a piece of paper that says that's the right number.

Mr Carr: The ballpark. Okay.

Mr Christie: Certainly some of it is due to induced changes in duration on the rolls as a result of the recession and, in some cases, to federal unemployment insurance changes, which have caused people to spend less time on unemployment insurance and therefore have a longer duration on welfare and some is due -- and again, I don't know the fraction, but it's a relatively small fraction, less than a quarter I would think. There have been some studies on this and I think we can look for those studies and see if we can get specific figures for you, if we have them available.

Mr Carr: The federal government, as you know, had no control over what happens to welfare rates and that's why a lot of the cutbacks that the Premier and the Minister of Finance talk about -- blaming all the downloading from the federal government. What happened is, the rates were increased and the federal government had no control over it, so the amounts were skyrocketing. Here's a government -- and as we heard today, they were bleeding to death with a deficit -- that had no control over it and it was an open-end funding.

Isn't it true that what the federal government said to the provincial government is, "You have to control it otherwise we will cap you"? That wasn't done arbitrarily without discussions, and then for whatever reason -- and it probably wasn't even the NDP government -- the government said no. I don't know how many of you gentlemen have been back that long, but the fact of the matter is that the reason the federal government in some cases did what they did in terms of the transfers to the provinces is because they saw it -- and if you look on the graph I have in front of me, it's like a plane taking off -- they're going up dramatically and they're saying, "Hey, something has to be done."

Only over the last two years with welfare have you heard the Premier say something needs to be done or you heard Bill Clinton say something needs to be done. In a non-political way you've got socialists, NDP, saying something has to be done. You've got a Democratic President down there who says something has to be done. So isn't it the case that finally, after all of this bleeding that has gone on, a big source of why we have the deficit is the increase in social assistance and that in fact only now are we even getting around -- and here the Ministry of Finance hasn't even looked at what the savings would be by reducing the payouts from 30% to 10%, which we've called for for over a year and yet, as the Ministry of Finance, you can't even tell me what the figures or the savings are. Isn't there something wrong with that system?

Mrs Caplan: You don't have to answer political questions.

The Chair: If the answer is not too long -- I just want to let Mr Carr know that we've concluded his first 20 minutes and when you're finished, we'll proceed to the government member.


Mr Christie: I'm not sure this is an answer, Mr Carr, but in terms of when the federal restrictions were put on, when you look at the chart that you have on the escalation of social assistance costs I think you'll note that the very rapid period of escalation was from, say, the middle of 1989 through 1992 and 1993, and it was at the beginning of that period, not at the end of that period, that the federal restrictions, particularly the federal CAP restrictions, were put on. To see them as a characterization of the very rapid growth in social assistance spending during the recession is not -- I mean, they predate the very rapid growth in social assistance spending during the recession.

Mr Sutherland: I guess just to pick up on that, because at the depth of the recession I used to get a lot of calls too into my office about the numbers on welfare, I do remember seeing the statistics that indicated that during 1991 over 250,000 people in the province of Ontario exhausted their unemployment insurance benefits. If you go back and you look at 1991 and you look at the dramatic increase in social assistance that year, you will see that the 250,000 would account for -- I don't know -- probably 85% or 90% of the increase in social assistance costs that year.

Picking up on that discussion though, and particularly since the analogy to Alberta was made, I thought the slide on federal share of social assistance spending was a very interesting slide because, as we know, there have been three provinces that come under the cap -- BC, Ontario and Alberta -- but your slide indicates that Alberta is still receiving roughly 50 cents of every dollar on social assistance spending, which would indicate to me two things.

One is that they came under the 5% cap, because the recession in Alberta in the early 1990s wasn't as great, because a great deal of the recession had to do with adjustments to free trade, restructuring, primarily more in the manufacturing sector rather than in some of the other sectors. I know the resource sector had been weak for a couple of years, but it didn't see the dramatic decline in employment levels or the same degree of a recession that we saw here in the province of Ontario at that time, particularly on the employment numbers, and that points out the difference.

It's great to say, and I guess congratulations to Premier Klein for getting there, but when you're looking at that, Premier Klein is able to do that with 50-cent dollars. We could make our deficit significantly lower, I'm sure, if we had 50-cent dollars with social assistance. So I thought that slide was very interesting to point out how, again, the impact has been on Ontario in its treatment from the federal government versus even one of the other provinces, Alberta. Certainly to some, as I said earlier today in response to the auditor, the new alleged messiah of how to run government finances is Ralph Klein.

I guess a couple of other questions I had -- oh, I think I've lost it now. Sorry. If there's someone else, you'd better go to them. I've lost my question.

Mr Wiseman: I want to pursue this questioning because I need to have an idea of the impacts of what's going to happen in terms of the future. We see this graph -- it's the graph of the interest rate increases from 1971 -- and we see in 1989, for example, that the interest rates start to go way up even though the inflation rate was somewhere around 3.8%. My question is, for every 1% increase in interest rates, how many people are going to be put out of work?

Mr Dorey: In part it depends upon where the increase in interest rates comes from. We've seen that the US economy has been growing stronger very strongly, and that's put some upward pressure on US interest rates. That in turn has led to higher interest rates in Canada. That US growth, on the other hand, will be good for the Ontario economy.

If the interest rates are taken alone and are simply the result of Bank of Canada policy, our estimation is that a 1% increase across the board in interest rates would reduce real GDP by about four tenths of a per cent in the first year. Four tenths of a per cent in employment would be -- see if I can get this right -- about 200,000 jobs I think.


Mr Dorey: Oh, 20,000? Sorry.

Mr Wiseman: A 1% increase in interest rates will create a four-tenths-of-a-point decrease in GDP, which is --

Mr Dorey: It's 20,000 jobs, I'm sorry.

Mr Wiseman: It's 20,000 jobs.

Mr Dorey: Or 2,000; it starts with a two.

Mr Wiseman: Now we've gone from a magnitude of -- there's 100 magnitudes here. Let's see if we can nail that down a little bit. We're trying to write a budget here, folks. What is it, 2,000 or 20,000?

Mr Dorey: It's 0.4% of a five million labour force. That would be, according to my expert friend here, 20,000.

Mr Wiseman: So 20,000. Okay. Now, I'm not sure that I followed why the connection should be to whatever is happening in the United States. A 1% increase in interest rates in Canada, for whatever reason that the Bank of Canada has decided to do it, is going to translate into a 0.4% decrease in GDP.

Mr Dorey: That's right.

Mr Wiseman: Now, what is the impact on unemployment when the dollar rises one cent? What can we look at in terms of that? The other part of that question is, can I assume, is it safe to assume, that it is 0.4% plus or minus, if interest rates drop a per cent or go up a per cent? Is it safe to make that connection?

Mr Dorey: Yes, that's generally symmetrical.

Mr Wiseman: Okay. Then what is the impact of a one-cent increase in the Canadian dollar, and at what point, if it goes up, does it start to become detrimental to the Canadian and the Ontario economy and start to put people out of work as the dollar rises?

Mr Dorey: Again, a rough rule of thumb would be about two tenths of a per cent on real growth from each cent increase in the dollar.

Mr Wiseman: So, 10,000 jobs.

Mr Dorey: Yes, 10,000 jobs or so. In terms of where it starts to have an impact, there's really a huge variety among industries. Some industries are competitive, would be competitive with a 90- or 95-cent dollar, some have trouble at 80 and for some it's 70. So you get an incremental impact all the way up.

The Chair: Back to Mr Sutherland.

Mr Sutherland: I remember two of my questions.

(1) Regarding the forecast for economic output, on the slide you talked about consensus forecasts and blue-chip economic indicators. There seemed to be some question because the figures put forward here are a little higher than what we heard from one of the presenters today. Could you just outline, then, for the committee how you developed the consensus forecast?

(2) On the slide about the strongest job growth in six years, it talks about full- and part-time jobs, but it doesn't give a breakdown of the percentage of new jobs that are full-time versus part-time.

Mr Dorey: Right. In terms of the consensus, essentially what we do is take a survey of all the forecasters we know that forecast the Ontario economy. That's a much larger number for this year and next. There's a much smaller group who forecast out to 1998 or beyond. So we take whoever there is.

Actually, that's the consensus view of private forecasts, all the people that we are aware of who forecast out to 1998, their view of average real growth in the Ontario economy and the other provinces over the 1995-98 period. That's somewhat higher than some of the people you've heard from this morning, but that's a survey that we do, and I don't think we've missed any professional, significant, reputable forecasters.

Mr Sutherland: Or any of the ones who may appear before the committee?

Mr Dorey: No, we certainly included the Royal Bank in our forecast. I understand Mr de Bever is now with the teachers' pension plan, and they're not part of our forecast survey at this point.

Mr Sutherland: Okay. Thank you.


Mr Dorey: The other point to take account of is that it's the combination of real growth and inflation that affects our revenues and the question of whether we're exaggerating or not. I think our view on inflation is that we expect somewhat lower inflation than the consensus of forecasters at this point for next year, so that for next year our forecast for nominal growth is 5.6%, which is exactly equal to the private forecasters.

Mr Sutherland: And just the second question on the jobs, full-time and part-time?

Mr Dorey: Oh, I'm sorry. More than all of the jobs over the past 11 months have been full-time. In fact last calendar year there were 71,000 jobs created on a year-over-year average -- I forget the precise numbers -- but more than that were full-time, so there was in fact a decrease in the number of part-time jobs.

It's the first time that's happened in quite a while.

Mr Norm Jamison (Norfolk): In looking at the tax question around small manufacturers, small businesses, just a reflection on that 8.2% as compared to the 10%. The way it was explained was, when you take off the employer health tax with the exemption for new hires, that brings it down. Has there been that significant a growth in hiring in the small business area? To bring the payroll taxes down from 10%, what they would've been, what kind of numbers would be involved in there? Have you anything on that?

Of course, the tax comparison question between jurisdictions is one that I'm very interested in also. I know that the small business community had a tax reduction of a half a per cent in 1992, and the employer health tax exemption has really made our tax competitiveness in that area I think really obvious when you look at them in graph form. But I'm looking particularly at where we come from the 8.2% figure when we talk about the employer health tax exclusion for new hires and what that has meant in terms of that portion of the bar, numbers of hires.

Mr Trick: I think you're right on that point. What this graphic is intended to show is the effective rate of payroll taxes for employees in Ontario, Quebec and the US average, and it comes from an independent study that was done by Peat Marwick in the United States. Essentially what it shows is that for the average employee in Ontario, the payroll tax is 10% of the employee's compensation. If it's a new employee -- so they can take advantage of the one-year holiday we have for new employees -- then the effective rate actually is only 8.2%. So the gap there is for the one-year payroll tax holiday. Of course it shows higher in Quebec and higher in most of the United States, particularly because of social security taxes and health costs in the US.

If you look at the situation of small business as a whole, you're right that there is a lower tax rate for small business today than there was prior to the 1992 budget: 9.5% versus 10%. It's also lower compared to what's charged to a larger company. The statutory rate for manufacturing is 13.5% and for non-manufacturing business it's 15.5%. So it's quite a bit lower rate for small business. As well, as you mentioned, they do pay a lower rate on employer health tax and they're exempt from the corporate minimum tax.

So there are a number of ways in which the tax system is intended to encourage small businesses to start up and to try to give them some potential for growth without paying as high taxes as they would for larger ones.

Mr Jamison: The same situation is really shown here in the corporate tax rates and, again, there's been a lot of debate around corporate tax rates. We've all heard the debate going on for years, probably before I was here and continuing through this term. When we look at the effective corporate tax rates, again, where were these figures where Ontario is second lowest in all the surrounding jurisdictions? How were these figures compiled? Basically, was there a reduction, as there was in the small business and I believe there was for small manufacturers, in 1992 also?

Mr Trick: Yes, there was a reduction for manufacturers in 1992 as well. The rate came down a point there; it was 14.5% and it was reduced to 13.5%.

What this graphic shows is the results of a study, again that was done independently by Peat Marwick in the United States. They did it for the state of New York actually, and it combines the impacts of a number of taxes. This is not just corporate income tax, which is the rate I just cited for you, but also capital taxes, property tax and the sales tax you pay on business inputs. So it tries to cover a whole spectrum of taxes, recognizing that all of them ultimately get paid by somebody and have an effect on the competitiveness of the business. When you add them all up, this is the outcome that Peat Marwick came to.

Mr Jamison: One last question I have, and it's really to clear up any confusion: When the auditor was with us earlier on today, he talked about two different ways of, really, accounting, and the way in which the books have been done as far as deficits and budgets are done, it's been explained there are two different ways of doing that. How long has the government of Ontario been using the practice which the auditor is concerned about? How long has that accounting system been in place and used in the province?

Mr Christie: The system the auditor's commenting on and which the auditor has dealt with over the last couple of years, the cash accounting system, has basically been in place since about 1967 or 1968.

I think it's important to note that the things that the auditor has talked about the last few years in that system have basically been the issues of preflows, which has been an ongoing issue for at least 15 years under the cash accounting, yet the concept of accrual is supposed to address that. The other thing that he's talked about is the loans-based financing for capital, which is a practice that was used in the late 1960s and early 1970s with some of the educational capital corporations and has been used in the last few years, again, for some educational facilities, for transportation and some sewer and water.

So these facets of Ontario's books have been a property of the system for about 25 years, and it was really last year for the first time in the public accounts that we made the transition to a different accounting system. As the minister described this morning, that's the system that's being used in public accounts, although the budget as a planning document will maintain a lot of the characteristics of the system that's been in place for some time.


Mr Wiseman: In your determination of the comparative taxes in the United States to here, I know some of the cities have taxes on businesses as well, some of them as high as 5%, 6%, and they also have city income taxes. Do you have any opportunity to calculate those taxes into the scale, or are those left drifting and not really part of the equation to determine comparative competitiveness?

Mr Trick: In the studies that were done here by Peat Marwick, what they did was they took the total tax revenues in a state, including the local taxes that people are paying, and they averaged them out across the state, so they are in here. What doesn't really show in here is, for instance, if Buffalo had higher taxes and Rochester had lower, you don't really see the specific number for Buffalo as opposed to Rochester; it's just averaged across the state of New York. So you would see variances, which is exactly, I think, the point that you're making.

Mr Phillips: Just a comment, Mr Christie, on what the auditor said: I have real difficulty with the way the province reports its finances. I just cannot accept that it's simply accounting. The auditor this morning said this has nothing to do with accounting rules, selling GO trains for $430 million to a Bermuda company, leasing them back and showing that as revenue; selling all of the government buildings -- the Frost building, the Macdonald building -- to yourself, showing that as revenue; saying to school boards, "You go borrow the money we used to give you as grants, show it on your books, not on our books, but whoever you borrow the money from, we'll repay 100% of the principal and interest."

The auditor says that doesn't reflect financial reality under any accounting rules, so I frankly have difficulty accepting that this is just a battle of the accountants. I don't think the auditor could have been clearer that to report the GO train sales as revenue is not an accounting battle. He calls it an incorrect reporting of revenue. I want to get that on the record. I hadn't planned to because it's not really a question; it's more a statement. The auditor uses terms like "incorrect," not that this is a "different way of handling it," and I'm afraid that the document's riddled with that.

My question, though, to start with, is on your revenue estimates. I see that in the revenue estimates for 1994-95, and then 1995-96, 1996-97, in all of the financial numbers you've prepared for your declining deficit, you've assumed federal payments on what's called the EPF and the Canada assistance plan of $6.5 billion for 1994-95, $6.1 billion for 1995-96, and $6.2 billion for 1996-97. I am using the right numbers, am I?

Mr Trick: Yes.

Mr Phillips: So the expectation is that the federal transfer payments will -- I guess they went up this year, 1994-95, by $300 million. Is that right?

Mr Trick: For EPF and CAP put together, yes.

Mr Phillips: And you expect they'll go down to about $6.1 billion or $6.2 billion over the next two years, and you've built those numbers into the forecast?

Mr Trick: That's right, yes.

Mr Phillips: I was surprised to see personal income tax in 1994-95 unchanged from 1993-94, that it just stayed flat when I think you had been predicting a fairly substantial increase in personal income tax revenue. Can you explain that for us and then let us know the basis on which you've estimated the 1995-96, 1996-97 revenues? I also was interested by the way the employer health tax revenues dropped as well in 1994-95.

Mr Dorey: I can deal with the revenue questions, or at least David will deal with the federal-provincial questions but I'm happy to deal with PIT and EHT.

On the personal income tax front, the decline reflects information we got from the federal government about 1993 assessments. Essentially what's happened is they're lower than we had thought. It appears to us that the principal factor was higher RSP contributions than we had expected, and that in turn lowers -- the lower assessment base in 1993 lowers the base a bit for 1994 too. So that accounts for the principal difference in the 1994-95 PIT payments.

Mr Phillips: Does that impact 1995-96, 1996-97 at all?

Mr Dorey: Well, there are some offsetting effects. It does reduce the base, but we've got stronger growth this year and into next year than we had expected in underlying income, so the net impact is not particularly large. We'll have to take a good look at the information -- we haven't had it for a long time -- that we've received from the federal government, and we're looking at the behaviour of RSP contributors to see whether there is an underlying trend there that may be a problem.

On the EHT side, the answer is that we've given people the first -- nobody pays more this year than they did last as a result of the measure contained in last year's budget, so we've essentially returned something in the order of $300 million to employers for hiring new employees.

Mr Phillips: Okay. The federal numbers: Those are the right numbers, are they, that we're using?

Mr Trick: Yes, they are.

Mr Phillips: So if there's any change, it would be off those numbers, obviously.

Mr Trick: Right.

Mr Phillips: Am I right that the CAP, the Canada assistance plan, has gone up an average of 10.7% a year -- these are the numbers I asked for -- for the last 10 years or so?

Mr Trick: Over that period, yes.

Mr Phillips: Right. And the established program financing has gone up around 5% a year.

Mr Trick: That's the total entitlement, yes. The cash payments have gone up 2.7% a year.

Mr Phillips: But I assume the government looks at the total payment: cash and the tax points.

Mr Trick: We do. You understand that the tax points are included in the personal income tax numbers and the corporate income tax numbers that Steve was talking about.

Mr Phillips: I understand that, but when you look at what you get from the established program financing from the federal government, you put the two together; you put the tax portion and the cash portion together and look at that as the total. Is that fair to say?

Mr Trick: Well, the position we take on that, sir, is that the tax portion is something that was transferred to the province in 1977 and it's used in calculating the cash payment, but it's the cash payment that is actually what we receive from the federal government. The federal government does not give us those tax revenues. They're collected by the province in the name of the province.

Mr Phillips: The documents I got from you always show that you looked at the total. You said, "All right, here's what we're entitled to." Part of it we get from taxes, part from cash. If the taxes go up, the cash goes down. That's the deal. Is that fair to say?

Mr Trick: Yes.

Mr Phillips: So why wouldn't we look at the total?

Mr Trick: I'm sorry. I guess it's just a question of the phrase "looking at." We do have to look at it in order to calculate the cash payment, but in terms of what we count as a revenue from the federal government, we only count the cash portion.

Mr Phillips: Why would that be? I notice that the tax portion went down a little bit this year, so the cash portion went up. Why would we not look at the total? Because a tax dollar is a tax dollar is a tax dollar. What's the justification for not looking at the total?

Mr Trick: The reason we don't count the tax points as a revenue from the federal government is that when the taxpayer sees it, he pays it on the line that says "Ontario income tax," and from the taxpayer's perspective it's money that goes to the Ontario treasury from the taxpayer. It doesn't go to the federal government. And the same way with the corporate income tax point: It's paid directly from the taxpayer to the Ontario government. So even though the federal government uses those numbers in calculating the cash payment, it's not money that the federal government gives us; it comes to us from the taxpayer.

Mr Phillips: I just want to be clear. I gather 20 years ago sort of a deal was made and they said: "Listen, we used to give you cash but we'll do it a little differently. We're all agreed. We'll transfer some what are called tax points. So revenue we used to get federally, we'll give it to you." And the deal is, if that goes up, cash payment goes down.

Mr Trick: Right.


Mr Phillips: Why would we not look at that total? Aren't we only looking at part of the deal if we only look at the cash part of it?

Mr Trick: What you're describing there is an accurate description of what happens. The provinces have never accepted the federal government's perspective that this was sort of an ongoing gift. The provincial calculation of it is really that once the tax points were transferred they belonged to the province and they're not like an ongoing revenue that we get every year from the federal government.

Mr Phillips: But if I strike a deal with you and say: "Well, I'll pay you in two ways. One is that I'll pay you cash and the other is that you can have a share of these revenues and that's how you'll get paid. If your share of revenue goes up, I give you a little less cash." But now you're saying, "No, no, we're only going to count the cash part."

Mr Trick: We'd look at it more as, "You gave us an asset in 1977 and we continue to hold the asset but it's not something you've given us new every year."

Mr Phillips: But in all the documents I got from you it says: "Here's what we're entitled to on established program financing in total. We're going to get it in cash and tax." But you're now saying you're only going to look at the cash part of it.

Mr Trick: Let me ask Harriet.

Ms Harriet De Koven: I'm Harriet De Koven. I'm the director of the intergovernmental finance policy branch.

I don't know if I can help here. What the federal government did in 1977 was not to cede us the revenue from the tax points but to vacate the actual tax room. In other words, the federal government reduced the amount of tax it was raising in the personal income tax and corporate income tax fields, and in the case of Ontario it vacated the equivalent of 13.5 personal income tax points and one corporate income tax point. In return, the province had the option of raising those revenues so that the net effect on the taxpayer was zero. The same amount of revenue was being raised but the province was raising more of it than it had been previously and the federal government was raising less.

So these are taxes, as my colleague has said, that are levied by the province. They appear in our books as personal income tax and corporate income tax revenue because they come in with our personal and corporate income taxes from the government of Canada. They are used in the calculation of the total entitlement for established programs financing, but for reporting purposes, I believe in all cases in all provinces, are reported with the personal and corporate income taxes. However, they are part of the total entitlement, as you point out.

Mr Phillips: I'm just anticipating the usual battle when the federal budget comes out and the NDP will say the dastardly Liberals federally are cutting our transfer payments. I'm trying to understand. What I see from you is that you've always included tax and cash in here, in the entitlements. Your established program financing money from the federal government is cash and tax total.

Ms De Koven: You're correct. That is the entitlement, although the entitlement does not correspond exactly with the cash flow. There's a very complicated program, set up with a formula, and I think we've talked about this before. With the cash flow you get benefits and deductions for prior years, so if we are paid too much in a previous year, up to three years previous, that is deducted from the current year and vice versa.

Mr Phillips: Sure, over time it works its way out.

Ms De Koven: So what you see on the cash payment in our budget represents the netting out of all of those effects for that year, and it's not identical to what you have there. The entitlements are part of the calculation to determine how much we're getting in cash, but you're right that the tax points were part of that calculation.

I should add that the federal government, having vacated those tax fields, has in the intervening period, which I guess would be not quite 20 years, raised those taxes. We have not gone through an examination of the degree to which those tax fields have been reoccupied, but the federal government's taxes in personal income tax and corporate income tax have not remained unchanged since 1977.

Mr Phillips: I have one last question. You gave me the payments against the unfunded liabilities for the teachers' pension. I want to be sure I've got this right, that there will be no payments made in 1994-95, 1995-96; then in 1996-97, $263 million, and then 1997-98, $610 million. Next year, 1995-96, it will look pretty good on the books because there are zero payments; the next year they start to kick in and then a brand-new expense of $610 million to fund the unfunded liability. Have I characterized that properly?

Mr Christie: The numbers are certainly correct. It's not a new expense, it's the same ongoing expense, not having gains to be netted off against it and therefore recurring at its full level -- but that's semantics.

Mrs Caplan: I have a couple of brief questions and then I'm going to leave time for my colleagues.

The Chair: Six minutes.

Mrs Caplan: Six minutes in total? Then I'll just ask one question and leave some time for you, Monte.

The Provincial Auditor this morning, in giving us his advice, said that since the treasury has changed the way you keep your books and it took you approximately a year to do that, that you've moved from the old cash -- for people who don't understand what that means, it's sort of all in, all out in one year; no what's called depreciation or so forth. That was seen as an old and archaic method of keeping the province's books, and the suggestion for a number of years was to change to an accrual method that, I think it would be fair to say, conformed more to generally accepted accounting principles.

I see you nodding your head. If I say something you disagree with, please feel free to jump in.

The Provincial Auditor said you've accomplished that. You have moved from the old cash accounting methods to the new accrual accounting methods. That's now how you keep your books, and you presented to the public accounts committee last fall your books done in the new way.

I support that and I think that's important. I believe that accountability and transparency go hand in hand, and if there's a better way to keep your books so that people can understand how you're doing business and relate it to either other jurisdictions or other organizations of the same nature -- and I'll digress for a minute to say that we understand a government, while it may have some of the same imperatives of the private sector is, by its very nature, different. Therefore, some of the accounting practices would be best compared to public sector organizations. Accounting agencies and accountants over the years have developed standards for public organizations as well as private.

Today the province of Ontario does its books on an accrual basis; you've made that change successfully. You presented those books to the public accounts committee, and you could, if the Treasurer so directed, present your budget within those same parameters. What I want you to confirm is that it is a direction, a political decision by the Minister of Finance, to present the budget in a way other than is recommended by the Provincial Auditor, that it's a political decision that's been made by the Finance minister, but you could, if he directed, present the budget in an alternative way, as suggested by the Provincial Auditor.

Mr Christie: The question you ask about political direction I think was answered by the minister earlier. But in terms of the capacity to do so, one of the things that's important and that we've certainly talked to the public accounts committee about is the fact that the last public accounts was what we've called a snapshot; that is, in terms of particularly identifying the accruals, what we would be trying to do in making what was and continues to be quite a substantial shift in the way in which business is done in government is that at March 31, the end of the fiscal year, we would do a snapshot that showed the accruals and the consolidations at that point in time.

It would be significantly more difficult to do that on an ongoing day-to-day, week-to-week basis that would be associated with doing an estimates process, an approvals process and an in-year monitoring process. Doing that all on an accruals basis would be significantly more difficult.


Mrs Caplan: I hear what you're saying. However, what we've heard, both from the Provincial Auditor and from the Treasurer, is that there will be a reconciliation provided along with the budget and that that adds to the confusion. What that tells me also is that if you are able to do a reconciliation, then if directed by the Treasurer, if he said, "I want to present the budget in the same format, using our estimates, on an accrual basis," you could do that.

Mr Christie: I think there is a difference between doing a summary comparison of the budget plan on the two bases -- for example, doing line-by-line ministry estimates on an accrual basis with the appropriate consolidations built in. I suppose to some extent it's a question of what one means by preparing the budget on the new basis, because the process of preparing the budget is a good deal more than a figures-generation process. As you know, there's quite a bit of decision-making and management -- options, consideration, evaluation etc -- all of which require financial information. It depends on how one defines the process. If the process is a presentation one, it depends on the level of detail.

It will certainly be possible to do the kind of comparison the minister has talked about, and certainly, with enough preplanning -- this is tautology, I suppose, in a way -- it would be possible to do the full process. Whether we could do it for this year, starting now -- to do the whole process on that basis, I'm kind of sceptical.

Mrs Caplan: And that's because the direction was not given far enough in advance to be able to accomplish an end product?

Mr Christie: We have not looked at how long it would take to change all our systems around to do the full conversion. There are a number of intermediate steps as well, but we haven't done a complete scoping of, "If one went this far, one would need this much lead time," so I really can't answer.

The Chair: Unfortunately, we've used up seven minutes, but we do have another round to go. I'll break the next portion of time into 15-minute sections; we start with Mr Johnson.

Mr David Johnson: I want a little extra clarification on the tax points you were talking about. How many direct tax points does the province of Ontario have on the income tax?

Mr Trick: What was transferred to us was 13.5 personal income tax points and one corporate income tax point.

Mr David Johnson: Thirteen and a half personal income tax?

Mr Trick: That's right.

Mr David Johnson: So of what is perceived to be the federal tax people pay, actually 13.5 points of that is provincial.

Mr Trick: No, sir. At the time the fiscal arrangements were done in 1977, the federal government essentially, instead of charging 100 points of federal personal income tax, reduced its tax rate by 13.5 points and left the province to increase its own personal income tax to fill that void. Right now, if you pay $1 in personal income tax to the federal government it does go to Ottawa, and since we had the higher rate since that time, you pay $1 in personal income tax to the province and it comes to us.

Mr David Johnson: Can I just ask you, then: Generally the provincial tax is 58% of the federal tax?

Mr Trick: Yes.

Mr David Johnson: Are the 13.5 points you're talking about contained within that 58%?

Mr Trick: Yes, it's all taken into account in those numbers: the lower federal base and the higher provincial rate.

Mr David Johnson: There's no other pot that 13.5 comes out of?

Mr Trick: No.

Mr David Johnson: All right.

Going back to the auditor's concern about the non-budgetary loan-based issues, "loans," apparently, to colleges, universities, school boards, health facilities, that sort of thing, which totalled this year some $1.6 billion, is it the expectation that this money will be somehow repaid? It's called a loan. The auditor is of the opinion that this money is a grant, not a loan.

Mr Christie: These loans will be repaid by the loan recipient but will be repaid out of funds given to them by the province; that is, the province's operating grants to those bodies will include an allowance for the principal and interest that needs to be repaid.

Mr David Johnson: In other words, the provincial budget will have to go up.

Mr Christie: That's right.

Mr David Johnson: And then that money will be given to the school boards and universities and health facilities and they'll turn around and give it back as a repayment.

Mr Christie: That's right. The principal and interest on those loans will be explicitly recorded as part of our operating expenses. In fact, one of the reasons the government has expressed for going in this direction is to match the costs of capital with the benefits of capital. In this case, these are long-lived capital assets, up to 20 years, and this practice is in effect a way of amortizing the cost of those assets over that period. The result is that you pay for the assets over the term of the loan, which is about 20 years.

Mr David Johnson: The $1.6 billion that was included for the crown corporations this year would not be reflected in this year's budget, I presume, in terms of operating expenses?

Mr Christie: There would be a relatively small portion, because interest is paid in arrears.

Mr David Johnson: That's right. Could you tell me what the impact of that amount of money will be on next year's budget?

Mr Christie: On a full annual basis?

Mr David Johnson: Once it's fully in the system.

Mr Christie: I don't have that number exactly. If we don't have it exactly handy, we will certainly supply it to you.

Mr David Johnson: Can you give me a guess? If it's over a 20-year basis --

Mr Christie: The principal and interest on $1.6 billion would be roughly in the order of $150 million to $175 million a year, perhaps up to $200 million --

Mr David Johnson: Probably about $175 million a year, depending on interest rates. That's for that amount. Then of course there's the subsequent year's amount of $854 million, which will be now working its way through the accounts as well, and any future years'.

I'm looking at your sheet on the balanced operating budget in 1998. In terms of the possibility of balancing the budget by 1998, which is what you're speculating, there are a number of assumptions you'd have to make to arrive at that very happy conclusion. I'm very doubtful, obviously, that you're going to do it, with what I've seen so far. What assumptions have you made on expenditures through that period of time, total expenditures, bottom-line expenditures -- not just program, excluding debentures etc, but total expenditures?

Mr Christie: The expenditure assumptions are as shown in the medium-term plan, and because we look at this on an operating-versus-capital basis, the operating expenditures were assumed to grow at less than the rate of inflation, which is on the order of 1.5% per year.

Mr David Johnson: Can you give me a number, for example, for 95-96?

Mr Christie: Those numbers are included, I believe, in terms of the questions Mr Phillips posed, the actual numbers out to 1998-99. I believe you have a copy of the answers to the questions Mr Phillips posed.

Mr David Johnson: It's possible, in this mound of information.

Mr Christie: We can pass you a copy. This is page 2: The table there indicates both the revenues and the operating expenditures.

Mr David Johnson: What I'm trying to get my mind around is, what are the key components in balancing the budget? That's the bottom line. The deputants this morning expressed that as a key concern. Obviously, expenditures are a key component. The growth in the economy is another key component. Let's look at the growth: The growth you've forecast is 4.3%.

Mr Christie: Economic growth.

Mr David Johnson: Economic growth is 4.3%. I think I saw a chart here earlier that indicated that, in terms of consulting with various organizations, the average is 3.9%. If the growth was one percentage point lower than you've forecast, if instead of 4.3% it was 3.3% -- and certainly there are many organizations such as the Royal Bank and such as the first deputant today who would indicate that 3% would be about what we can expect -- what impact would that have in terms of balancing the budget? I would presume that would have an impact on your revenues.


Mr Christie: Steve, why don't you talk about the revenue impact.

Mr Dorey: By way of context, the average recovery period, the average period of expansion, in the postwar period has averaged about 5%, so 4% is not particularly high by historical standards. One per cent lower growth would cost us about $350 million to $400 million on the revenue side and the impact on expenditures could be as high as $200 million, so $600 million could be the full impact of a 1% lower growth.

Mr David Johnson: Six hundred million dollars a year. Over the course of four years, that would be about $2.5 billion. Is that about right?

Mr Dorey: That's right.

Mr David Johnson: In terms of expenditures, then, from your numbers, you're bringing the deficit from $8.3 billion down to zero in four years. Is that purely as a result of the economic growth we're talking about or is there any expenditure reduction? I'm trying to interpret your numbers on the fly. It looks to me as if the expenditures are actually up.

Mr Christie: The operating balance goes from about $6.3 billion in 1994-95 -- so that's not including any of the capital -- out to a surplus of $1.3 billion in 1998-99. The path is as you see there: Over the four years, operating spending grows by about $3.5 billion whereas revenue grows by about $10 billion, the difference being the reduction in the operating position; and the growth in revenues is due to sustained economic growth at the levels Steve described.

Mr David Johnson: Would the growth in revenues be a reflection of the 4.3% economic growth? Is that solely what we would --

Mr Dorey: Inflation obviously makes a difference. It's nominal growth that is the principal driver.

Mr David Johnson: Inflation plus economic growth. Ten billion in extra revenues during that period would seem to be quite a hefty increase. I guess that was realized prior to 1990, during a three-year period, but it's very unusual growth in the province of Ontario over any period of time. Are there any other factors other than inflation and economic growth that would contribute to those extra revenues?

Mr Dorey: I think that's quite a modest pace of growth compared to some of the earlier periods. There are no tax measures built in there, and obviously in the earlier periods there were some significant tax increases. Revenues from 1985 to 1990 grew by a little over $15 billion for a comparable period.

Mr David Johnson: That's what I indicated: prior to 1990. But that was an exceptional period in Ontario's history, I would submit. At any rate, I guess the question was, have you incorporated any tax increases? And the answer is yes?

Mr Christie: No. The answer is that there are no tax increases built into this.

Mr David Johnson: So this is purely because of inflation and economic growth.

Getting back to the deficit: When the minister refers to a 30% reduction in the deficit, can you give us the numbers he's referring to, that the deficit has gone down by 30%?

Mr Christie: That's the $12.5-billion to $8.5-billion figure over the two years ending with 1994-95.

Mr David Johnson: From the $12.4-billion deficit in 1992 to $8.3 billion.

Mr Christie: Yes, those are the current numbers.

Mr Wallace: Actually, the number used is $8.5 billion. They're the numbers published in the budget of last year.

Mr David Johnson: If we were to look over that same period of time in terms of the actual borrowing, what the province of Ontario has had to borrow, and it was added on to the debt, would there be the same 30% reduction?

Mr Christie: I don't believe the reduction is as large for net borrowing.

Mr David Johnson: During those same years, the borrowing and what has been added to the debt of the province of Ontario has actually exceeded $10 billion, I think, every year.

Mr Christie: I don't have the exact figures; we can get those for you. Certainly, the public accounts figure for 1993-94 was $10.8 billion and that, on the new basis of presentation, is what was added to the debt in 1993-94.

Mr David Johnson: I guess it depends on what numbers you choose, but in actual fact in 1992, $11.6 billion was added to the debt and in 1983, $10.2 billion. This year, 1995, what are we going to add -- the Royal Bank says another $10 billion -- to the debt of the province of Ontario?

The minister also referred to the social contract, and I just want to shift to that for a minute. He indicated that there's a $2-billion saving for the social contract which would not be coming back into the budget of the province of Ontario. Yet we hear stories that there are municipalities, for example, with vital services -- policing, firefighters, those kinds of services -- that have incurred costs which have simply been shifted to the end of the social contract. I wonder what information you have on that situation.

The concern is that there will be millions of dollars, tens of millions of dollars, I suppose, in a bubble or a balloon that is about to burst about one year from now in March 1996 when the social contract expires. What information do you have on that?

Mr Christie: As a matter of fact, we're having a survey done at the moment. In fact there was a survey done about a year ago, I think up to a year ago, in terms of the steps that local bodies had taken and the planning that had been done locally in terms of exit from the social contract. We're redoing it now as we get to within about a year; we're coming up very quickly now to one year till the end of the social contract. We're having that survey redone so that we have a better sense of the kinds of steps that have been taken locally to prevent that sort of bubble.

We've also, as the minister announced at the time of making our major transfer announcement, broadened the program of adjustment that was in place for the broader public sector and the public sector in general in terms of labour adjustment and training and restructuring to aid in the changes that will be coming over the next couple of years.

The studies that we've done, the work that has been undertaken, some of which has been shared before and will be shared again when this new survey is done, has not indicated a large identifiable bubble. One of the reasons, I think, is that one of the main sources of a potential bubble, which would be that compensation trends would have diverged markedly between the public and private sectors, really hasn't happened because wage settlements in the private sector have been quite low as well, market wage settlements have been quite low. Relative wages have not gotten dramatically out of line. However, we'll see when we do the survey what the people who actually have to plan for this on a day-by-day basis with their bargaining agents feel about the pressures they're facing.

Mr David Johnson: So the kind of thing --

The Chair: Our time has expired, Mr Johnson, amazing as it seems. When you're into that most interesting dialogue, the time just whistles by, as I say.


Mr Jamison: Again, going back to the handout from the Treasurer in and around job gains, I guess the new figure as of December is that your revised data indicate that 196,000 new jobs have been created in the province. That's from February through December. I believe that's what that graph indicates.

When I look at that and I look at job gains by industry, manufacturing seems to be far outpacing, again in the job gains area. Just to be more specific so I get some idea of where these job gains are coming from, would that be in the auto-related end of manufacturing and, if so, are those major auto makers or are those jobs in manufacturing parts and so on, large or small manufacturing? Is there a breakdown in that light at all?

Mr Dorey: The transportation equipment sector as a whole accounts for about, over that period, 40,000 of those 75,000 jobs. The precise breakdown between the assemblers and the parts we don't have. We think the parts section has done very, very well. Over a good part of the year there was a lot of retooling going on, so there has been hiring coming on now with the assemblers, but we think the parts sector has done very well. I don't have the precise breakdown between the two parts of the auto sector, though.

Mr Jamison: Okay. One other question I have again deals with the graphs. I find that the graphs are interesting, but it's also important to know where the information actually was sourced and comes from. The graph on real output, and it's a projection again from 1995 through 1998, shows on that particular bar graph the average annual per cent of growth and Ontario again leading Canada in that time frame; not only that, but also leading the G-7 countries, such as France, Germany, Japan, Italy, UK and the US, for an example. Where did these statistics come from? Are these internal statistics or are they statistics by major think tanks or a combination thereof?

Mr Dorey: They're surveys of primarily financial institutions and econometric firms. Basically, the data for the G-7 countries are taken from a survey done by a British firm called Consensus Economics, which surveys all the major investment houses and so on. The Ontario data we take from a survey we do simply because it's not available in international surveys. We survey all of the major banks and all of the major econometric forecasters and that's the sample they're taken from.

Mr Jamison: Again, the growth that we've seen in jobs in the province, is it centred as it traditionally has been -- and we've had a discussion prior and the questions that have been asked here have evolved somewhat around other jurisdictions, for example, Alberta benefiting tremendously from a mini oil boom.

Our economy here in Ontario has always been very much auto-related. That's been the centrepiece of our manufacturing industry. The investment levels that are taking place in that industry -- and again, it really refers to the page entitled "Major Automotive Investments in Ontario" -- those investments totalling $5.5 billion heading into 1997 are announced investments, number one; they've been already announced in the plans to invest those kinds of funds in the auto industry here. Is that what you would call normal investment in the province or above in this sector, or average investment?

Mr Dorey: Well, it's certainly substantially higher than it was in the previous period. It's a very strong investment. I don't have the precise figure on how it compares with part of the 1980s. I can take that up. I'll have to get back to you.

Mr Jamison: That answers part of the question, but the other part is that these are assured, these have already been announced by the various companies. We notice it goes through to 1997. The ones in 1996-97 are important to the economic outlook, especially being really an automotive-centred economy here in Ontario. So the ones such as the Honda plant at $20 million, Ford expanding the Oakville truck plant at $400 million, Toyota, $600 million, again Ford in Windsor at $650 million, those particular ones that are scheduled for, say, 1996-97 have already been announced by the companies.

Mr Dorey: That's right, yes. They're firmly committed to those expansions.

Mrs Haslam: I'm smiling because I don't know if you're going to like my questions. But that's okay; I'm used to that anyway.

A balanced operating budget in 1998 is what that slide is showing. We had a gentleman in this morning who felt that wasn't possible, but I think back to some of the other impossible things, like the Tories saying a 30% tax decrease and a balanced budget in four years, and I think of the Liberals promising to reduce the province's unemployment rate to 6% when the government is looking at an estimate of 9%, and a promise to balance their operating budget within five years.

We've got three different things about balancing operating budgets, balancing the total budget in five years, lowering taxes by 30%, creating 725,000 new jobs, looking at a 6% unemployment versus a 9% unemployment, and then we have a fellow who came in this morning and said they're all not going to work. So when I look at this I'm going to say, is that going to work? Have you got the facts and figures and do you feel confident in saying that you can balance the operating budget in four years?

Mr Christie: The fundamentals of the chart you're looking at there are matters that have been described. We've talked about the rate of economic growth. We've talked about the degree of expenditure restraint that will be required there. Not every element of a plan works to the last decimal place of all of the assumptions that are put into it, and whether adjustments are made and what those adjustments are in terms of changing the plan to meet the eventualities that occur is a matter for the government of the day. No plan automatically unfolds.

I guess the question is whether the assumptions are realistic. Steve has discussed the economic assumptions. The expenditure restraint assumptions are for people to judge, I would have to say. It then becomes a matter of the management of the plan to carry it through or not, which is a matter of government decision-making.


Mrs Haslam: I wondered why 1998-99 and why not by the year 2000 or something like that. I see that your "Budgetary (Requirement)/Surplus" is still at a negative, and when you look at a projection, why did you stop there? Why didn't you go on? Do you think there's going to be a major degree of change to re-evaluate before you reach the year 2000? Because you haven't gotten to zero, is what I'm saying.

Mr Christie: The budgetary requirement is still not zero. As the minister discussed this morning with the analogy of paying for the groceries, the government's focus on this for the last several budgets has been in terms of balancing the operating position, and that's what has been put forward as the goal and that's what the management plan has aimed at. Then, shifting it to the other line has not been part of the discussion to date.

Mrs Haslam: Okay. I understand operating versus -- I'm getting very good at finance, to tell you the truth. I'm enjoying it.

When we look at the other plans, do the Liberals have a plan? Have you looked at the Tory plan? Have you looked at what they are suggesting? Have you taken that into consideration?

Mr Christie: Certainly, I have not personally done work on alternative plans and I'm not aware of staff work on that.

Mr Wiseman: When the Liberals allow the Bank of Canada to increase its interest rates, we've already ascertained that for a 1% increase we will lose approximately 20,000 jobs. Can you give me some idea of the mix? How many small business bankruptcies are these Bank of Canada policies that have been allowed to go on under the Liberals and Tories for the last 10 years -- how many small business bankruptcies are included in that 0.4% decrease in GDP for every 1% increase in interest rates?

Mr Dorey: I'm sorry, I can't tell you.

Mr Wiseman: Let's try it from a different direction then. When the Tories pushed the interest rates up from 1987 to 1990, they pushed the unemployment rate up as well. What was the rate of bankruptcies during that time? Do we have those numbers?

Mr Dorey: No, we don't have them.

Mr Wiseman: Oh. Well, that really makes my next question a little difficult then because my next question was, if we had the absolute numbers of bankruptcies caused by the Liberal-Tory policies, we'd be able to then figure out the average number of people who were unemployed because of the Bank of Canada's policies of increasing the interest rates. My just quick guess was that the interest rates from 1987 until about 1991 went up about 4.5%, almost 5%, which would be translated in rough numbers to about 100,000 people, and on to welfare after unemployment insurance somewhere in the neighbourhood of 180,000 to 200,000 people just because of their bank policies alone, roughly.

Mr Dorey: Well, I do have your bankruptcy numbers, if that helps.

Mr Wiseman: Okay, great.

Mr Dorey: The number of total bankruptcies in Ontario rose from 10,500 in 1989 to a peak of 31,300 in 1992. So that's an increase of about threefold.

Mr Wiseman: About 300%, yes.

Mr Dorey: The increase was about equal. Consumers' and businesses' bankruptcies both increased about threefold over that period.

Mr Wiseman: Consumers and business. Do you have the impact of these? Because obviously if you've laid off around 100,000 people, then these people and their families don't have purchasing power, so that would have an impact on the economy, especially in the retail sector. Which area has the highest multiplier impact from the Bank of Canada's interest rate policies?

Mr Dorey: The initial impact is strongest in the interest-rate-sensitive sectors, which would be primarily housing and autos.

Mr Wiseman: Well, we know what it did in housing and autos in Ontario.

I think I just ran out of time.

Mr Kwinter: I'd like to go back to some of the auditor's concerns and some of the concerns of the other people who made presentations today. On your slide that we just referred to a minute ago, "Balanced Operating Budget in 1998," you show that the deficit for 1994-95 is going to be $8.3 billion. Is that correct? If all of your assumptions are correct and all of your projections come in exactly on target, when you go to the public accounts hearings in that year, what will be the deficit that you'll be reporting?

Mr Christie: This is for fiscal year 1994-95? I couldn't estimate that for you at the moment. I know the auditor has made some comments and estimates on that, but there are areas that we just don't have an estimate of yet, particularly some of the revenue accruals. I couldn't give you a realistic --

Mr Kwinter: The auditor feels it's going to be $9.9 billion and the Royal Bank feels it's going to be $10.154 billion. In either case, there's approximately $2 billion in additional deficit allocation that is going to be attributed to 1994-95. Is that a fair estimate? I mean, it's ballpark.

Mr Christie: Ballpark, those numbers would be consistent with the kinds of things that we have found to date, and some of the adjustments --

Mr Kwinter: This gets to the crux of the auditor's problems, the bankers' problems, the bond rating agencies' problems and my problems. If you can tell me now, before you've even gone into this thing that, yes, that is probably going to be the figure, why doesn't the budget reflect that? Why are you using phantom numbers? Why are you using an 8.3 number that everybody knows is not a real number? It makes good political sense but it makes no economic sense, and that is the crux of what the auditor is complaining about. He's saying: "Let's get some reality in these numbers. Let's make sure the numbers that I have to audit at public accounts have some relativity and some semblance of relationship to the numbers that are projected in the budget."

The other problem is this: From a strictly crass political point of view, the average citizen up until recently had one interest only in the budget: "What is it going to do to my taxes?" Now there has been an awareness, a sensitization, you might say, to the fact that the deficit is a problem, and the polls that are coming out right now are saying -- I think it's 47% of the people in Canada take the debt problem as the number one problem facing the government.

The problem I have is that when the Treasurer stands up on his budget day and says, "The deficit is going to be $8.3 billion," in fact he knows, you know, I know and everybody else who has any kind of familiarity with this process knows that that isn't the figure. When you take a look at your net borrowing requirements -- because the concern that the people are now aware of is that they have to pay this debt and this debt is going to increase probably by about $11 billion when you take into account your net borrowing requirements -- why can't you come clean and tell the people: "You know what's just happened? We have taken our $90-billion debt and we've increased it to $101 billion. That's why we have to make the cuts that we're making and that's why we have to do the things we're doing"?

But everybody deals with this phantom number that has no relationship to anything, and I suggest to you that this $8.3 billion is meaningless other than in the mind of the Treasurer who's looking for some political advantage. Can you respond to that?

Mr Christie: I think, as the minister has noted both today and on other occasions, the past budget contained the information on borrowing requirements that you've mentioned and the next budget will contain the comparison of the budget presentation to the public accounts presentation, which are different concepts, different ways of measuring the government's financial transactions. Both will be provided, as will the borrowing requirement information, so the full information will be available to people on which to assess the government's financial plan and financial transactions both on a cash basis and on another basis.

So there will be more information available probably than there has been at any time in the past.


Mr Phillips: I will follow up a little bit on that because this is becoming quite frustrating for the opposition, as you can appreciate. We have an audited statement that reflects the real numbers in the province for 1993-94, last year: $10.8 billion. The auditor has told us very clearly that he's looked at the budget, the 1994-95 budget, and in his opinion -- and I trust him; he is the individual the people in the province count on to give us the straight numbers on the budget.

He has said that the way the government is reporting its finances, and this is quoting him, does not reflect financial reality under any accounting rules. This isn't a battle of the accountants. This is just straight-out facts. He is saying that the government is, and these are his terms, incorrectly treating capital grants as loans receivable, incorrectly reporting sale of office buildings as revenue and incorrectly treating, last year, the GO Transit sale as revenue. This year, I'm told, you've got similar activities in the answers you gave, answers that the ministry gave us.

The pre-budget document that the government is using in going around the province and saying, "The deficit is down 30%," the auditor is saying: "That's bogus. It is not down 30%, and if you, the public, believe it's down 30%, you aren't being given numbers that reflect financial reality." So here we are trying to be helpful in spending our time on the budget, but we're being given numbers that don't reflect financial reality. Those are the auditor's words; they're not my words. They're the Provincial Auditor's words, which I assume no one's ever challenged, and I certainly believe they don't reflect financial reality under any accounting rules.

Even today we've been told that the numbers the government is going to present show a deficit of, as you said, Monte, I think, $8.4 billion, going down to $6.5 billion, and the auditor says, "We're playing with incorrect numbers." How can the ministry staff be helpful to us in knowing what the real deficit reduction is? I guess I'll reinforce Mr Kwinter's comments. The auditor gave us these numbers today saying that if you go ahead with these transactions -- and right now, after nine months of the year, we're told you are going to go ahead with these transactions. If you go ahead with these transactions, can you confirm that these transactions alone will raise the deficit by $2 billion?

Mr Christie: Is that the piece of paper that the auditor tabled with you this morning?

Mr Phillips: He tabled it with us this morning. He tabled it with us two months ago.

Mr Christie: I'm not sure exactly what's on it, Mr Phillips.

Mr Phillips: Okay. Well, why don't we pass it around to him?

Mr Christie: Yes, these are transactions which in the public accounts statement would largely, on consolidation, become part of the deficit, as they did last year.

Mr Phillips: I wanted to follow up on some of the answers that I got on my written questions. One was on the number of employees, and I think actually I'll combine the answer you gave to Mr Johnson in your written response. I gather that the number of employees in the Ontario public service in 1994 would be 82,600 what you would call full-time equivalents. Is that right?

Mr Christie: At March 31?

Mr Phillips: Well, it just says -- I guess it is. Yes, right, March 31, 1994.

Mr Christie: Okay.

Mr Phillips: Those numbers include, I assume, OTAB, the Ontario Training and Adjustment Board, the clean water agency, the realty corporation, the Ontario Financing Authority.

Mr Wallace: Yes.

Mr Phillips: And the expenses of the Ontario Financing Authority, its overhead, its staffing expenses and things like that: Where would that show up in the provincial expenses? It's not included in the public debt interest, is it?

Mr Christie: We'll have to get that information for you. Was that not provided in the responses?

Mr Phillips: If it was, you need a code, in my opinion, to figure it out. It says, "At present, ORC, OTCC and OFA are part of government overhead as their costs in the above-noted categories are paid for from their parent ministries' voted appropriation." But I was unable to find in the voted appropriation the Ontario Financing Authority's overhead costs. Maybe you can just show --

Mr Christie: If it wasn't provided with the written evidence, we'll follow up.

Mr Phillips: But you can assure me it's not in the public debt interest costs?

Mr Christie: As I say, we'll follow up in terms of where it is.

Mr Phillips: All right. Just to follow up a little bit on some of these sales of -- I gather it is the intention of the government this year to sell some more government buildings. Is that this figure, 1994-95?

Mr Christie: Yes, 1994-95.

Mr Phillips: How much in government buildings? How much revenue do you anticipate getting from the sale of that?

Mr Christie: I believe there's $250 million scheduled to be sold. I'll be corrected -- no, that would be correct there.

Mr Phillips: It's $250 million this year of government buildings? Now, last year we sold a lot of the prime stuff. We sold the Frost building, the Macdonald building, the Michael Starr building, all the good stuff around here. Where's the other $250 million? Are we down to the jails yet? Have we sold any jails?

Mr Christie: Barbara Stewart is the director of our capital and crown corporations branch.

Ms Barbara Stewart: My name's Barbara Stewart. We have not yet seen the final list of properties to be sold this year. The transaction is yet to take place, and it will be a variety of buildings, but I can't confirm one way or the other, Mr Phillips, as to whether there are jails in those transactions. They'll largely be a variety of fairly small buildings across the entire province, but they will be buildings that are marketable from the perspective of the ORC, on the one hand, or ones that we wish them to manage on our behalf, so it'd be an ongoing program of government.

Mr Phillips: So it might be similar to the Michael Starr building or the Macdonald Block or the Frost building?

Ms Stewart: Potentially so, yes, although I think you're quite right, that most of the larger assets have been sold.

Mr Phillips: And will they be office buildings? I understand we had been thinking about selling off some of our jails and stuff, or is this just strictly office buildings still?

Ms Stewart: I can't confirm precisely what's going to be in the package, but the focus will be on office buildings and/or properties that are marketable.

Mr Phillips: But it is possible it could be a jail or a courthouse.

Ms Stewart: It is possible.

Mr Phillips: When will we know that?

Ms Stewart: We'll certainly know by the end of the fiscal year.

Mr Phillips: All right. But you will continue to show that as revenue, even though the auditor has said that's incorrect, to show it as revenue?

Ms Stewart: It's the way the budget plan is arranged for the current year.

Mr Phillips: Last year we sold and then bought the GO trains back in Bermuda -- I think it was the Bermuda Leasing Co or a Bermuda holding company; I forget the name of the company -- and a deal done in Bermuda I guess sold it and bought it back in half an hour or something like that. We're planning this year to sell ferries and airplanes and other assets. What other kinds of assets would we be selling off? I gather we're selling them and then leasing them back.

Ms Stewart: It is primarily aircraft, ferries. That's about it for the package now.

Mr Phillips: There's $165 million. Again what the auditor has said was incorrect, but we'll proceed with that.

Changing the subject just slightly, I gather that it is still the plan on the driver's licence, where you buy now a five-year driver's licence, we're still showing all of that revenue in the year it's collected as opposed to -- will that mean, because I think you started the five-year driver's licence in 1993, that in 1993, 1994 and 1995 we collect five years' worth of revenue and then in 1996 and 1997 there will be very little revenue from driver's licences available?

Mr Christie: It will depend entirely, I guess, on how many people elect for the extended term.

Mr Phillips: Do you have a choice of a five-year licence?

Mr Wiseman: You can do one. You can just do it one year at a time.

Mr Christie: You can do one. You can do from one to five, as I understand. I've certainly personally done one, so I assume that's all right.

Mr Phillips: But the ones that pay the five years, you're showing all the revenue in the year it's collected.

Mr Christie: That's right. The ones who choose the longer terms, on the budget accounting system or presentation system the cash is shown the year it flows. The ultimate impact, after it's been in place for a while on a cash basis, will depend upon the proportions that select.

Mr Phillips: In terms of the federal infrastructure spending, the joint program with the federal government, where I gather it provides a third of the spending, the province provides a third of the spending and the municipalities provide a third of the spending, are you showing on the government's books the federal capital spending, whatever it is, a couple of hundred million dollars federal infrastructure spending -- is their portion of the federal spending in Ontario's capital expenditures?

Mr Christie: Yes, sir, it is. Their contribution is shown as a revenue, and then our disbursement of our contribution and their contribution to the local level is shown as an expenditure.

Mr Phillips: So you've taken whatever money the federal government spends on infrastructure in Ontario and shown that as revenue and then added it on to the capital budget of the province. Had you considered doing the same thing with the municipalities, to report their spending as part of your spending?

Ms Stewart: We actually administer the federal portion of the spending on their behalf, which is why we're receiving their funding as revenue and then expensing it out to the estimates process. We aren't administering the municipal share. In fact, the way we're treating that federal share of the infrastructure program is quite equivalent to the way a number of other provinces would treat it and the way we treat similar payments, like CAP refunds, that relate to a specific spending program.

Mr Phillips: I remember an exchange, actually, with the Premier, who said I was absolutely dead wrong in saying this was the case and that I should apologize to everybody.

The Chair: On that note, Mr Phillips, I thought I'd let you --

Mr Carr: Are we out of time?

Ms Stewart: That's been clarified.

Mr Phillips: So I was right and he was wrong. And you plan to continue to do that. Is anybody going to tell the Premier?

Ms Stewart: Actually, we already have.

Mr Phillips: Have you? Okay.

Mr Kwinter: Are you also going to take credit for spending the whole amount that is being spent by Ontario?

Mr Wiseman: Well, if the feds are trying to take all the margins --

The Chair: At this point I'd like to thank the Ministry of Finance staff for ably assisting the committee with answering its questions this afternoon. This committee stands adjourned until 10 am tomorrow morning.

The committee adjourned at 1604.