Tuesday 7 February 1995

Pre-budget consultations

Committee on Monetary and Economic Reform

William Krehm, chairman

Ontario Coalition Against Poverty

Mike Lerner, Metro Toronto organizer

Ontario Road Builders' Association

Arthur Ryan, executive director

Ontario Public School Boards' Association

Donna Cansfield, president

Sharon Summers, vice-president, and chair, policy committee

Bob Dureno, member, technical advisory committee

Sam MacKinley, member

Canadian Mental Health Association, Ontario division

Glenn Thompson, executive director

Carol Roup, senior director, policy, research and branch services

Ruth Stoddart, executive officer

Conference Board of Canada

Dr Jim Frank, vice-president and chief economist

Paul Darby, director, forecasting and analysis

Doug Nevison, senior research associate

Canadian Federation of Independent Business

Catherine Swift, executive vice-president

Judith Andrew, director, provincial policy, Ontario

Ontario Natural Gas Association

Paul Pinnington, president

Bernard Jones, consultant

Canadian Tax Foundation

Tom McDonnell, director

David Perry, senior research associate


*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:

Malkowski, Gary (York East/-Est ND) for Mr Abel

Also taking part / Autres participants et participantes:

Cunningham, Dianne (London North/-Nord PC)

Clerk / Greffière: Mellor, Lynn

Staff / Personnel:

Campbell, Elaine, research officer, Legislative Research Service

McLellan, Ray, research officer, Legislative Research Service

The committee met at 1004 in room 151.


The Chair (Mr Paul R. Johnson): The first presentation this morning is Mr William Krehm, chairman of the Committee on Monetary and Economic Reform, if you would please come forward and make yourself comfortable. I'll remind you that you have one half-hour within which to make your presentation and to field questions. Whenever you're ready, you may proceed.

Mr William Krehm: I will try to keep my presentation within 15 minutes, with a danger of overrunning a few. Perhaps you'd let me know when the 15 minutes have come because I would like to give members of the committee an opportunity to ask questions and to even play the devil's advocate.

The Chair: I'd be pleased to do that.

Mr Krehm: I'd bet dollars to doughnuts that every last member of this committee knows about the editorial in the Wall Street Journal early in December nominating Canada as "an honorary member of the Third World." However, if you depend on the Globe and Mail for your information, you will not be aware of a front-page article in the Wall Street Journal that pursued the matter of the Mexican meltdown, with very contrary conclusions. It appeared in the January 30 Wall Street Journal, front page, and another one yesterday about the responses of the government in Manila, the Philippines, about this.

We had had it drummed into us that the one way of dealing with our debt and the pressure on our dollar was to put on a blindfold and slash social programs: "Don't ask which and don't ask when. Get it done with." But under the impact of the Mexican peso's collapse, it appears that there is, after all, a way of handling an exchange crisis other than panic. It's very simple, says the Wall Street Journal: exchange controls.

With that scaffolding to keep the sky from caving in, we could go back to a whole menu of policies that helped us cope -- I'm talking of Canada now -- with a deficit that amounted to 142% of the gross domestic product after the Second World War. By 1975 that percentage was down to 22 and a fraction, and we are now having panic sowed because that proportion has got back to somewhere in the 70s.

But let's listen to the Wall Street Journal's front-page article. "The dizzying [Mexican] reversal raises new questions about whether unfettered private capital flows really facilitate economic development." It was more than a meltdown, by the way, of the Mexican peso. It was a meltdown of the dogma that has driven economic policy, financial policy, for the last 20 years and brought us to where we are.

Exchange controls are the ultimate no-no in the dogma in question. This has set us up as helpless prey of hot-panted international money speculators to the point where a few weeks ago a Bay Street money changer had the gall, on the heels of the Wall Street Journal editorial, to predict that the Canadian dollar would slip into the low 60s, and on the strength of that the Bank of Canada raised interest rates almost by a full per cent.

The Bank of Canada was founded in 1935 not to serve as a patsy for international money speculators. It's time that we realize that and it was time that we sought out alternatives still on our law books to deal with these trumped-up international currency crises. In the Bank of Canada Act there are still provisions for defending this country against such scams. There is no limit on the amount of federal or provincial bonds that the Bank of Canada can hold. And when the central bank holds federal bonds, the interest paid on them reverts substantially to its one shareholder, which happens to be the government of Canada. That's not funny money. That's the good capitalist institution of dividends.

With the financial scene dominated by such shenanigans, nobody in public life, no matter what party he may belong to, has the right to remain ignorant of the changes that have taken place in the ground rules of banking over the past few years. Without serious discussion in Parliament, the Bank Act -- I'm talking of the Bank Act, not of the Bank of Canada Act -- was revised in 1991 to do away with the reserves that the chartered banks had to hold against their loans. Those reserves earned the banks no interest, so to help the banks out of the mess they had gotten themselves into financing speculative mega-real-estate deals and speculative mega-takeovers, the reserves were abolished. Along with the United Kingdom and Switzerland, Canada is the only country that has abolished the reserve requirements for its private banks.


At the same time, the Bank for International Settlements, the central bankers' club in Switzerland, to the sessions of which Mr Martin would not be allowed, introduced new risk-based capital requirements that stated that government bonds, being risk-free, require not a penny of the banks' capital at all, whereas loans to business require 8%. Naturally, this has led to the banks turning their backs on the needs of business, especially small businesses, and they have loaded up to the gills with government bonds.

Over the last four and a half years, the holdings of our chartered banks of federal government bonds have gone up from $3.5 billion to $35.5 billion -- that's an increase of 900% -- whereas the holding of the Bank of Canada of federal bonds has gone down from $10 billion to $6.4 billion to make room for the increased holdings of the chartered banks. That, at current interest prices, represents a social aid program to our chartered banks in excess of $3 billion a year.

Of course, government bonds are really not risk-free, if you consider that our central bank is still pursuing a zero inflation goal through higher interest rates. Our newsletter, which every member in the Legislature receives and I hope reads, predicted the meltdown of bonds almost two years ago. It has happened. Bonds, with higher interest rates, have plummeted and you have had mutual funds, pension funds and financial institutions in a disastrous state which is just beginning to come to public attention.

At the last meeting of the Toronto-Dominion Bank an irate and very well informed shareholder raised the point of what the losses were on the vast hoard of government bonds, and the answer was, more or less, that since they're going to hold them to maturity, then there is no loss. But meanwhile, that means that $35.5 billion of bank money is frozen, because if they sell their bonds now in order to make their capital available for loans to business, they will sustain losses.

Our deficit, our debt and our recession have largely been byproducts of Bank of Canada policy and these most recent revisions of the Bank Act. I haven't time to go into details except in the question period, but the fact is that for years under John Crow our short-term rates were kept over 5% higher than the American short-term rates and that is why the provincial governments of Ontario and other provinces went outside the country in order to get lower interest rates and this of course is the bugbear that they are scaring the wits out of the Canadian public with today.

What has all this to do with the government of Ontario, which is not a shareholder in the Bank of Canada? Can it do anything about the situation except suffer? The province of Ontario and its people have an immense vested interest in the Bank of Canada Act. Under its article 18, which every member of your Legislature should read and memorize, the Bank of Canada is empowered to advance to the provinces one quarter of their anticipated revenue -- this is short-term -- until the end of the first quarter of the following year. But as I have already said -- or have I? -- it is also empowered to hold provincial bonds with no limit or even debt guaranteed by the provinces.

The only constraints, and obviously there have to be constraints to these powers, are to be found in the real economy. If in fact we have a boom that's getting out of hand, for example, the building industry in 1988 with the collaboration of the banks, then obviously we have to restrict that and the way to restrict it was by raising reserves instead of raising interest rates. But reserves have now been abolished and that alternative way of fighting inflation is not on the books. We can put it back again.

Ontario, first of all, is the victim of Bank of Canada policy as much as and even more than most of the other provinces. This was a prosperous province and should be a prosperous province. It's got to educate itself and its public. It's got to ask questions. It's got to insist on honest dialogue instead of the bogus charade that the Finance minister in Ottawa has been conducting. We must listen to the alternatives. We must ask why what worked in the most prosperous 20 years in the history of this country should be completely ignored. But beyond that, the province has to send out signals -- urbane signals but firm signals -- that there is no reason for our being at the mercy of money speculators.

There is in existence in Ontario the Province of Ontario Savings Office. You'd hardly know it. However, with the chartered banks paying as low as one quarter of 1% in savings accounts -- some of the banks do; others go as high as 0.5%; I'm talking of the big chartered banks -- the provincial savings bank could be far more generous to depositors and still bring money in for constructive use, investments, at a time like this, without having to go abroad. At least the point could be made. It would be a signal. That signal is long overdue.

There is, however, another plan that I would like to develop and then I'm at the end. I've been advocating this for many years. There is no question about our economy becoming tax saturated. The taxes, legitimate ones for legitimate ends, have risen to such a point to run our complex, urbanized, high-tech society that they are messing up the signals of the price system. So what we design in the way of policy should be headed towards detaxing the economy and finding alternative sources of revenue, alternative to more taxation for the public sector.


The Chair: Mr Krehm, I just want to let you know, as you requested, you've just gone beyond your 15-minute mark.

Mr Krehm: All right, I will hurry up.

I do want to outline this: The policy should be designed with parameters headed down rather than up; not raise interest rates, not raise taxes, because that will continue it.

Let's refer to street smarts. Forget about high economic theory. If operator A sells something to operator B and both of them are allergic to paying taxation, there is a classic scam. That scam consists of invoicing the price of what is sold well below its real price and B lending A the money at far less than the going market rate of interest.

Now, suppose the government pursued a legitimate version. That, of course, is a scam; the tax people would not take kindly to it. But suppose the government of the province pursued a version of this that would be highly legitimate. In short, it could offer tax bonds to the taxpayers long-term, not to defer a portion of their taxable income but to give them all-time exemption on that portion of the taxable income. The tax bonds would run for long-term, 20 or 30 years, and the rate paid on them would be far, far below the market rate, say, one half of the market rate.

The province would recoup the interest forgone in two ways: first of all in the lower coupon on the bonds, but secondly for the last almost 50 years, 40-some years, we have had a price gradient, prices inching upward fast or slow. It was not all inflation. Some of it was solid investment that transformed this country from a semirural land into a highly urbanized, better educated one, better living one. This doesn't show up in the price index because people don't buy fresh air by the pound, there's no meter on our noses, but that is a benefit that eludes the price index.

Now, under the tax bond scheme, if this should continue even with the detaxation of the economy, then there would be less capital gain when the bonds fell due and had to be repaid. That is, if it continued, there'd be a greater capital gain because after 20 years the real value of the dollar would probably be worth 60% of what it is today.

If it failed in that respect and the price gradient continued fairly high -- no, the contrary. I have set it out. If the price gradient were tamed, there would be less capital gains but we would have moderated the price movement without ruining the economy.

Now, you could also attach insurance features to this plan for death of a breadearner, for disability, for long-term involuntary unemployment. The bonds could be cashed in, redeemable at par, which would represent a bonus. Now that our social programs seem to be headed for slashing, such supplementary social programs would be very, very timely.

That's all I want to say as introduction. I apologize for having run over my 15 minutes.

The Chair: Thank you very much. We have about three minutes per caucus per question and answer and we'll start with Mr Kwinter.

Mr Monte Kwinter (Wilson Heights): Mr Krehm, I read with interest your presentation, and I in fact read regularly your newsletter when it comes to me.

Mr Krehm: Thank you.

Mr Kwinter: I have a concern in your sort of premise in that it seems to be almost an isolationist point of view in that all you deal with is the central bank and what it has the ability and not the ability to do, without taking into account external factors and the fact that we are in a global economy. Can you tell me, for example, I think all economists agree that there just isn't enough capital --

Mr Krehm: All economists agree on nothing, Mr Kwinter.

Mr Kwinter: Well, I'm saying that they all agree in varying degrees to the fact that there isn't sufficient capital generated within Canada to meet the needs of the central government, of the private sector and of the debt obligations of the various levels of government and, as a result, we have no choice, we have to go out and attract investment outside the country.

In order to do that, we have to have a competitive interest rate, so that if the United States has an interest rate of whatever and it increases its interest rate, then it becomes more attractive for foreign investors to put their money into the United States. If we want to attract money, we have to at least match, and because of our high debt ratio exceed, that of the United States, which is one of the factors that determines our interest rate. Do you have any comments on that?

Mr Krehm: I certainly have. It is a fiction that we have to borrow savings from abroad. I have the advantage over you, Mr Kwinter, that I remember the 1930s very vividly, and there were only holes in Canadian pockets when the war broke out. How in hell did they finance the war with a minimum of foreign borrowing and go on to finance 20 years of prosperity? When we push up interest rates, we make our exports uncompetitive and we make our manufacturers uncompetitive on the domestic market, and this is what has happened.

Now, don't take that on faith value. The last time I was here, Mr Kwinter, you asked, "If it's such a good idea" -- that was some years ago -- "why hasn't it been done?" It has been done. Go back to our history. We have been brainwashed in a reverse of archaeology. Archaeologists dig up the past; the people who run our media, and the government, unfortunately, Ottawa, bury our history. Let us consult our history. Let us have dialogue; nothing more. Let us have dialogue.

The Chair: We have to go on to Mr Carr.

Mr Gary Carr (Oakville South): My question was similar to Mr Kwinter's. As he stated, we are in a market economy whether we like it or not. The people who are supporting our social programs are foreigners who are giving us the money to pay for it, and when the bonds come due, they can move it to Switzerland, Japan, the United States, without even going to the bank.

You seem to be saying, and I know you talked a little bit about the tax bonds, that there's some other alternative. Could you explain to me -- I know you've done it once, but I still haven't been able to grasp how we can get money to pay for all these programs or to pay for the government spending without going to the people who are holding the debt.

I still, and maybe it's me, can't comprehend where you're going to get the money, because the foreigners right now are the ones who are supporting it, and if the interest rates don't reflect, then they can move it tomorrow without a bat of an eye, and then we're really in trouble, because then we're talking about slashing the programs because we can't afford to support based on our own savings. Could you explain to me where we would get the money if the foreigners don't invest?

Mr Krehm: Yes, I will try. First of all, I must say that tax bonds are not advanced as a solution, as the overall solution. It is an example of the type of policy that could be formulated if we cleared our minds of what has been crammed into them.


First of all, as advocated on the front page of the Wall Street Journal, we could resort to exchange controls if the dollar came under pressure. This does not mean that people couldn't get exchange, but those people who go to Florida might perhaps have $1,000 instead of $10,000 or whatever they want to spend. This has been used. Let us consider using it again. In that case, by keeping our interest rates reasonably low, we would export more and our dollar would be strengthened by a strengthened real economy behind it instead of just the manipulation of an artificially high dollar. That is how we got into debt.

I would suggest, Mr Carr, that you study what happened. You will find indications of it in the newsletter that we publish practically on postage stamps, but you will see references to other books, to the history of Canada, and see that what we want is dialogue. We're not giving you gospel. It has been done. Let us study how it was done. Since this is one of the most victimized of our 10 provinces by John Crow, let's look into the matter.

Mr Carr: Thank you very much. Good luck.

Mrs Karen Haslam (Perth): I'm going to ask two very brief questions, and I know that the Chair is going to ask for two very brief answers, so we'll do our best, right? It's always fun to be at the end when there's no time left.

Two points: Number one, I'd like your comments on whether it would be a good idea for Ontario to offer savings bonds. You seem to talk about Ontario tax bonds, but I wondered if you would make a brief comment on the idea of Ontario offering savings bonds to the people to keep the money back into our own province, because I've always liked that.

The second thing is, you've talked about a "long overdue program of educating the public to our real economic problems. Let's have dialogue. Let's study." Would you just make a brief comment on how you feel we can educate the public to the real economic situation that we have out there?

Mr Krehm: As far as bonds are concerned, that is fine, but you will find, of course, that as long as the government of Canada pays higher rates to attract foreign money, the province is going to be at a disadvantage. I think the point can be made best in the savings field, because if you consult your Monday Globe and Mail any week you will see what the chartered banks pay on savings accounts: one quarter of 1% in most cases.

If it were just a few tens of millions of dollars that were attracted, the province would be making a point. The spread between the loans when made by the chartered banks to business and what they are paying that famous saver, that's not much encouragement, is it? It has been indecent.

Your other question was, where do we --

Mrs Haslam: Let me just say I agree with you. I've just done my reconciliation at the bank and couldn't understand why I was leaving my money sitting there at a quarter per cent when there were other places to put it. So I agree with you in that area, but the other area was a "long overdue programs of educating the public. Let's have dialogue. Let's study." I just wondered if you had a point of how that could be done a little more, how you get that message out to the public at large.

Mr Krehm: Since we, the province, are the victim -- and politicians particularly; because you are really put in a mug's game with no funds and good intentions, you end up the villains -- just study how it was done, ask what the alternatives were. Just start with the banks. We have had six bank annual meetings and the CEOs started in choreography by lamenting how the people of the country have lived beyond their means and then after that came the record earnings and the record salaries.

Mrs Haslam: Profit.

Mr Krehm: Nobody wants to quarrel with the banks. We want to quarrel with them, but we want to lure them back into banking. We're not enemies of the banks. You can't run an economy without banks. But they're abandoning their field. Just ask questions, urbane questions. Then comes up the question of the $3-billion annual social program that the government of Canada has given the banks. There is, by the way, a table on that at the end. The sources are entirely from the Bank of Canada review.

So start at any point. Let's be proud of our history and not bury it, because that is the clue for alternatives, and nobody's asked to swallow these alternatives. Let us have discourse.

The Chair: Our time unfortunately has expired, and I want to thank you, Mr Krehm, for making a presentation before the committee this morning.


The Chair: The next presentation this morning is by the Ontario Coalition Against Poverty, Mike Lerner, Metro Toronto organizer.

Mr Mike Lerner: Before I begin my speech I just want to tell you that the Ontario Coalition Against Poverty is a group that represents the poor and unemployed of this province. We have 16 member groups across the province, ranging from northern Ontario to southern Ontario.

I just wanted to say that I understand that the federal budget will have a lot of say in this budget. I understand that the Liberal government is planning to cut the Canada assistance plan and replace it with block funding to fund social services. I understand that will put pressure on this government to pass those cuts on to its programs. Also, Ontario has been hard hit by the Progressive Conservatives putting a cap on the Canada assistance plan in the early 1990s. As I understand it, 30% of the money that's spent on general welfare assistance is provincial dollars and 50% is provincial dollars to family benefits allowance.

What I want to say is that in the last few years the provincial government has undertaken welfare reform. Basically, what they're doing is, they're tidying up the eligibility of the system of the welfare and family benefits systems. What that is leading to is that agents of the government, representatives of the Ontario government, are being asked to make most of the cuts being brought down. As many of you already know, the administration of a system is probably the key way that you can make cuts, by tidying up the eligibility, adding a few policies. You don't have to say in the media that you're making the cuts, but cuts can be made by denying people what they're entitled to.

I run an advocacy committee called the Toronto Direct Action Committee. We've helped approximately 60 people on welfare and family benefits get cheques by just fighting the administration of it, either municipal or provincial. I just want to say that what the cutbacks agenda is leading to is a few tactics that I want to bring to your attention here today. One of them is arbitrary conduct. Most workers may cut someone off for any reason. I'm just going to give you a few examples of certain situations.

A young high school boy who was in grade 13 came to us. His father had been laid off, and so in order to maintain going to high school he had to get welfare. His worker had cut him off because he considered that grade 13 was post-secondary education, and just after that he was forced to quit school.

Another one is stalling tactics. Quite often, welfare will put procedural roadblocks in front of people. If you have to bring three documents in, they'll ask for the first one and then, when you've brought that documentation, they'll ask for another to stretch out the amount of time you're waiting for assistance.

The other thing is that unproven allegations often lead to people being cut off. This has been enhanced by the provincial government's hiring of 270 welfare cops, or eligibility review officers, as you like to call them. Just presently, I had a woman, a single mother of four, come to me crying and sobbing because she was cut off welfare on the last day of the month.

That means she and her four children will have to go an extra 10 days with no assistance and her landlord is now harassing her for the amount of money that she owes in rent. Basically, what happens is that anybody can call in any complaint and call welfare and say, "This person, her husband is still living with her," or something of that sort. What will happen is welfare can cut you off for that without proving that those allegations are in fact correct.

Now, also as serious is the problem of people with no fixed address. Quite often, people with no address or the homeless people are left on the streets of Toronto or other areas for up to four weeks waiting for a measly $250 from welfare. A couple of cases that have been brought to my attention are people who have contracted AIDS, HIV, by blood transfusion, mostly people who are haemophiliacs. They got $6,000 from the Canadian pension plan just recently. Welfare has taken $3,000 from each of these people because you're only allowed to have so much assets on welfare.


What has happened to these people is they have actually, by an error by the Red Cross in the early 1980s and the way we treated AIDS at first, contracted HIV and when they are able to get a measly $6,000 for their life, they weren't even able to spend it on themselves and get themselves -- a man who called me wanted to buy a nice bed because he's bedridden most of the day. What happened is that the bed cost more than he was allowed to spend and now he has been cut off for a few months from welfare.

So I'd just like to say that when government makes cuts to social programs, invariably people will be thrown into the streets, because as it filters down through the system, eventually a few people will have to be cut off the system.

Right now, I understand that the federal government is offloading all the responsibilities on the province. I know the cuts to transfer payments and I understand that the CAP being capped has hurt this government considerably, especially as well since the recession in the 1990s and the rolls in Ontario have probably doubled in the last five years.

What I want to say is that fighting the government offloading is important, because the amount of money that you give to people on welfare, on social assistance, directly affects the wage levels in this province. I know our programs are means-tested, but if a worker has a measly welfare to fall back on and a boss knows that, they're able to push the worker and the workforce to do things that they may not want to. As well, if you have a whole bunch of desperate people out there looking for work, it tends to push wages down. If someone was offering $7.50 an hour and they got a flood of applicants who are desperate, they can easily say: "Why am I paying that extra amount of money? I can easily pay minimum wage." So it tends to bring down wages.

I just also wanted to say there is a fiscal deficit and there's real deficit out there. I've had people come to me who just came out of prison and since they did not have ID they had to wait on the streets of Toronto for four weeks in order to get money. Now, you take someone who just got out of prison and has to wait four weeks with no money, obviously they're going to be tempted to commit a crime. The fact of the matter is you cannot push people off the system. People will not starve in silence. When you make cutbacks, you're going to force people to commit crimes, there will be higher domestic violence and you're going to have to step up policing.

I just want to say before I close here that basically there's a lot of misery out there, there are a lot of people suffering. I think if you offload the cuts back on these people, it will come back to haunt this government.

I just wanted to make a statement directed to the government, especially since the NDP government made a lot of promises before it came into power. I think they're facing circumstances as they're soon realizing that if they don't change their fiscal planning, they'll have no one to knock on doors for them in the next election. That's basically all I have to say to the committee today.

Mr David Johnson (Don Mills): Thank you very much for your deputation. Certainly you have raised some good issues from the point of view that welfare is a problem and has been a problem in the province of Ontario. I'm just trying to recall the statistics. I think the caseload in 1985 was about 250,000 people in the province of Ontario. Even during the boom years, the final five years of the previous decade, 1985 to 1990, when the economy flourished, the welfare rolls grew by about 50%, which is incredible, in the province of Ontario. You'd hope that the welfare rolls would go down, but they did increase.

Then over the last four or five years, since 1990, I think, as you indicated, the welfare rolls have just about doubled in the province of Ontario, so they stand at somewhere around, I believe, today about 670,000 cases, representing over 1.2 or 1.3 million people in the province of Ontario, and that is indeed a tragedy.

What's happening, I guess, as you've indicated, is that the federal government is taking action to cap the welfare rates. From their point of view, I think, being in their shoes, the federal government certainly has an enormous problem. The debt that this country is facing and the annual deficits cannot continue; they have to be addressed.

I think the federal government has expressed concern that the welfare rates in the province of Ontario on average are considerably higher than the welfare rates across the rest of Canada. The last couple of governments that essentially put the bulk of those rates into place would probably say that that's because the cost of living in Ontario is somewhat higher. Nevertheless the federal government cannot, from their point of view, match rates which escalate at an extremely rapid pace in the province of Ontario, and I assume that's why they put the cap on.

In terms of offloading on to the people, that's happening, and there's no way around it, because the deficits in the province of Ontario over the past four years, the real deficits, the increase to the debt in the province of Ontario each and every year has been over $10 billion. That's why the debt in the province of Ontario has increased from somewhere around $42 billion in 1990 to $90 billion as it stands here today.

What happens when the debt gets that high is that the interest rates to pay for that debt escalate. It's not surprising that the interest rates have doubled from 1990 from $4 billion in interest in the provincial budget to $8 billion this year. For sure they'll go up another $1 billion in next year's budget, and that's just interest to pay the debt.

Then the problem is that with that money that goes to pay the interest -- and a lot of it now is going offshore, Japanese investors, European investors, not staying in Canada -- and what happens when that interest goes up is that there's less money to pay for welfare, there's less money to pay for health, there's less money to pay for education.

Indeed, if you look in the budget of the province of Ontario for the last couple of years, you'll see that in actual fact the amount of money for education and training has gone down and the money for health has actually gone down; not by much, but by a little bit. The void is being picked up just to pay the interest on the deficits. So there's a form of offloading on to the people of the province of Ontario, in the sense that they're getting less money for services, less money for health, less money for education.

So it's a problem, and when we talk about fraud and the extra police that are put out, I know one of my constituents in my riding within the last year was noted for paying for, I think it was, two or three houses and convicted of welfare fraud to the tune of, I think it was, about $150,000.

Mr Lerner: Do you have a question, sir?

Mr David Johnson: I'm simply stating some of the background, and I'll give you a chance to react to it.

Mr Lerner: Okay, sure.

The Chair: You have two minutes left, Mr Johnson.

Mr David Johnson: But that's why it's important to address fraud, because everybody else suffers. If there's fraud, then those who should get the service suffer. That's why it's important to address the deficit and the debt of the province of Ontario. I think the best thing, and you will surely see this, working with people who are on welfare, that the majority of them want to work, and the best thing that we could do in the province of Ontario is to push forward a platform, an economic policy and platform, that would enable people to get back to work. With that, I'll stop and let you react to my comments.

Mr Lerner: Basically I think when you cut welfare you're not really going to save anything. Now, you think you may make some wholesale cuts across the board, maybe make a rate cut because you think that Ontario rates are too generous, but the fact of the matter is that when you cut rates you also create not only -- I mean, there is a deficit out there of people who are obviously cut from any sort of civil society, but there is also a debt that people will commit crimes. You cannot force people off a system when there are no jobs out there. Unemployment is going to remain high. Basically, when you cut people out of welfare you force them to steal and you have to step up policing.


Now, when you talk about welfare fraud, yes, there is about 2% to 3% welfare fraud, and basically when you cut back on fraud that's not a money-making deal; you just pay for the extra staff that you have to hire to step up eligibility. It's been proven in Quebec. Robert Bourassa did it in the late 1980s and Bob Rae's attempt has probably basically broken even.

Right now on the Toronto Stock Exchange they have 10 people who handle all stock fraud for the whole system. There was an article in the Star. That's definitely not a left-wing paper by any means.

Mr Carr: The Toronto Star is not a left-wing paper?

Mr Lerner: I mean, honest reporting; it's not a left-wing paper. Anyway, what they said was that they cannot keep up with all the fraud that's going on. So it's not really the fact that there's not money out there.

I understand your concerns with the debt and the deficit, but you're not going to really get the savings that you want from cutting welfare. There's no savings out there. If you save a small amount of money, you'll lose a lot in the type of society you'll see created out there, and you're already starting to see it. The hostels are jam-packed; there's no room in them. You cannot keep forcing people into hostels. Once you start creating misery on that level, you are going to see it come back at you one day and it's not going to be pleasant. That's all I have to say.

Mr Norm Jamison (Norfolk): Thanks for coming today to make your presentation. As you know, we're here to listen to the views of all Ontarians about what kind of budgetary arrangements should be made for the upcoming year. Of course there's been great emphasis put on the whole question of deficits and debt and taxes and all of the things that are out there today: front-line, headline kind of stories about where we are as a people both here in Ontario and in Canada as far as deficits are concerned. It's my point of view that that's a very important issue and I'm sure many of the Canadian people and the people of Ontario also recognize its significance.

But there are two kinds of deficits; one you can deal with directly with the cut, slash and burn mentality that seems to be more prevalent today than ever before. My fear is that if you go with that in a very direct, short-term approach, you run a very real risk of creating a much larger social deficit, and I'm not sure that one deficit is any worse than the other when we speak about those two. There are people -- I think people even within this room -- who are talking about just that: talking about cutting levels of payment; people here who express views, and certainly views about another Premier, Premier Ralph Klein, who takes pride in putting welfare recipients on buses with one-way tickets. I don't believe, again, that we should create a larger social deficit when dealing with the real problem of bringing deficit levels down.

What do you envision, as far as where you're coming from is concerned, as the needed changes in the system that will not just in the short term but in the long term serve to help people in their futures and allow them the ability to really leave at one point or another the assistance that many people -- and I would say the vast majority of people on welfare -- really wish they didn't have to receive?

Mr Lerner: A few of the logistical problems that I've run into is there are a lot of people who want to get off the system, but it seems that the administration of the system is -- true, obviously government planning is being harder and more rigid.

There are people who are actually trying to get themselves out of the system, but they run into roadblocks, like OSAP. If you want to go back to university and take out loans, loans are considered income for welfare, so something like that will prevent people from going out there and getting training.

So the system in itself does not make sense. It's not trying to get people off the system; it's trying to actually either keep people on the system or try and just get them off the system on the streets now. When you have no fixed address, when you're homeless, it's the hardest to get welfare because they've got a chance to get you off the system, they've got a chance to move you just like Ralph Klein. It's just done under the table here.

The welfare rates in Ontario are the highest in the country so that's why a lot of people come here. A lot of people from Alberta have been coming here because they're just simply starving in Alberta and they come here.

But as far as the debt and the deficit is concerned, I think it's ludicrous that we have people sleeping on the streets, having actually to sell crack or their bodies 10 minutes away from where people have millions and billions of dollars hidden away and we don't go after that. The fact of the matter is there is misery out there and we're not doing anything about it except enhancing it and that's basically my point.

Mr Gerry Phillips (Scarborough-Agincourt): Just to see if we can get some advice from you on how we can perhaps deal more effectively with our social assistance system, and it's a challenge, I think, yesterday we had some statistics from the Ministry of Finance, and the federal government's payments for social assistance to Ontario have gone up an average of 10.5% a year for the last 10 years. It used to be that the federal government, I think, provided $860 million, according to these numbers; the year that's just ending, they're providing $2.6 billion.

As I say, it's gone up an average of 10.5% every year, which is a challenge. The economy isn't growing at that rate; there are a lot of demands on government spending. Even in the last two years, while employment's been growing in Ontario, the money from the federal government has gone up, I guess, around 15% over the last two years for social assistance.

Even when we saw probably the best growth we've seen in the last five years, in 1994, the year that just ended -- actually the number of people, as you know, on social assistance went up again. So we have a challenge. It's finite resources being asked to serve infinite demand. This is one of the areas where, as I say, the federal government has provided transfers given through the province, increasing an average of 10.5%, 10.7% a year for the last 10 years, and yet the message is, "That's nowhere near enough."

My question to you is -- you know the area quite well -- have you any advice for us on how we can spend our money more effectively, how we can assist people in this area and how we can perhaps look at some ways to economize in the area?

Mr Lerner: I don't know how you can economize it as well, but I know that this government is probably considering some sort of workfare; I'm sure they're all considering that.

Basically, the reason why the amount of people on social assistance has gone up recently is because UI requirements have been tightened as well and what you have to look at is that there are some logistical things you can do to the system to make it run a little better, but it's not going to do a whole lot.

The fact of the matter is there are no jobs out there. There were a couple of jobs in that Pickering auto plant; 20,000 people came. It's not the question of people who don't want to work, it's the question that there are just no jobs out there, but if you go into workfare -- which I think this government may be considering; I think it's on the table as well -- as far as social assistance is concerned, you're basically creating a disincentive to employ people. That's why I say steer away from welfare. I would also make it easier -- first of all, there are 20,000 single mothers on welfare. There are people being on the wrong system as well in this province, so you have to make sure that there are different needs met, especially people who are long-term unemployed. There are a lot of single mothers out there and I think you have to tune the system in to those problems.

As well, I think you should do something with OSAP and welfare so that if people want to go back to university and take some loans out and if they think it's financially viable, they can actually maybe turn their lives around, because you've got women who have been in the home for the last 20 years. The job market just isn't out there for them, so they want to go back to school maybe for a couple of years, maybe in a community college, and if they get OSAP and if they're on welfare or if the single, employable person is on welfare and they want to go back to school, they can't because it's considered income.

Just a few things. That's all I can think of off the top of my head.


Mr Phillips: The government publishes something called the Ontario Economic Outlook, which is the sort of stuff we read; not too many in the public perhaps read it. But what it shows is the number of people unemployed from 1984 to 1994 has gone up by about 110,000; the social assistance caseload has gone up by 420,000, and of course I gather you essentially double the caseload for the number of people on social assistance. What has been the cause of that? Why would there be -- yes, I know more people unemployed, but the number of people, quite a dramatic increase in social assistance caseload over the decade?

Mr Lerner: That's the way you do stats, right? The government will say that unemployment has decreased, but the fact of the matter is I think there have just been more people who have given up. They're not considered unemployed because they're not looking for work any more. There are more people who fall in those cracks. So even though unemployment has decreased statistically, I think why welfare has gone up is because people have given up looking for work. They don't fit in what "unemployment" is defined as, what "unemployed" is defined as.

The Chair: Thank you, Mr Lerner, for making your presentation before the committee this morning.


The Chair: The next presentation this morning is by the Ontario Road Builders' Association, Mr Arthur Ryan, executive director. Please come forward and make yourself comfortable.

Mr Arthur Ryan: Thank you, Mr Chairman. I apologize; I normally have a couple of people with me to support my views, but I can't do it. The weather's bad and everything else, so I'm here myself.

Mrs Haslam: You were held up on the roads.

Mr Ryan: Exactly right, yes. There's not enough money spent on highways.

If I may, I'd just like to read my brief through and then I'll certainly answer any questions you may have.

The Ontario Road Builders' Association represents virtually all of the major firms involved in constructing and maintaining Ontario's provincial highways and municipal roads. The association was formed in 1927 and now comprises more than 170 companies in over 50 communities across Ontario. Our members represent a large labour-intensive industry, both union and non-union, working in an area which has a substantial impact on the quality of life of Ontarians and the economic viability of the province. We welcome this opportunity to present our views to the standing committee and trust they will be given due consideration in the preparation of the 1995 budget.

Economic development: The roadbuilding industry is an important segment of the Ontario construction industry, which latter is the province's biggest industry, its largest employer, is Canadian-owned, largely by small entrepreneurs, pays the highest wages and is the province's largest taxpayer. These facts cause our industry to have a substantial impact on all segments of our society. We fully concur with the Treasurer's statement that Ontario "must generate economic renewal that will create and maintain jobs, attract dynamic new investment and promote business confidence."

Economic renewal: The government has consistently stated that economic renewal can only be achieved from jobs training and investment. In these times of severe economic restrictions, it is virtually impossible to attain these aims through normal economic and fiscal policies. We do believe that Ontario's economy is on the move. The real volume of Ontario's economic output increase of 4.5% in 1994 was attributed to job creation, some through infrastructure investment and cost-cutting measures.

Deficit reduction: The obsession with deficit reduction is laudatory. However, deficit reduction is not achieved only by reduction of expenditures or tax increases. Increases in revenue far outweigh the current commitment to cost reduction. Increased revenue for the most part can only be created through increased employment. We feel very strongly that this administration must emphasize the job creation aspect of the equation to achieve any substantial reduction in the deficit.

When revenues are increased through job creation, the effects are extraordinary. These increases have immediate impact on economic activity. The general confidence generated causes reduction in interest rates, and as we have seen in past years, sparks economic recovery. We must continue to foster growth. We say fight the deficit, but not obsessively. Do not slacken efforts towards job creation.

Capital investment: Our industry is extremely pleased that the government of Ontario has continued with its commitment to infrastructure and building renewal in this province. There is no doubt in our minds that money spent on capital investments for new highways, new roads and new infrastructure in general had an immediate and extremely important impact on economic development in this province.

We support the government's position and stance in continuing its commitment to differentiating between capital and operating expenses.

We have continued to support the formation of the crown corporations to ensure that funding for these capital programs be handled through a different manner and investment in these capital programs can conceivably be written off over the life of the project.

I'll tell you as an aside, we have taken this position for the past three years, and it was only in reading my paper this morning, the Globe and Mail, I guess Floyd Laughren, the Treasurer, had made that commitment too. I tell you, representing my industry, we're very appreciative of that commitment to that kind of philosophy. We fully believe in that.

If you have a capital investment, the government has to operate -- and I'm an accountant by profession, so I can make these statements with some credibility. In a normal private sector industry, when you have a capital investment, you write off, on a diminishing balance or an amortization basis, the cost of that asset, and there's nothing wrong, in this economy today, with doing that. I think this may be a change of philosophy, but that's my personal view. As I say, I'll read through the brief in a second, but certainly that's the way the government has to go, and I think generally to achieve the aims we're all looking for, any government, whether it's provincial or federal, will have to assess that situation and make that commitment to -- when they make a capital investment, don't write it off immediately but amortize over the life of that investment. That's the key to what's going to happen in this country in the coming years. That's just an aside from my statement here.

We are fully supportive of the partnership arrangements developed by this government. The private and public sectors working together can develop an infrastructure program which is more economical, can be built more quickly and will prove to be in the best interests of the Ontario taxpayers.

We do feel, however, that the private sector involvement in Highway 407, which is a specific project, was changed somewhat in its initial concept, and inasmuch as the government is providing the capital funding for this project, we do feel that future projects of this nature should have private sector funding involved in the process.

Infrastructure investment: The phrase "infrastructure investment" has today become a household word. The federal government announced early last year a commitment to job creation, and job creation based on the commitment to capital infrastructure investment. Philosophically, this created a change in public perception; that is, the public became more familiar with the view that sustainable growth could be achieved by job creation.


At this point in time, deficit reduction is the current panacea.

For the past three years, and many of this committee here today have listened to our representations over those years, our association has always maintained that the resolution of deficit reduction is predicated on the basis of cost reductions, but by far the most important factor of deficit reduction would be through the revenue stream which can only be achieved by job creation.

As stated, we praised the current administration for their total commitment to differentiation between expenditures made for capital and operating costs. Over the past years we have dealt, as an association, with many administrations. Each of those administrations has made varying commitments to job creations created by investment infrastructure. This current administration has followed through on that commitment.

The federal government's infrastructure investment program announced last year got off to a slow start, but has gradually started to have effect.

We do urge the Ontario government to continue pressure on the federal government to commit to a national highway program.

As an aside, the last program that was announced by the federal government was a cost-sharing program between the province, the federal government and basically the municipalities, which was a $6-billion investment and we fully support that. The problem was initially that over the first six or seven months there was a slow process in having those funds allocated, and I'm not sure whether it's the municipalities' fault or the federal government.

For some reason, it seemed to be that the federal government, in a sense, had provincial approval, but almost bypassed the provincial mandate and went directly from the feds to the municipalities. The municipalities at that time spent money on areas which, representing my industry, would not be deemed to be infrastructure investments. But we have no quarrel with that because I think the mandate -- realistically the federal government said to municipalities, "Spend the moneys as long as it's on capital investment that will create jobs." So we support that philosophy. We're very supportive of that. It started to generate some revenues in the last few months and I think most of us in the province, whether we're general contractors or roadbuilding contractors, have supported that process.

The second phase I'll just read through now and this I'd like to touch on in some detail.

As committee members are aware, Ontario agreed in principle with the program of federal-provincial cost-sharing for a national highway program which would be funded jointly by both those parties.

Unfortunately, the federal government has recently stated that it has no funds available to commit to this sorely needed national program. However, agreements are being made regionally by the federal government with individual provinces, and it is extremely important that Ontario maintain pressure to ensure that the Ontario taxpayers become beneficiaries of these federal funds and to express very strongly to federal administrators that Ontario must be part of any regional funding program.

This is the most important issue that our association is addressing today. The transportation association of Canada three or four years ago came up with a program and they determined at that time that there was a need for a national highway program. Their forecast, if you remember, of the cost of that program was something like $18 billion spread over a 10-year period. The federal government, which was a participant in that program, fully agreed with that process.

What has happened over the past two or three years, because of probably the political situation or whatever, there's been a backing down by the federal government to ensure that this national highway program goes into effect. Going back a little while, one of the reasons that the federal government had not pursued the program was because of so-called Ontario intransigence in the sense that Ontario felt that they had to have a proportionate allocation of funds based on their revenue stream going into the federal government and the size of their province. The federal government said no, this could not work on that basis. We are our brother's keeper, in a sense.

Last year, the Ontario government, through Bob Rae, said, "We agree that we may have to back down a little in the sense that we will not request all the funding that we require, but we would really like to participate in this program."

In an October meeting last year with Doug Young, the current Minister of Transport, every province across the country agreed that they would pursue this national highway program and each province, exclusive of Quebec, would commit to that program. The federal government then at the last minute said, "There are no funds available."

Our problem right now, frankly -- and it's not just my association, it's every association across this country: The Canadian Construction Association, the Better Roads Coalition, the Council to Renew Canada's Infrastructure, cannot believe what has happened. The situation right now is that the federal government has said, effectively, "We can't have a national highway program, but we will deal, on the regional basis, with certain provinces." The federal government today is saying that it has no new moneys available, but what it will do is reduce transfers to wheat subsidies or Via Rail subsidies, and any moneys it can accrue from the reduction in those transfers will be allocated to those particular provinces. That means that the east coast provinces, New Brunswick particularly, Nova Scotia and PEI, will benefit, and the west coast provinces, Alberta and BC, will benefit from the reduction in those subsidies, but Ontario again will not be a beneficiary of any of those things.

That's very important; that's the most important issue we're facing today. There's a lot of money involved. I'll tell you, in terms of job creation in this province, the federal commitment which this government -- and I'm sure, Gerry, we have different governments here; there may be changes over the months. But certainly it's very important that whoever the incumbent provincial government is, it has to assess what's happening here, because if we're not careful, the federal government will bypass Ontario again with a major capital commitment, and the capital commitment, I tell you very quickly, creates jobs in this province. It's the most important thing my association and the other coalitions I'm involved in on a national basis are very concerned about.

I know I'm digressing from my statement. Revenue streams can be created provincially, but don't ever forget the federal participation. I think we sometimes tend now to get so obsessed with our own internal dealings that we're missing, in a sense, a lot of moneys that conceivably could be allocated to this province.

If I may, I'll just continue.

Members of this committee may not feel as committed as ourselves to the implications of the economic benefits of infrastructure investment. We can only assure those members that we have been involved, over the past many years, with advisers from various sections of the economic mainstream who have fully supported the economic benefits of infrastructure investment:

A dollar spent directly in construction generates at least the same in terms of all the ancillary industries involved in the process. A dollar spent in construction means an immediate commitment to job creation. A dollar spent in the manufacturing industry unfortunately needs much more lead time to generate specific economic returns in that industry sector.

The concern in this province today, and this may well not be reflected across the country, is a lack of confidence in the public about whether there is a commitment towards job creation and that the public can feel some confidence in maintaining the present positions or jobs they have.

This committee's responsibility, we feel, as it is the present government's, is to rebuild confidence in the Ontario public to ensure that all segments of society are working towards the common goal of creating jobs, increasing prosperity, and generally affording a stability of lifestyle that has been missing in the past couple of years.

Public-private sector partnership: The task ahead in the coming weeks and years is to ensure that all Ontarians become confident of a better future and are all equal beneficiaries in the process. The way to most easily achieve this aim is to promote the partnership of workers, business, communities and government. Our industry's involvement in major capital programs, working in different ways with the province and municipalities, is in the forefront of this movement.

We urge all committee members to emphasize the partnership arrangement, work more closely with industry, seek innovative means of achieving goals and challenge all parties to be proactive and innovative in their thinking.

New ideas are more and more critical to economic and social success. Let's all work together.


Mr Gary Malkowski (York East): Well presented; it was very good to hear. I wanted to thank you for your comments, particularly about our job creation. We've worked very hard on that end with our Jobs Ontario Capital projects, which is a fairly big program, in building highways, for example Highway 407. Our government has a commitment to that and we agree fully with what you say.

In the Ontario government, from our own experience, we have experienced a lot of discrimination at the hands of the federal government -- the previous Conservative government and the present Liberal government -- in terms of transfer payments. We have been cut back and it's hurt us. None the less, we try to persevere and continue with the programs and our commitments. But I wanted to thank you for your comments, sir.

Now just a quick question. Specifically in terms of recommendations to us in our next budget, how much do you think one should spend in terms of jobs, capital projects and investment, and in building? What kinds of recommendations would you bring forward to us? What kind of moneys would you like to see put into Jobs Ontario Capital for job creation? We have a commitment to that to continue, but I'm just wondering what kind of numbers you'd like to see.

Mr Ryan: In all honesty, as I mentioned in the brief, this administration has committed much more than we have received from other administrations in the past. It's not a question of asking for more moneys; it's a question of maintaining what we have. Also, the key is that we would like to promote more private sector involvement.

You had a representation yesterday from the Treasurer and from the Auditor General, and there was some comment about what I guess the Auditor General termed to be off-book accounting relative to capital investment. Frankly, our association has promoted that concept for many, many years. It promoted that concept with David Peterson.

We have a strong position to take in the sense that when you are making an investment of a capital nature, any administration, whether it's NDP, provincial, or a PC government, has to differentiate between expenditures made for operating expenses and capital investment. We fully support that process. Whether it's through a crown corporation or whether it's through in-book accounting, or whatever the provincial government calls in-book accounting, is really irrelevant.

I tell you frankly, our association's view, and we've studied this across the world, is that if Ontario doesn't come up with the kind of program where it has the private sector, creative funding, dedicated funding, some form of other means of funding a national highway program, and new investment -- not just highways; capital investments -- it's going to be so far left behind it's going to curl everybody's hair. It's so obvious today, if anybody reads all the national trade papers, which I do in my industry, that everybody in the capital highway program today is looking for innovative means of financing.

This government has taken the first step, and we are fully supportive of that, except I think in the final analysis, on 407 it sort of backed down a little and did the funding itself. If they had continued with the thrust of private sector involvement in that process, no matter what administration, whether there's a change in administration or whether it's the incumbent government or whatever government, we'd have no problem with continuing that program.

Our concern as an industry right now is that a new administration may say: "This is really just an increase in deficit. Maybe we have to look at that and revisit that thing." It's really not that simple. It's a capital investment. A capital investment must be amortized over the life of that project.

The Chair: Just for the record, I want to correct something you said. When you spoke of the Auditor General, I believe you meant the Provincial Auditor.

Mr Ryan: The Provincial Auditor. I just read the Globe and Mail on the way down. I wasn't here, but I just read his comments.

The Chair: Just in case someone happens to flip through Hansard and see "Auditor General," I don't want them to think that person was here.

Mr Ryan: I see. I think he's totally out in left field, frankly. My two sons are chartered accountants and they work for that government.

Mr Phillips: Just so I'm clear on your advice, your advice is that we should spend roughly $4 billion a year on capital each year, which is roughly what we've been spending?

Mr Ryan: I'm not saying that, Gerry, so much. All I'm saying is that I think what has happened -- and it's a quantum leap; I really do believe this very strongly -- is that this current administration has finally, as I mentioned earlier, differentiated between capital and operating expenses.

Whether your government comes into power in a couple of months or whatever, you're going to be faced with the situation and you will have to support the process, because I think it's a genuine commitment. I think it means something to everybody in this crowd.

All I'm concerned about, frankly -- I mean, I'm at the end of my tether. I'm not trying to promote the roadbuilding industry in that sense, but I know that what has happened in the past year or so is so beneficial to our industry and to the economy in general. It's extraordinary, and I don't think anybody, any of you parties here, should berate that. You have to go along with that. In the final analysis, analysing all the input I get from all the European countries, they're all looking at that kind of --

Mr Phillips: I think you know from our meetings that we've been very supportive of the 407. I think that's a good idea; no problem.

Mr Ryan: Absolutely.

Mr Phillips: If I can paraphrase what your advice has been, you're saying the province should spend $3.5 billion to $4 billion a year in capital, because that's what it's been spending each year --

Mr Ryan: I would think so.

Mr Phillips: Let me finish -- but only report the amortized portion of it as an expense. So we spend $4 billion a year, every year, but we only show one twentieth the cost of that.

Mr Ryan: No, no. No, that's not quite what I'm saying. All I'm saying, as an accountant by profession, is that provincial governments and the federal governments are the only agencies that do not relate to the type of expenditures they make in the current year, every expenditure they make.

Mr Phillips: Business would show it as depreciation, I gather, you would say.

Mr Ryan: That's right. Normal business practice is obviously --

Mr Phillips: And what would you think the depreciation is per year? I'm just trying to get at that. Is it $4 billion a year?

Mr Ryan: Well, no, I wouldn't really make a commitment on the type of --

Mr Phillips: Roughly. We need your advice on how we should be accounting for the expenses, that's all.

Mr Ryan: Let me answer it in a different way. It's not the dollars so much; it's just a method of accounting for them. I would suggest, as I mention in my presentation, that the concern we have as an industry is the fact that some of the current commitments, whether they're capital or operating, are made to capital.

Going back to 407, specifically 407: Our industry had a real problem with the 407 in the sense that the initial concept of 407 was private sector involvement directly.

Mr Phillips: That was ours too.

Mr Ryan: Private sector funding -- everything was private sector. I tell you, if that commitment had been made by this administration, which it fell short of, we would have no problem with that, because the private sector would have been involved. The questions today would have been, how did the Ontario taxpayer accept -- you know, do they think it's worthwhile to pay the tolls on the highway system when those revenues are going to reimburse the private sector? In every other country in the world, that's the process going on right now, and I think the provincial government today made a mistake in the sense that at the last minute it decided in its own wisdom that it would not go to private sector financing but would handle it publicly, just the cost structure.

Mr Phillips: I'd just say, if you've got other recommendations on good private-public sector partnerships, certainly we're interested in looking, because I don't think there's any doubt.

Mr Ryan: Let me just ramble on for a second, if I may. I always do anyway.

The Chair: Our time's running very short and the Conservative Party would still like to ask a question, Mr Ryan.

Mr Ryan: Oh, I'm sorry.

Mr Carr: It's on the same lines, because I agree with both you and Gerry that in all areas we need more private sector involvement. In fact, we're on the record that for things like day care and nursing homes there should be more private sector. You can continue with Gerry's, if you like. It's along the same lines.

What I see happening, though, and the difference between what's happening with this government and the new government, what your group would like to see, is that when the 407 is built, the contract would go out and the funding would be in terms of tolls.


The government would set the criteria, put it all together and say to the private sector, "You bid on it now; the project will cost X billion dollars; we're going to pay for it over 20 years with tolls," and the government wouldn't fund it at all. It would be private sector with the tolls paying the total cost of it and the government for all intents and purposes getting out of funding any new roads. Is that what your group is requesting and is that how you see the future going?

Mr Ryan: Actually, what is happening with the 407 right now is that the government is building the 407, and the toll revenues -- the point I was trying to make was that the initial concept of the 407 was that it would be a build, operate and transfer, which means in effect that the private sector builds it, operates it for a certain period of time, collects the revenues and then at the end of maybe 20 or 25 years, for whatever nominal amount, it reverts back to the government.

That never happened. What happened was that the provincial government decided, on the bidding process between these two consortia, that the cost of the funding was so exorbitant in terms of what the provincial government could get themselves in terms of funding that they would fund it themselves, and that distorted the whole process.

Mr Carr: One last quick one: If we do it like you want, do you feel you can do it cheaper than the way we're doing it now, the bottom-line cost?

Mr Ryan: "Cheaper" is a quantitative statement, but certainly that's the way to go. I would think so, over the life of the process, in the sense that business operates a little tighter to the vest.

Looking at what's currently happening in the rest of the world, there's no question that's the way to go. I don't care what administration comes in in the future: Any capital investment and infrastructure investment -- new highways, new systems -- Europe, Britain, France, Italy, everybody today is looking at it. The only way they can produce a new highway system, which is really, when you cut through all the crap about what the economy's going to generate -- but the most important thing is to have access to markets. When you have access to markets, that's the most important investment you can make, and when you make that investment it has to be in the most economical way. Now governments have to step aside from the process because the electorate -- well, there are no moneys available. The private sector must be involved in the process.

The Chair: Thank you very much, Mr Ryan, for making your presentation before the committee this morning.


The Chair: The next presentation this morning is by the Ontario Public School Boards' Association. A number of people are going to come forward, according to my list, with respect to making this presentation. Please introduce yourselves for the purposes of the committee members and for Hansard; it would be appreciated.

Mrs Donna Cansfield: My name is Donna Cansfield and I'm the president of the Ontario Public School Boards' Association. With me today are Bob Dureno, superintendent of business; Sam MacKinley, superintendent of business; and Sharon Summers, vice-president of the Ontario Public School Boards' Association. We're pleased to be able to have an opportunity to speak to you about some of our concerns and obviously to help you in terms of your deliberations with some possible suggestions and opportunities for you to capitalize upon.

Without question, the political and economic uncertainty that faces us all in the next few months when we have an election, and also with the recession not quite over -- certainly as a trustee within the Etobicoke system and the Metropolitan system, I'm well aware of the issues around assessment base, which we will discuss. We're aware, as you are, of the constraints and restraints that are facing all of us in this province, and I think we also are aware of the concerns. We're not coming here looking for any magic wands or quick fixes; we actually have some solutions for you to consider.

We know that the economy and job creation are key public concerns, not only for our association but for the members of the Legislature as well. We also know that economic renewal is tied both to training and to education. What we are concerned about is that often there is a great deal of discussion about lifelong learning and the necessary attitude that this must continue, and yet the foundation skills, both in elementary and secondary schooling, that are required to reflect this often are not reflected in terms of walking the talk when it comes to putting education as a priority in this province. This is an absolute must. We have to start deciding how we value education and we also must put the dollars towards the education we value, or, you've got to stop using it in the inappropriate fashion that you are using it as your economic renewal.

School boards are facing increased demands in funding. Actually, our numbers have increased by 7% since 1990 and our dollars have decreased significantly. However, our mandates to meet these needs have not decreased; they have actually increased. These are important things for you to consider.

I know there's a great deal of discussion about our cost of education when you use comparative analysis around the world. However, you must at some point step aside and look at exactly what those costs reflect: It simply is not reading, writing and arithmetic any more; they involve a great deal of social services that are an integral part of why the school system continues to exist. If you believe those systems must be there, then you must fund them and you must cost them out appropriately. We will discuss more of that.

Currently, I can tell you that our psychosocial service support system across this province is greater in salary component than it is for the child welfare budget. Now, look at that number: That's $346.9 million that are not educational dollars per se but are dollars that go to support the classroom and the teacher in the classroom. If you recognize that this is an integral part of what teaching is all about, then you have to say that those dollars belong there, and if they do belong there, then you're going to have to fund them.

We're asking you to look at the mandates you continually download on to the school boards, and I can give you a litany of those that have absolutely nothing to do with education: Let's try workers' health and safety, pay equity, and the costs that take the dollars out of the classroom.

Also, you must look at education as a key platform and a public policy priority. Again, that gets back to walking the talk. If you say that education is going to be an integral part of where you're going for economic renewal and job education, make it the priority you say you're going to. You must deregulate education to facilitate school board innovation and restructuring. We've given you numerous examples and we will speak about that again today.

We have actual examples of where, if we didn't have the legislative impediments, we could go forward and do many more innovative and entrepreneurial things in our schools that in fact would help to reduce those costs and make for a better education system. You also must accurately cost out the education and separate the costing for the other services so that when you do your comparative analysis it's judged on fair numbers.

Then the bottom line is, you've got to stop downloading to the local tax base and then taking the high road and saying: "It's not my fault. It's their fault." I don't know about the rest of you, but quite frankly, I'm sick and tired of it. I'm tired of your lofty goals and then we have to implement them, and when they don't work out or there's not enough money or there have to be taxes, then we take the flak. No more: Enough is enough.

One of the other concerns we have expressed and will continue to express is the issue between "equity" and "equal." Look at the fact that there are 1.7 million students in this province, 1.3 million of those students in the public school system, 500,000 adults. Recognize that it costs dollars, so "equity" and "equal" are not the same thing when you start looking at the distribution of dollars. If you were to have the dollars follow the student, maybe that would be a different idea of what "equity" and "equal" would be all about.

We would also like to concur with Erik Peters, the Provincial Auditor, in terms of the issue around the separation of the capital, in particular, out of the school board financing and how it reflects on the provincial deficit. I'll ask Bob Dureno to speak to that.

Mr Bob Dureno: I have three areas I'd like to talk to you about regarding capital. The first one is the issue of deregulation. The current capital financing plan for school boards has basically wound up in a lot of administrative requirement and detail. It's to the point where the Ministry of Education can no longer handle that, and it has resulted in long delays in school boards getting approval to carry out the capital needs that require ministry approval.

We would like to see deregulation around the capital, and we think this will facilitate a more economical construction cost locally. There are a lot of provincial requirements that we believe are unnecessary that are presently contained in those regulations.


The second area that we want to emphasize is in the area of additional capital and replacement schools. There is a lot of requirement across the province for additional capital in the area of additional schools because of the enrolment growth in certain areas, and the province needs to fund those properly. We understand that there are not a lot of dollars to go into this additional requirement. However, we believe that through deregulation and through freedom under the Education Act we might be able to come up with innovative local processes for financing schools with the private sector. At the present time, boards are constrained from doing that because of the requirements of the Education Act.

Thirdly, we want to have you emphasize the requirement for repair and renovation to our existing infrastructure. There's a recent report that was issued last year called Canadian Schoolhouse in the Red, which outlined both on the federal and local Ontario basis the large requirement that's there that isn't being met to maintain our present infrastructure.

The ministry did announce last year that there was $80 million set aside for 1996 for repair and renovation of schools. We have yet to hear that announcement be made officially as far as detail is concerned. It's very difficult for boards to plan on a three-year planning basis when we don't know really what to expect in a subsequent year. So we would like to see a specific plan outlined on that very soon so that we can get on with it; 1996 is not very far away.

Those are basically the comments that I had regarding the school capital.

Mrs Cansfield: Thank you, Bob. Sharon Summers will address some of the issues around education finance reform and our recommendations. We'd like you to notice that on the government side there is no action to date.

Mrs Sharon Summers: Needless to say, education finance reform is of great interest to us, and I'm sure it's of great interest to you also. We have been working on this for some period of time. In May 1994 we produced a document that consolidated our positions on education finance reform. We have worked towards sending out some ideas on how to restructure education so it could be more cost-effective. That was produced and distributed in April 1994. So this isn't something new; this is something we've been working on and trying to get the message out.

We need to cost out exactly how education dollars are being spent and develop a completely new education finance system. There needs to be less reliance on the property tax through increased provincial support to its share of education from existing provincial revenues. We need a new education grant based on an accurate costing of education and an accurate level of provincial support to meet clearly defined objectives, a new distribution formula based on individual school board demographics and need. It's difficult to separate out education finance reform from program reform. A current lack of definition of what is funded has resulted in a finance system where there is little relationship between grant levels and actual costs of delivering that education.

We need to develop a provincial health, social service, education network of supports for students. As we talked about earlier, there is approximately $350 million in education grant dollars that is being used for health and support services for students. The education grant should not fund these necessary services. Education cannot take place in the classroom unless these services are available for the students.

We produced an education restructuring document and policy and legislative analysis, and we have a few copies of that which we can leave with you, although they, as I said before, were circulated in April 1994.

We have requested the province to proceed with legislative policy and grant change to facilitate school board restructuring in the following areas: cooperative services, networking, transportation, staff reorganization, alternative program delivery and school capital. There are 25 recommendations in this document, and to date no action has taken place on any of these.

We do thank the provincial government for helping us in producing a restructuring binder that has gone out to all boards, although that is not enough. We also need changes to legislation to help us initiate some significant changes in how we are able to operate our education system.

Mrs Cansfield: Mr Sam MacKinley has been involved with the Fair Tax Commission and education for many, many years and probably is known to most of you. I would like to ask Sam to make some comments around the issue of the assessment base, because it isn't simply a Metropolitan Toronto problem; it's a problem around the province that we need to address.

Mr Sam MacKinley: As Trustee Cansfield has said, one of our positions is to put your dollars into education. A major phenomenon that is now hitting education, however, is a significant reduction in the revenue base that we have. Our assessment base at the present time is approximately a little over $5 billion, equalized across the province, upon which education is funded. It was fairly common not that long ago that you would actually see the assessment base growing 3%, 4%, 5%, 6%; not that long ago it was growing at 10% a year. Now it is not. It is actually decreasing at the present time in a number of boards, and as Trustee Cansfield said, this is not just a Metropolitan Toronto issue.

When you looked at 10% increases or 5% increases, it was fairly common then that the expenditure base increased by in excess of $2 billion a year. When you look at the decrease we are now looking at, we are looking at a $1.6-billion or $1.5-billion decrease, and it is the swing that is very, very hard for education to fund. At the present time, with virtually no increases in the funding from the provincial government, boards of education are now faced with major increases in mill rates or major decreases in the level of service. The boards are in that very, very difficult position of trying to meet, of course, the needs of the students and at the same time meet the responsibilities that they have as trustees in the economy of this province.

Very briefly, what is causing the decrease? There are two major instances. One is simply businesses going out of business and the impact that has back then on the assessment base as the properties become vacant. The second is significant appeals of the assessment base, which is contributing remarkably to the decrease. Commenting on just one number for Metropolitan Toronto, for example, our revenue is expected to be down $100 million in 1995. That is part of the reality that we are facing in education: to try to maintain the quality, maintain the things that Trustee Cansfield indicated are being downloaded in many respects on education on a significantly reducing revenue base at the same time.

Mrs Cansfield: We would be pleased, if there are any questions, to try and respond.

Mrs Elinor Caplan (Oriole): I was interested in your representations around deregulation and I'd be interested if you could be a little more specific as to what you mean by deregulation. Are you talking about no regulation or specific changes to regulation?

Mrs Cansfield: Specific changes to regulation. We can give you some examples. Currently, municipalities have the pleasure of being able to have parkland donated, for example, by a developer. School boards do not have that pleasure. We cannot enter into any agreements with developers other than through the Development Charges Act. For example, we can't find another opportunity to maybe have a school built or a school donated or participate in some sort of a joint effort with the universities or colleges, so we'd need changes to the Education Act.

Another example would be around the provision of services: librarians, early childhood education for junior kindergarten provision, counsellors, those sorts of things in the school. So there are a variety of opportunities we identified and they are in the recommendations in this report. We went through and identified many areas where if we had opportunities, we could be a little more entrepreneurial, reduce our costs, yet it's the regulations themselves that prohibit this.

Mrs Caplan: I'd be interested in your view as to why the regulations are there. What was the rationale for restricting the boards?

Mrs Cansfield: I'm sure, like most things, just over the years one has been added to the other and that usually it's been some advocacy group or lobby group, probably the teachers in terms of teacher-librarians, this sort of thing, or you have to have only certified teachers for the provision of junior kindergarten. Certainly, that's not the position the school boards have. The other thing in that particular instance is that certificate early childhood education, and it's also a degree out of Ryerson, is relatively new in the last 10 to 15 years.


Mrs Caplan: So some of it is just updating and some of it also is a rethinking of the flexibility that you allow the boards to have to meet some of the new challenges of decreases in assessment base.

Mrs Cansfield: The Education Act, if you've ever looked at it, is enormous. They haven't taken anything out, they just put it in.

Mrs Caplan: I appreciate that. I think the advice that you give us is interesting, particularly from the viewpoint of how you can stop just adding on to additional regulation and look at a rethinking of those kinds of complex pieces of legislation. I was also interested in your suggestions for changes in education finance. I'm convinced that there must be someone somewhere who understands the formula. It is the most complicated.

Mrs Cansfield: I agree with you. I've always said to Sam that I thought that somebody sat down with a bottle of Scotch one night and worked this out, because it's probably the only thing that would make any sense, that at the end of the night they'd had far too much Scotch and the regulations were born.

Mrs Caplan: I believe if you're going to have accountability, you have to have that kind of transparency. If people are going to see that it's reasonable and fair, then you have to be able to explain it to someone.

Mrs Cansfield: I think also the time has come to value and respect education and the children. You know, we've been a whipping person for a long time. You've either got to get off the pot or whatever. Enough's enough; either you value education or you do not. The fact of the matter is that successive governments over the years have downloaded on to the educational system and we have been willing participants to accept catheterization, suction, counselling, suicide prevention, tragic events teams, workers' health and safety issues, health tax, the litany goes on and on and they're not reading, writing and arithmetic. But you need those things in order to provide the reading, writing and arithmetic. Value them or get rid of them.

Mrs Caplan: I know the education system has also changed. You're now dealing with a lot of adult students. It's not just a question of children. Can you give us any statistics that you might have about the percentage of adult students who are in the system province-wide?

Mrs Cansfield: Approximately 70% of the adults -- it's in the brief -- are in the public school system. It's 70%.

Mrs Caplan: You're not suggesting that 70% of all of the enrollees in the school system are adults?

Mrs Cansfield: No. We have 70% of all of the adults. There are 500,000 approximately in the public school system.

Mrs Caplan: I'm interested in what's the percentage of the total school population in elementary and secondary, not post-secondary.

Mrs Cansfield: It's 1.7 million.

Mrs Caplan: And what percentage of that is adults?

Mrs Cansfield: Those are just the children.

Mrs Caplan: And how many adults are there?

Mrs Cansfield: Five hundred thousand on top of that.

Mrs Caplan: So about 40% of the present student population --

Mrs Cansfield: Approximately.

Mrs Caplan: -- in the public school system in the province are adults? Would that be fair?

Mrs Cansfield: There are 1.7 million children, 1.3 million in the public system. On top of that there are 500,000 adults. We have approximately 70% of those.

Mrs Caplan: I see. Thank you.

Mrs Dianne Cunningham (London North): Thank you very much, especially for the great work that you've done since 1991 with regard to some 17 publications on finance. I think it's probably been the busiest bunch of trustees in the province for many years.

My question has to do with recommendations that you have made, for instance, "There has been no action on the rated capacity formula." That's the number of students in a classroom. No action on year-end. By the way, I have a private member's bill here that the minister agrees with and he's waiting for the royal commission. So we'll see what happens when the House comes back. It was approved unanimously by the House, by the way.

I'm also wondering if you would like to talk a little bit about pooling. So I'm giving you some things to talk about here.

Fourthly, you didn't say anything about the fact that when you get your capital funding, you have to go borrow money for three years before you get any money from the government. So I really commend you for not asking for more money but for asking for more efficient ways of getting the money and distributing it. I really commend you, because you're obviously aware that we're not in the business of spending more money these days.

I've asked you three questions: capital grant program with regard to rated capacity, if you could speak to that; the year-end, because you mention it in a different way here and I'm wondering if you still want what we suggested; certainly the fact that you have to borrow money before you get the whole program. I'd appreciate your comments. I'll give you an opportunity and it will help me along for the future.

Mrs Cansfield: The rated capacity: That's one of the opportunities where we could be a little entrepreneurial. Currently, you build to capacity and then if your school increases, you're out of luck, because then you have to put on portables or whatever.

Mrs Cunningham: Before it's open.

Mrs Cansfield: Before it's open. If we could enter into agreements where we could build beyond capacity, rent out the space until we need it, again, you see, it's a little more efficient way of doing business. But currently, we're prohibited by law from doing that. We just cannot do it. That would be one example.

The issue around the pooling has been -- that's a Band-Aid. As Sandy Ransom out in Peel said, it's a Band-Aid on a great big open sore. That isn't solving the problem of education finance reform. The education system is broken in terms of finance reform and needs to be addressed thoroughly, comprehensively, efficiently and effectively, not with Band-Aids. Band-Aids don't work any more. We all know we have a serious problem with our deficit. We all know we want to be able to do our business in a new way for restructuring.

What we're saying is, we're prohibited in certain ways by law from doing that and we'd like to find more effective ways. We have asked consistently to work with the minister, to sit down and help work out a new finance formula that would be more efficient for the system.

The 20-21 is what I'm sure you're speaking to because that's currently very punitive in my estimation. Currently, by law, the ministry says that you can have 25 children in senior kindergarten but for some magic reason when they get older, you can only have 20 in grade 1. It doesn't make any sense. However, it's a regulation, but not by law, that is attached to dollars. If you go over your rated amount in the 20-21, they take away your money, so it's very simple, very punitive. The minister said he will not touch it. It doesn't make any sense to me. We have 25 in senior kindergarten but only 20 in grade 1 or grade 2. If you were to just have one more in the PTR, one more alone would make an extraordinary difference in the cost of education across this province. There's a good example.

Mrs Cunningham: Could I ask you what you're expecting from this committee, and I ask it in this regard: The royal commission did not have a mandate to be reporting on finance, but it did. So this committee, I'm sure, is looking for some direction, especially if it doesn't cost any money, to go back to the minister with specific recommendations for change. Your brief is quite inclusive, but I wondered if you would comment for all of us who are going to have to put the recommendations together with regard to how your position may have changed if you in fact know now that this whole issue of education financing has been opened up by the royal commission.

We know we need Education Act change, but the pooling issue is a very big one. It's just an opportunity to let people who aren't often part of education, which is so complicated these days, know a little bit more so they can put it in the report, especially with regard to the whole issue of pooling. It's something we should, I think, be remarking on in this committee.

Mrs Cansfield: Robbing Peter to pay Paul isn't the answer. To take from one child to give to the other and call it equity is not the answer. You have to look at the actual costing of what education is all about and then determine if you're prepared to pay those dollars for those costs. If you want to look at the health services that are currently provided within the school system and the social services that are provided and ask those ministries to assume those costs, there's a good start.

We've been working with the triministry group but there's a great deal of turf protection in terms of, "This is mine and I'm not going to share it," but if we actually costed out the provisions just in those three ministries and then put the dollars from the other ministries into education, you'd find your education bill would go down big time. There's one of the things you can do. In the triministry issues you must deal with the issue that turf protection can't remain.

I think the other is that we've been saying for a long time that all children should have access regardless. There's no question that we've all said that, but it has to be based on the needs of those children. Currently, we do serve the greatest percentage; 75% of all special education is in the public school system.

The reason for that isn't because the separate school system didn't have the opportunity at the same tax base we did; they do. The fact is they've chosen not to and we get their children. As a matter of fact, they counsel them over to the public school system and there are letters that have been made public to that. So you again have to recognize the kind of cost the public system bears. I can't see where this is rocket science. I really can't. It's not that difficult.

Mrs Cunningham: We wouldn't want to call it common sense though, would we?

Mr Kimble Sutherland (Oxford): Oh, please.

Mrs Cansfield: I was careful.

The Chair: Sorry, we're going to have to go on to Mr Sutherland.

Mr Sutherland: Given the fact that many of these funding systems have been in place for 15, 20 years, we can go back to find out where we lost some of the common sense.

I think some of the points you have made are certainly well taken and everybody acknowledges the problem with education finance issues. I think your comments about health and social services and whether the school system should have to pay for them -- certainly having them in the school is beneficial. Of the parts of the royal commission report that I've gone through, I think you had a great deal of support from the commission in what it's saying about that, that it's important to have them in the schools.

You've also acknowledged about legislative changes that you feel restrict some of your activities. But I also know that, for example, there are new endeavours being undertaken. Both local school boards, the public and the separate, have entered into a consortium for purchasing with municipalities in the local area. Have the school boards -- and I know you're only speaking for the public school boards -- fully utilized all the options available, such as this consortium for purchasing outside legislative restrictions? Have they fully utilized all those options to date?

Mrs Cansfield: Some of the legislative changes that we require are necessary for some of those cooperative services, but I'm going to be very blunt with you. The fact remains that the grant distribution for transportation is such that the separate school receives more dollars per grant than the public school. So you tell me where the heck the incentive is for them to share. It's a disincentive because then their money is taken away from them, and if it's unfettered dollars and they can do what they please with them, where's the incentive to share transportation?

The other is, and this will probably sound a little disrespectful, but the school boards are on board with the consortiums. What they can't figure out is which union's going to take place, and we have no support from the government in terms of helping us through this quagmire of difficulty because we've got different school boards with different unions. So we're together, but now we have the unions fighting on which union takes precedence.

Mr Sutherland: I'm not sure. The one I'm familiar with in my local area is school boards and municipalities strictly on the issue of purchasing. I guess my question to you would be, have all school boards entered into it solely on those issues that aren't limited by union issues or limited by legislation into these areas that would help reduce costs as well?

Mrs Cansfield: Some have. The Lakehead board, for example, I think has saved $2.5 million and it's in the purchasing with separate, public, municipality, hospitals. They've done a superb job. Niagara South Board of Education is another good example of a multiconsortium where they've gone into banking. That's that restructuring binder that we wanted to get out right away because everybody's in budget.

That's a good beginning. We're saying, build on that good beginning, give us some flexibility around some changes in the Education Act and watch us take off. Currently we have schools filled with computers that the kids need but, boy, computers work best if they work all the time. We could run career schools in our schools in our downtime and make money to pay for those computers, but we're prohibited by law from making money. Think about it. I can give you all sorts of great ideas that we could do.

Mr Sutherland: I think there are all kinds of options there, in your option about renting out the school property, but I'm sure the third party would be here saying that you're interfering with the private sector if you did that because --

Mrs Cunningham: No. That's been our position since 1988, on the record.

Mrs Cansfield: I don't think so.

Mr Sutherland: -- there's extra commercial space around to lease.

Mrs Cansfield: Actually, if I may, as a matter of fact --

Mr Carr: Whoever does it the best and cheapest is competition.

The Chair: Order. One final comment.

Mrs Cansfield: I did specifically request the minister for that particular, and it was not this minister but the previous minister who refused us, and in fairness, the other individuals involved said they thought it was a good idea.

The Chair: I'd like to thank the Ontario Public School Boards' Association for making its presentation before the committee this morning.

Just a note of business for the committee members: We have a document here that represents our 3:45 pm presentation this afternoon, if anyone would like to pick it up. I just wanted to bring that to your attention.

The committee recessed from 1205 to 1407.


The Chair: Our first presentation this afternoon is by the Canadian Mental Health Association, Ontario division. Glenn Thompson is executive director. Kindly identify yourselves for the committee members so we will know, and so Hansard will know who you are.

Mr Glenn Thompson: Nice to be here. Carol Roup is senior director of policy, research and branch services in our organization. Ruth Stoddart is executive officer in the organization, and because she's a lawyer, we rely on her for all sorts of services of that sort. Lisa McDonald is one of our branch services consultant staff, specializing at the moment in the area of the safety net reform, the federal material that you see referred to in this document. You may well have an interest in our comments in that area as well.

I'd just say for those of you who may not have been present when this organization presented before that ours is a very old organization in Canada, about 75 or 76 years old now, and in Ontario we've been a chartered organization since 1952. We have well over 3,000 volunteers in our organization. We see that as our main strength in terms of our anchor in the community for the opinions we bring to you: We're not simply a staff-driven organization but very much a volunteer-driven one. That anchorage is out there in 36 branches across the province where we have a variety of funding, as you can see in the first part of the document, from provincial government grants, local United Ways and a wide variety of, and increasing, fund-raising activities of our own.

I'll say no more about introductory material and ask Carol Roup to proceed right into the content of the document. We'll try not, under any circumstance, to take more than 15 minutes talking at you.

Ms Carol Roup: I'm going to try to highlight very quickly some of the issues we've got in the first part of our paper and then I'll probably move straight into this document which was recently released by the Ministry of Health; it has some information in it that we've never before had in the mental health field, so it's quite important.

Just to highlight some of what's in there, figures we've known for a long time that this document now confirms, one in five people in Ontario between the ages of 15 and 64 suffers from at least one form of mental disorder. Approximately 118,000 Ontarians suffer from severe mental illness.

The survey also tells us that mental disorders affect 18% of men and 19% of women in Ontario and that there's a strong relationship between disadvantaged living situations, such as unemployment, and mental disorders. I don't think these are things we didn't know before, because the literature has said this for at least decades, but having a document that has surveyed the population is wonderful support for the kinds of figures we've been presenting to committees like this.

In Ontario, we're told that 1.8 million days of productivity at work, home and school were lost per month by people with mental disorders, and this is nearly twice the number of days by an equally sized group of the so-called healthy population. Nearly a million informal caregivers, family members and friends, provide care to, among others, people with mental illness, and of course mental disorders disrupt family life and may have adverse effects on children.

These statistics speak for themselves, and we know mental illness is a serious problem in Ontario and affects large numbers of people and their families. We expect these costs to increase and to grow.

In 1992, the Minister of Health at the time, Frances Lankin, made mental health a priority strategic direction, and that was supported by the government. A couple of years later, in 1993, the Ministry of Health released Putting People First, which described the policy of the government around mental health reform and described what it intended to do about the statistics I've just read off to you. Now we're in a phase where mental health reform is being implemented to address the changes needed both in the way services are provided and to use limited resources more efficiently.

Undoubtedly, the mental health reform initiative was also a response to the following budget numbers in this province, all of which I'm sure this committee is knowledgeable about: In Ontario we spend $17 billion on health care -- that's a 1992-93 figure -- more than 32% of the total provincial budget. Also in 1992-93, Ontario spent more than $1.3 billion on mental health services, which is only 7.5% of the total provincial health care budget. In view of the fact that mental health is a strategic priority of the government, somehow 7.5 seems like a very small number.

Currently, as this 1992-93 figure indicates, and I don't think this has changed too much, approximately 80% of the mental health budget, excluding OHIP, was spent on institutional care and 20% on community services. One of the essential components of the government's mental health reform initiative is that these figures will be more than reversed, with 60% being spent on community services and 40% on institutional care by the year 2003.

These statistics obviously indicate the disparity between the total cost of mental health care in Ontario and the funding that's dedicated to community-based mental health care. We know about serious gaps in service. We know about waiting lists for community mental health services across Ontario. A snapshot survey which was released by the Ministry of Health in 1992 told us that 34,000 active registered clients were being served by community mental health programs; over 50% of housing, social rehabilitation, vocational and case management programs had waiting lists of three months or more; and, most importantly, 49% of the programs had a majority of clients who were comparable with populations of the provincial psychiatric hospitals.

I'm sure you can anticipate what our concerns are going to be after hearing those numbers, and we feel this is probably one of the most important groups to hear the numbers and then to hear our concerns. Obviously our overriding concern in mental health reform at present is funding. Our board more than recognizes the urgency of the provincial government's need to reduce the deficit, but we believe that the most vulnerable people in this society, including the seriously mentally ill, must not be affected by a reduction in services.

Approximately $20 million has been cut from provincial psychiatric budgets in the past year. Alarmingly, these funds were intended to be transferred to community-based mental health services but instead were put forward to reduce the deficit.

More recently, $20 million was announced by the Minister of Health for the purpose of building up community services, and this was met with extreme excitement and was very welcome. However, $20 million is really a small step in the right direction, and we need to be cautious that it's dispersed and implemented according to the ministry's guidelines.

We are extremely concerned that further cutbacks within the hospitals sector will cause far greater numbers of people to be in the community and be needing services. In the last two presentations to this committee on the provincial budget we've emphasized the need for transitional funding which would ensure that community services are in place before further cuts to hospitals. We certainly don't want to see a repeat of the deinstitutionalization crisis of 25 years ago.

Clearly, hospital care will be needed and should continue and it'll be required as re-entry into the community is accomplished, but we must expect that the process of establishing services in the community will be difficult and expensive, especially in the short term when transitional funding will be required to do this.

In a time of fiscal restraint, it'll be extremely important for the Ontario government ministries to work together and cooperatively to prevent unnecessary duplications and gaps in service. One example I'd like to highlight is one we highlighted in our presentation to the legislative committee on long-term care.

We believe that those with a psychiatric disability are not specifically mentioned in the description of those who will be served by the long-term-care services, and as was stated in our submission to the legislative committee, CMHA, Ontario division, believes that all individuals who require long-term care and support services in order to remain healthy and able to live in the community should be eligible for those services regardless of the nature of their disability. The Long-Term Care Act identifies seniors and people with a physical disability in particular.

I think we need to ensure a rapid shift of resources so that an increased reliance upon care provided within communities where people live can be in place. We also need to ensure that adequate public education occurs in order that our understanding of mental illness has the mystery and mystique and fear removed from it. I think those are the two most important things we'd like this committee to hear.

Ms Ruth Stoddart: I'd just like to talk a bit about the upcoming federal budget and some of the proposed federal social assistance reforms and their effect on people with mental illnesses.

We're well aware that the federal government is likely to decrease transfer payments to the provinces in the upcoming budget, and the reason stated for this has been to reduce the federal deficit. One of the ways in which transfer payments will be cut is to the Canada assistance plan, and the stated goal is to reduce payments to the Canada assistance plan to 1993-94 levels within the next two years. This is going to have a very significant effect in Ontario because Canada assistance plan payments have already been cut to this province, and we feel that any further cuts to the plan will make it very difficult for people to access both financial and human services they may require. These services are often required just to meet people's most basic needs.

To give you some numbers, a large number of people with serious mental health problems rely on social assistance as their sole means of financial support. For example, in Ontario 25% of the 116,700 people who receive family benefits allowance due to a disability have a psychiatric disability. People with psychiatric disabilities comprise the largest number of persons of all disability groups receiving family benefits allowance. Because of the large numbers of people with psychiatric disabilities receiving FBA, any changes to provincial or federal social assistance plans will affect a very significant number of these people.


With respect to the Canada assistance plan, the CMHA, Ontario division, agrees that the plan itself is outdated and has in fact created disincentives to work for many people, including people with mental health problems. We believe that with adequate supports most people with mental health problems do want to work, and reducing supports, either financial or other, for these people is shortsighted in that they will be unable to work and more likely to remain on assistance.

Within the province of Ontario, the CMHA, Ontario division, has commended programs such as JobLink Ontario, which is funded through the Ministry of Community and Social Services, and Jobs Ontario Training, through the Ministry of Education and Training. However, we would urge that close attention be paid to the development of these programs, because past experience with programs such as these has shown that in the initial stages of program development, if people with mental health problems are excluded, their needs are often not met by the programs. This means that people with mental health problems will not receive the training and education they need in order to maintain jobs.

With the Canada assistance plan, one of the proposed reforms in the federal social assistance reform was block funding to the provinces, whereby the federal government would transfer a set amount of money to each province with which the province could do as it wished within a set of federal so-called principles. We would urge, first of all, that national standards be set for the use of any block transfer payments to provinces so that there is a consistent set of standards throughout the country. We would also not like to see assistance being based solely on an area where people live, but rather on their needs.

We'd also suggest that priority be given, as was suggested in the federal social assistance paper, to improving access to things such as disability-related supports and services, and also providing improved child care and income support to low-income families, because supports such as these could reduce reliance on both federal and provincial social assistance programs.

Federal social assistance reform also proposes changes to the unemployment insurance program. One of the main concerns of CMHA, Ontario division, about the proposed changes to unemployment insurance is the so-called two-tiered system of unemployment insurance which has been proposed. Under this system, there would be reduced unemployment insurance benefits for people who would be called frequent claimants, those being people who had had more than a certain number of claims within a certain number of years. We would caution against this approach being taken because it could unfairly disadvantage people with any kind of psychiatric disabilities.

People with psychiatric disabilities often have illnesses which are cyclical. They'll have periods of wellness followed by periods of illness over a long period of time. These people may be able to work on a part-time or temporary basis but may also have periods of time when they are unable to work and could -- and often do -- end up as what would be termed frequent unemployment insurance claimants. If people with mental health problems are to have the best chance possible of returning to work and staying in the workplace, they should be able to obtain full unemployment insurance benefits.

The final concern with respect to unemployment insurance would be the likely impact of overall cuts to both unemployment insurance and the social assistance system. If the federal government does cut social assistance programs or social assistance payments to the provinces, and the province follows suit with cuts to provincial programs, this would likely result in more individuals relying on the social assistance system, particularly with the current lack of jobs, and would also create a downward pressure on those who have the fewest resources, who are often people with mental health problems.

We've attached to our brief a copy of the document we presented to the federal committee on the federal social assistance reforms, if you'd like to look at it.

The other thing I'd like to talk about is the four new pieces of provincial legislation, the Advocacy Act, the Consent to Treatment Act, the Substitute Decisions Act and the Consent and Capacity Statute Law Amendment Act. These four pieces of legislation have been in the process for quite some time. Proclamation was recently delayed again until April of this year.

Our agency has been involved in both advocating for and supporting these pieces of legislation through three provincial governments. We believe that all four pieces of legislation will act to help support the rights of the most disadvantaged members of our society. We do realize, however, that implementation, particularly of the Advocacy Act and Substitute Decisions Act, is going to be a very expensive and very lengthy process.

For example, advocates are just beginning to be trained under the Advocacy Act. Capacity assessors are being trained, I believe beginning this week, under the Substitute Decisions Act and will have to continue to be trained probably for a fairly long period of time. We would urge the government not to decrease any funding to the three ministries responsible for these acts so that full implementation of all pieces of legislation can occur.

Mr Thompson: You see the recommendations that attempt at least to wrap up what we've said on pages 8 and 9. I think the important things there are that we see the need for an appropriate kind of spectrum of services, and certainly those including housing and training and employment, supported by very solid volunteer systems for a mental health system to work appropriately. A lot of that better-working system will occur we think if early childhood development is attended to, and perhaps some of the announcements made recently in that area will be helpful indeed.

It's a tall order for governments across Canada to try to ensure that the deficit is reduced. At the rate I heard the other day that it's going up, at $85,000 a minute was the figure quoted, we all need to worry about it dramatically. Nevertheless we think that there's quite an opportunity to shift those expenditures along the spectrum and to make the spectrum more complete and more appropriate for the seriously mentally ill particularly and certainly to affect workplaces in a dramatic kind of way for the better in terms of productivity, probably one of the most unattended-to areas in the workplace. I'll wrap up there.

Mr David Johnson: Thank you for your deputation. Certainly everyone involved in the mental health field in the province of Ontario deserves to be congratulated. The statistics that you have indicated here this afternoon about the number of people involved and the need certainly portrays an immense need in the province of Ontario and one that is not going to be easily satisfied but one that deserves our full attention.

One hardly knows where to start in three minutes. I noticed partway through your deputation, on page 5, you indicated, "We need to ensure a rapid shift" -- I'm talking about halfway down the page on page 5 -- "of resources so that there is an increased reliance upon care provided within the communities where people live" and "we also need to ensure...adequate public education." Maybe you could just tell me a little bit more about the rapid shift of resources that you see that's necessary to provide that support within the community.

Ms Roup: I think that over the last couple of years the downsizing of psychiatric hospitals has begun, and I think our disappointment was that as they're being downsized, instead of those funds being put into communities to build them up, they've been used to reduce the deficit. I guess when we say "rapid," certainly as fast as psychiatric hospitals get downsized and beds are reduced, at least that rapidly we'd like to see community programs be developed.

I think we'd actually like to see it a bit more rapid in that we keep recommending transitional funds, because I think if we only rely on the extent to which psychiatric hospital beds can be reduced, then what's needed in the community is not going to catch up. We feel that there is an injection of new money that is absolutely necessary to build up community services prior to hospital downsizing and then, as hospitals get downsized, keep working at that restoring of the balance.


Mr David Johnson: Maybe just in my last minute or so I'm going to shift to another topic. You were talking about the Advocacy Act and the Substitute Decisions Act and you indicated that you realized there was considerable cost in terms of implementing those two acts with regard to the advocates and whatever the name of the person for the Substitute Decisions Act; I forget. But at any rate, do you have any ballpark figure? I've really been unable to get a cost myself. What is your understanding of the cost associated with those acts?

Ms Stoddart: Frankly, I couldn't tell you as far as the actual training. It's not merely training of assessors and advocates.

Mr David Johnson: Assessors.

Ms Roup: It's things like public education within the hospital system on both consent and substitute decision-making, a lot of various other things. What's going to be the public guardian and trustee's office? Under the Ministry of the Attorney General there's been a complete reorganization of what was the public guardian's office.

Mr David Johnson: In other words, it's big.

Mr Sutherland: I have one quick question, just a point of clarification, and that is on your statement on page 1, "In Ontario, about 1,828,200 days of productivity at work, home or school were lost per month by people with mental disorders."

I just wanted to get a clarification. Probably I should know this, but how are you defining "mental disorders"? Would that include people with addictions such as drug addiction, alcohol addiction, or is this totally separate then from that?

Ms Roup: That figure was pulled from the survey --

Mr Sutherland: Okay. I'll follow up in the survey then.

Ms Roup: -- and the survey describes the definition.

Mr Sutherland: Thanks.

Mrs Haslam: My comment is about the additional thing that you gave us, which was the appendix submission to the House of Commons committee on human resources development. I found some very interesting figures in that and I wondered if you -- because you gave suggestions.

You said to the federal people looking at a budget, "Here are some current tax expenditures that we feel you could cut back on," that was page 12 in the Ottawa brief, and you list the millions of dollars, the corporate tax expenditures, personal tax expenditures and so on and so forth, as a way of enlightening them to the amount of money that was available to them within their own budget.

In this submission to this committee, there were no suggestions. Basically you're saying, "We are representing socially disadvantaged people." You've given us facts and figures about mental health, talked about some of the restructuring and some of the new programs that the government's putting in place and hoping that they stay, but basically you're saying, "Don't cut us, don't cut back any more on this particular issue." I wondered if you had any suggestions, like you did in Ottawa, as to where some of the additional finances could come from.

Mr Thompson: For the seriously mentally ill, we're certainly saying, "Don't cut that area," for sure. But the seriously mentally ill in the health system generally are a fairly small number and, as you heard earlier in the figures, 7.5% of the health budget -- in our view, that's not the part of the budget to go after. In our view, there are many areas, probably within health and elsewhere in the government as much as anything, I would say with my background, where better integrated and coordinated services and certainly a reduction of duplication between levels of government would play out very well for the taxpayer.

Mrs Haslam: So basically what we're also saying, though, to the Treasurer is, "Be cognizant of the health care budget," but it is the Health minister who finds priorities and allocations within her budget and not to underestimate or take from the smallest in the largest ministry.

Mr Thompson: I think what has happened in the last few years is a dramatic change in the juggernaut of the health organizations of the province in terms of increase in spending. Just slowing that aircraft carrier down has been quite dramatic and that's good. I think one can do more of that and do much more community-based care, that for many people is a tremendous economy over care in the hospital.

Mrs Caplan: I was going to ask you to identify some areas where you thought the shift could be made, so I'll leave that with you as a thought. But the other one really is on the implementation of the three pieces of legislation, which I have some very serious concerns about because what I see is the development of a huge bureaucracy at enormous cost, at the expense of service.

Unless those issues are addressed, my own view on the models that have been identified, particularly for advocacy, assessors, rights advisers and all of that, is that the population may not get the services it requires simply because clearly there are no additional and new resources out there, given the deficit and debt situation the province is facing.

No one clearly has a reasonable expectation that there are pots or piles of new money or money trees out there that are going to be identified, so it's finding it in one place and moving it to another to make sure that people get the care and services they need. I thought I'd give you a chance to comment on that, since you know of my concern for mental health services in the province. I agree with the comments about the need for greater coordination.

Ms Roup: From the start of those pieces of legislation we've been very concerned about building up a gigantic bureaucracy. I think when we presented to the legislative committee on advocacy in particular, we cautioned about that and we cautioned about the array of individuals who would be needed 24 hours a day to see that this happens.

I think we've continued to support it because we believe that the most vulnerable members of our population need that kind of support. We keep reminding ourselves how it came about. It came about through some horrendous abuses in the system and there seemed to be no other way to protect people like the Joe Kendalls, a long coroner's inquest that led finally to the Advocacy Act.

We share those concerns but we are still supporting that legislation because we believe that it is the only way that the most vulnerable members of the population can be protected, and we're just hoping that at the end of the day they will be the people who are protected. Sometimes, with all the best intentions in the world, the legislation ends up by missing the very people it was intended to serve in the first place. We're watching that very carefully, because that legislation was intended to serve the most vulnerable people, and not crowds of other people. So we share it.

The Chair: I'd like to thank the Canadian Mental Health Association, Ontario division, for making its presentation before the committee this afternoon.


The Chair: The next presentation is by the Conference Board of Canada: Dr Jim Frank, vice-president and chief economist, Paul Darby, director, forecasting and analysis, and Doug Nevison, senior research associate.

Dr Jim Frank: We are pleased to join you again this year. We've been making presentations to this committee for a number of years now. I hope that you're not looking back and checking our forecasts, at least at the first decimal point.

Mr Jim Wiseman (Durham West): I brought my notes from last year.

Dr Frank: Yes, I thought somebody might be likely to do that.

What I have done here for you today is provided several pieces. One is a piece that has a cover on it that looks like this and it's got copies of some graphs and slides in it. There's another piece there that is a viewpoint, I believe, entitled "Stocks Matter." Yes, good. And what's the third piece?

Mr David Johnson: "Index of Consumer Attitudes."

Dr Frank: The consumer attitude survey, okay.

Mr David Johnson: And then "Canadian Outlook."

Mr Phillips: "The Harder They Land." I have that.


Dr Frank: Yes, good. Okay? So we brought a lot of material for you. What I'd like to try to do here is talk to a couple of the major issues that face Canada in terms of economics for approximately seven or eight minutes -- I appreciate this is going to take you through a lot of stuff pretty fast -- and then I'd like my colleague Paul to talk about the Ontario scene specifically for another seven or eight minutes. Then we'll leave the balance and we can talk about whatever issues you people want to raise.

If you'd look in that first handout that starts with forecast highlights, just quickly, as you look at Canada now, we will have two years of expansion. In other words, we've passed the peak that we were at before the recession started; we've got two years of expansion. There's no reason that we shouldn't get another two years out of that. The important thing here is that trade has been an extraordinarily important part of this performance and we think that will continue in the coming year.

There are a couple of key things that you need to know about the outlook, and I'm going to concentrate on the government issue and then, of course, political stability; I think you can all read between the lines on that one. But the first one has to do with the US situation. Frankly, they're doing too well. We think there's going to be a situation emerging in 1996 that will see the US economy growing still too quickly to suit the Federal Reserve board, leading to a fairly strong increase in interest rates through the year and staying at fairly high levels as we have now, and leading us perilously close to recession in the first part of 1997.

The important thing here is that this is a business cycle that is induced by high interest rates and it's going to feed through into Canada. So the growth rate that we have over the next two years at about 3"% or 3 1/2% or so drops to 2% in 1997, and that's really important to understand. So we have what we would call a quite serious slowdown coming within the next couple of years.

Now, you can see in the bottom slide interest rates. The key thing here is, how wide have we kept the spreads and is it wide enough to protect the currency as we move through the next six to nine months dealing with Quebec and the fiscal problems of federal and provincial governments? It's not as clear as I'd like it there, but it's essentially saying that there's a spread of about 120 or so basis points, or just a little over one percentage point, through the balance of the next year, year and a half, and we think that's strong enough to hold the currency. As you know, now on 90-day T-bills the spread is just a little over two percentage points, so it's quite a bit wider than what we are forecasting.

If you look at the second page, you'll see two slides there that show the impact of the referendum in 1980 on interest rate spreads. You can see in 1980 there that the spreads jumped about almost two percentage points from one quarter. You'll see in the next slide that the Charlottetown experience was somewhat similar, not quite as large. So the key thing here is that in previous experiences with referendums we have experienced sharp bumps in interest rates. We have not got a sharp jump in interest rates in this forecast. We've kept the rate relatively high compared to the US, thinking that we've not got just a referendum before us, we have a fiscal policy issue of consequence, so that on balance we're working with that one or one and a quarter percentage point spread which we're hoping will be adequate to keep the currency from falling too sharply.

Let me just turn you over the page to confidence. The bottom slide shows Ontario and Quebec and the top slide Canada. Confidence in the fourth quarter moved up a little bit. In Ontario it moved up about four index points. Ontario has experienced now six quarters in a row of steady increases in confidence as measured by the Conference Board. This is a pretty strong record and it's very encouraging, as far as we're concerned at least, for the near-term outlook. Paul will talk a little bit about that opposite Ontario. The only place where confidence has slipped is in the Atlantic region and in British Columbia, but for Canada as a whole and Ontario we're doing quite well.

Flip over to the middle slide under the unemployment rate for Canada. You can see that it's still running well over 8% as far as we're concerned -- quite a big difference across the country -- but the middle slide's important. The bottom line there, the one that's at about zero, is collective bargaining results in the public sector in Canada. We've had two quarters in a row where they're slightly less than zero, minus 0.1%, and this is a historical, very unusual event. It's never happened before in this time series where the public sector has been tracking at zero or slightly less than that. In our view this is going to continue this year and next year. All governments are in such severe restraint, there will be no choice.

The private sector, alternatively, is experiencing a pickup in wage increases in the unionized sector and in the non-unionized sector. At the Conference Board, we do surveys of the non-union people and we're seeing increases between 2% and 3%. The long and the short of it is that we're getting reasonably decent employment growth this year. We're forecasting an increase of 335,000 year over year compared to 250,000 last year. It's a bit of an improvement. So this wage gain that's coming in the private sector is one of the key drivers of the economy. There's no purchasing power gain coming in the public sector, and that's going to be true, of course, across the country.

Just to take you over to the top of the next page, "Index of Business Confidence," quickly there, we've had just an incredibly good string of increases in our measure of business confidence. We're at a record high almost, the highest since 1979, I believe. The index is at 196. You can see how much it's increased over the last while. The business community feels very bullish, very optimistic. Profitability is up and high, and we think it's going to continue. The low dollar helps, as far as traders are concerned.

Let me just shift. I want to talk about two points before I turn over to Paul. One has to do with the fiscal assumptions that we have in our outlook, that are embedded in this outlook, and then, secondly, a bit on the trade and the currency.

If you look at the slide "Fiscal Record of Governments," you will see that what we've done here is amalgamated all the provinces together and shown the federal government separately, and the total then is the bottom line there. We believe it's important to look at all levels together simply because what Ontario does affects the federal government and what the federal government does affects Ontario. It's very clear and it's not possible to segment the two at all in any meaningful fiscal policy sense.

The bottom line then, you will see, shows that last fiscal year we added $62.1 billion to the national debt and this year we'll add another $58 billion and change. If you average the number over four years, you'll see that it's about $61 billion. Each year we add about that amount to the national debt, and it's not sustainable. The next slide there shows what has happened. The debt-to-GDP ratio has hit 100%, so we're now in the 100% club along with the Italians among the G-7 countries.

One thing I'd like to note in that middle slide is that little period in the mid-1980s where the ratio between debt to GDP was pretty well flat, roughly at 65% or so. The important point here, ladies and gentlemen, is that even during a period of strong economic performance that ratio did not decline. That's just a matter of history and record.

There are some lessons we think that we've learned from this period of the last decade or so, and the most important one is the bottom bullet there, "Incrementalism will not work." In the viewpoint that I've given you here, I've gone through and explained the logic of what we've done in our forecast. Any of you who are really interested in that stuff can follow that through.

The next slide at the top of the page, "Real Government Spending": Those three bars below the line again are a record. The last time we had negative growth or decline was in 1959, and we had it only one year.

What did the board do in its forecast? What we said is that we believe that the federal government would move heaven and earth this time around to meet its target of 3% in 1996-97. We prepared our forecast, did all the work and asked ourselves, "Will they meet this target?" The answer was no, that more changes needed to be done. We chose to make those changes on the spending side, not because we think there will be no taxes, but because we believe the vast majority will be done on the spending side. There's too much resistance in Canada to tax increases.

So what did we do? We took half a billion out of transfers to provinces this year and another $2.1 billion in federal spending on goods and services, for a total cut of $2.6 billion on a base of just over $30 billion of federal spending on goods and services. This is a 10% reduction. It's huge. It's never happened before. In 1996 we took out $2.2 billion in goods and services spending. Again, that's huge and it's on top of the cuts that we talk about here in 1995, 8.7%.


So as we look ahead to the balance of the decade, there's going to be very, very tough restraint in place in this country almost regardless of what happens, and these kinds of cuts we have had to put in here in order to meet the 3% target imply structural change in spending. It's not going to be possible, in our view, to accomplish this goal by tinkering on the margin. I hope I'm not overstating.

If you look at the middle slide on the next page, that's the one that's a little worrisome, because even with these changes, the debt-to-GDP ratio remains about 100%. It does not fundamentally alter the fiscal situation in Canada, federal and provincial governments added together, and I think this is the most important finding of this research that we've done. Even with the level of cuts that we've put into place, we still just stabilized that ratio. If you look at what happened to us in the middle to late 1980s, we had a period of strong growth and we stabilized the ratio, and that's all that we did. So this is why our view is that this will require, to turn the situation around, some serious structural change.

Keep in mind that I said at the beginning we are expecting a cyclical slowdown close to recession in the United States in 1997, first part, similarly here in Canada. So with the kind of changes in spending and so on that we have in the regime, the best we can hope for is stabilization, and that's with these significant cuts.

Let me just turn over to the last point I want to make and then, Paul, you can take over.

Exchange rates: The Canadian dollar, in our view, is seriously undervalued. Why? Foreigners do not have confidence in our ability to pay the interest on our debt and our ability to finance it long term. That's one reason. The second reason, of course, is our political debates, which of course make foreigners nervous. So the currency that we have, that PPP line, suggests, at least in our analysis, that the currency should be worth, say, 80 to 83 cents. So when you're down in the low 70s, it's really low -- well undervalued. At the upper 80s, which is what we had under the former government in Ottawa, when it was fighting inflation, it was way overvalued. So we've gone from way over to way under. Now, these situations can last for some length of time and it's going to be very difficult for us to see a rapid move towards the 80-cent value that we think is realistic.

The last chart on that page then: Overall export performance is still super, and it's going to continue to be that way and Ontario is going to benefit a lot from that.

So with that quick introduction, Paul, can you do something on Ontario for us.

Mr Paul Darby: Basically what I plan to do is just briefly go over the outlook for Ontario.

First of all, in summary, it's fair to say that the Ontario economy began to experience a full recovery probably in the summer of 1994. It's been booming since. We saw substantial increases in exports in Ontario as early as 1992 but a very lagging domestic economy consumption, housing and so on, but finally by the middle of 1994, the strains on capacity, the strains on employment in the manufacturing sector, have forced firms to begin hiring in Ontario.

Since June, there have been 124,000 people put to work. Those are full-time jobs. I think the number of part-time jobs actually declined, so we've probably got more than 124,000 full-time jobs created. You're talking manufacturing, you're talking construction; they're highly paid. At that point, of course, other sectors begin to join the parade, particularly consumption and so on. So by the summer of 1994, I think it's fair to say, the Ontario economy went into a full recovery, and we've been waiting since 1989 for that to happen.

If you look at the slide on housing starts, we are forecasting a slight increase in starts next year but it's rather anaemic. The high interest rates that have just come through are going to help to dampen that off. Whatever growth we do get in housing starts is going to come from the employment growth. It feeds a slight increase in real residential investment spending, which is the next slide.

Interestingly, we are forecasting a turnaround in Ontario in non-residential construction. This will mainly be in the industrial and retail sectors, not commercial office space, and infrastructure spending, which is not unimportant in the outlook for 1995.

Machine and equipment investment is still quite strong in Ontario in real terms, but not at the same pace that we saw in 1993-94. Darlington is just about finished putting in generators and a lot of the retooling at the auto plants is more or less behind us. None the less, in the drive to remain competitive, we should have Ontario manufacturing firms continuing to put in place automated equipment. This helps to drive machine and equipment investment at over 6%.

The big story is exports. Turn to the next slide. We're still looking for 11% growth in exports in 1995. In fact, auto exports will be higher in 1995 than they were in 1994, in spite of probably some slight decline in auto sales in the US. This is simply a result of this retooling that took place early in 1994 and depressed exports in 1994. It'll come through in 1995. We are looking for slightly lower exports in some of the other sectors, as the cyclical recovery finally begins to wind down, but we're still looking at 10.5% growth in exports in 1995. Clearly, it continues to be the main driver of the Ontario economy, and it's not hurt by a dollar that's trading in the very low 70s.

The big story, as I've suggested, is employment growth, a 3.2% increase in employment on an average annual basis in 1995. We haven't seen that number since 1988. It's been six years coming, but it's pretty much in the bag now. It's almost in the history; 1995 is going to look like a wonderful year with respect to employment growth in Ontario and is in fact what is underpinning any kind of growth that we have in the province.

Not really a problem on inflation; just remember tobacco tax is out of the numbers so inflation should jump up to 2% as measured. It's really always been there.

Consumer spending will be at about 3% in Ontario in 1995 in real terms. Note, however, that in 1994 we saw something even slightly higher. In 1994, in fact, households financed a lot of this consumer spending by reducing their savings, a lot of pent-up demand which was finally expressed. We can no longer look for that in 1995 because it's hard to imagine the savings rate falling any lower than it already is, but with 3% growth in employment, that should be sufficient to fund an increase in consumer spending of around 3% in 1995.

Some bump and grind on the durable side because the higher interest rates will presumably hurt some car sales and the white goods, the large ticket items. But there should be enough momentum coming in from the employment growth to again get us 3% consumption: 3.3% in 1994, 3% in 1995, 2.9% in 1996. There are three solid years of consumer spending growth that should take place in Ontario.

Imports: Rather high in 1995 because of continued machine and equipment imports. Also, because of the auto production going up in 1995, there's a fair amount of imports of parts to feed that, so you do leak some out. But overall the bottom line is real GDP growth of about 3.8% in 1995, compared to 4.5% in 1994.

If we've got more or less the same exports, if we have more or less the same consumption, why are we looking at lower growth in 1995 compared to 1994? The main reason comes from what Jim Frank discussed in terms of what's happening on the fiscal side. The substantial cuts in spending that we're looking forward to from the federal scene are sufficient to take at least half a point out of growth in Ontario in 1995, in our view. Indeed, with some higher interest rates and slightly lower consumption, you can get the rest.

Nevertheless, 3.8% growth -- we'll, I think, take it. It comes after 4.5% in 1994. Slightly slower in 1996, in our view, and then, over the horizon of the short term, comes the nasty spectre of the slowdown. It's something we should all keep in mind, that you cannot expect to grow at 3.5% forever. That concludes my remarks.

The Chair: Thank you. We have just a little more than two minutes per caucus, so I guess that would be one short question per caucus.

Mr Sutherland: Do we have 45 minutes for this group?

The Chair: Oh, I'm sorry. Thank you for correcting me on that. Indeed, this is a forecaster and we have 45 minutes.

Mr Sutherland: So we have seven minutes?

The Chair: Seven minutes per caucus. Let's get at it.


Mr Sutherland: Yesterday we had a couple of other forecasters in, and without comparing every forecast or every statistic they gave us to yours, one issue that did come up was this question of proposals of significant tax cuts and whether, given the fiscal situation, that was a good idea or not, and given the savings rate is low and also personal debt is still relatively high, whether a tax cut would stimulate significant extra consumer spending or whether those dollars would be used to increase the saving rate or pay down the personal debt. I was wondering if you had any comments on that as to how that would play out.

Dr Frank: Frankly, I haven't thought about tax cuts for so long. But to be serious, I don't know that there are many governments that are in a fiscal position where they would want to do that and take the chance that the income gain on the tax side from a bit stronger activity would be "worth it." I don't think the arithmetic would give you that answer. If you're talking about a tax cut to stimulate at this point in the cycle, it's not clear to me how that would work out to your advantage.

Mr Sutherland: Okay. You mentioned an increase in the non-residential sector -- an increase in the retail sector -- in terms of investments. Could you just elaborate a little more as to what the rationale is for that?

Mr Darby: Shopping malls, retail developments more or less in the outlying areas, suburbia, small towns -- Brampton is an example -- not in Toronto, not downtown Toronto. But certainly we are seeing a number of strip mall developments taking place in smaller urban centres in Ontario as well as some of the growing cities such as London, Kitchener, Waterloo. That has come up into the numbers, interestingly enough. It may partly reflect some of the changing demographic character of Ontario. It probably also reflects retail demand which has finally come back -- again not so much in the urban Toronto area, but in some of the more outlying centres of Ontario, though we have seen some announced projects in terms of retail. It's not as significant, however -- even though it has turned up -- as what we're seeing on the industrial side and also on the infrastructure spending. But it finally has turned up; we're actually seeing some growth there.

Mr Wiseman: I'd like to pursue a question that intrigues me. I thought the separation between our prime rates and the American prime rates right now is about three and a quarter. What are they?

Dr Frank: A quarter of a point. On the prime rate?

Mr Wiseman: Yes, between the Americans and us?

Dr Frank: Yes.

Mr Wiseman: So it's a quarter of a point. Then how do we determine the rates? If the T-bills are 120 basis points apart, how do we get these wild fluctuations in terms of the separation between them? Is it based on T-bills, or how do we calculate that?

Dr Frank: The Treasury bill rate is the interest rate that typically drives other rate structures because it's a market-determined rate, and so are the rates on bonds that are outstanding, because they're bought and sold on a weekly basis. For example, today at 2 o'clock we had a new Treasury bill rate setting. It's an auction. People buy them and it sets the rate. You understand that. The difference between the Treasury bill rate is what's in that particular chart there. The prime rate, alternatively, is a rate that's a retail rate to consumers, and there's a typical spread between it and the Treasury bill rate, but it can vary a lot depending on market conditions. For example, the reduction in the mortgage rates yesterday was probably more to do with the fact that people don't want to borrow money to buy houses than it has to do with what's going on in the market with pesos or with the Canadian dollar or with T-bill rates. It's a retail market rate.

Mr Darby: A quick supplemental to that: There's been a tendency for the prime rate in Canada to be artificially low compared to the US prime rate because a lot of our domestic demand, particularly housing and mortgage markets and consumer loans, has been low compared to the US. So banks have tried to stimulate that demand with a lower prime rate.

Mr Wiseman: Thank you. That leads right into the next question. Given that our capacity for non-inflationary growth in the economy is greater in Canada than it is in the United States and that, if I understood you correctly, you said that growth in the United States is overheated, if they increase their interest rates, which seems to be what Greenspan at the Federal Reserve wants to do, to cool out their growth by putting people out of work, how do we divorce ourselves from that, given that we have a gap of non-inflationary productive capacity available to us, an extremely high unemployment rate compared to the American unemployment rate? How do we divorce ourselves from winding up having Mr Thiessen at the federal bank increase our interest rates, put our people out of work, when we already have a capacity that's not inflationary?

Dr Frank: I think there are two answers to that. It's an excellent question, the sort of question we should be asking ourselves as Canadians. It's not possible to separate out the components here, but I think there are two broad answers. One is $753 billion worth of debt, 40% of that held by foreigners; also, a political debate that's going on, on an ongoing basis, about whether the country is going to stay together or not.

I'd put it this way to you: If you had $100 million to invest and were an American, if you could earn 5.83% on T-bills in the United States, would you loan your $100 million to Canadians if you could get only 4% in Canada? Would you buy Canadian debt instruments if the interest rate were lower in Canada than in the United States? The record suggests that doesn't work.

Mr Wiseman: I understand that. I'm talking about the gap between the T-bill rendering and the Bank of Canada rate that they set in the marketplace. That is quite a bit higher. I'm concerned because we were told yesterday that for every 1% increase in interest rates in Ontario, that's 20,000 jobs reduced in the economy, and if we're ever going to --

Dr Frank: Okay. I know what the point is, and the issue is whether or not Canada could run a negative spread, or have the spread even narrower than we're forecasting, at about, say, 110 or 120 basis points. In our view, we believe that, absent these other two issues, we could have spreads that are negative, but that's fairy tale. We have those two issues before us day to day, and until we somehow get some resolution of them, it's hard to see how we could get those people who lend us money on a daily basis to accept a lower interest rate than they can get somewhere else.

Mr Darby: It's interesting, if I can interrupt, on the record, the Bank of Canada has tried twice now to get negative spreads vis-à-vis the US interest rates for exactly the reason that you indicated. They feel there's a lot more excess capacity in Canada, we could use a little stimulative boost, and we don't have the same demand conditions as the US. In both those attempts they failed rather dramatically. The last one was of course with the Mexican episode, and the Canadian dollar was -- a lot of people decided it looked a lot like a peso to some extent and no longer a store of value, and they flew from it.

The issue really comes back to, basically, unless you can get the amount of debt that's held by foreigners down and unless the constitutional issues can be resolved, we will be continually paying an interest rate premium. It's difficult to divorce the monetary policy in Canada from the rest of the world as long as you're depending on the rest of the world to finance your fiscal situation.

The Chair: Thank you. Mr Phillips.

Mr Wiseman: I'm finished because I ran out of time, not because I ran out of questions.

The Chair: You actually used considerably more time than was allotted, but that was such a good question and good answers that I didn't want the committee to miss that.

Mr Phillips: We had a presentation yesterday from the government that said they had done a survey of nine or 10 independent forecasters that were predicting, I think, 3.9% real growth over the next five years.

Dr Frank: Per year?

Mr Phillips: I think they handed that chart out this morning, if I'm not mistaken. But you have a slightly different view of that. Why would there be such a discrepancy between those eight or nine -- this is it here, the "Survey of Private Sector Forecasters, January 1995."

Mr David Johnson: There are five of them over there.

Dr Frank: That's three years.

Mr Phillips: Okay, 1995, 1996, 1997, 1998. I always add them all up. Four years, okay.

Mr Darby: You're obviously trying to guess what is in the minds of other forecasters.

Mr Phillips: I assume your number must be in here, that's all.

Dr Frank: I would imagine it is.

Mr Darby: Depending on when it was done.

There's a concern in Canada that in fact we have what's called a large output gap, that if you look at the potential of the Canadian economy to produce, if we were to fully employ all our resources, our capital and our labour, that would give us a potential level of output. The concern is that when you look at the actual measured level of output, it's about 8% below that potential. That preys on the minds of a lot of private sector forecasters, because if you look in history over any long period of time, the tendency has always been for us to close that output gap.


With potential output growing in the order of about 3% a year, if you're going to begin to close that gap over the course of four or five years, you're going to have to add at least another 1% a year to that growth in potential, so you're talking on average 4% growth. I would suggest that in my own mind that's a fairly mechanical approach to medium-term forecasting, but nevertheless one which is fairly pervasive in the forecasting community. It is a pressing concern that weighs on the minds of all forecasters. How do we close the so-called output gap over the medium to long term?

Mr Phillips: I'm trying to get at what's reality, and I gather you're saying that you --

Mr Darby: I also don't know what the date is on that survey of forecasters.

Mr Phillips: It says January 1995.

Dr Frank: It's hard for us to respond to what other people are doing because, as you know, there are some forecasters who are talking, I believe, about 5% growth in 1995 in Canada. We just have quite a remarkably different view of how things are going to unfold. To take Paul's point about growing so far above capacity for that length of time, that would almost certainly have to assume that there's no downturn in the United States at all, and I question that.

Mr Phillips: I guess we'll have to ask the government who the private forecasters were in its estimates. Your estimate, I gather, is a little less than 4% in Ontario for 1995 and then down a little bit more in 1996.

Mr Darby: Probably a forecast that we would have done in the fall, say September, would have been not 3.9% but closer. I think developments have taken place in the United States particularly which make it less likely that the United States will be able to wander through the next few years without having a severe downturn; that's become much less likely. It's now much more likely that the US in fact will enter into some period of slow growth in late 1996, early 1997. That's forced us, in turn, to downgrade our own outlook for the next three, four years in Ontario. It's possible that our numbers are in there, but they may be numbers that we had produced in September as opposed to numbers that we produced in December.

Mr Phillips: In the employment percentage change chart in Ontario, you show a bit of a decline in 1994 over 1993, that the rate of job growth declined a bit in 1994, which was unusual in that the economy seemed to be so robust. What would be the reason for that?

Mr Darby: Certainly exports were robust in 1994; there's no doubt about that. But we did see some weakening in the domestic economy in Ontario in 1994, which did have some impact on employment creation. Some of that in fact related to the pattern of interest rates, which began to rise significantly early in 1994, but as well, indeed we saw a pause in housing starts, we saw some pause in some of the components of domestic consumer spending, that had an impact on employment. I think the six months of growth that we've seen in employment since June, however, are not a false start or a false signal. We've got now six back-to-back months which are very solid, so I would suggest that the 3.2% increase that you see in 1995 is pretty much --

Mr Phillips: You could put it in the bank.

Mr Darby: Yes.

Mr Phillips: I gather we still had fewer people in 1994 working in Ontario than we would have had in 1989, though; we're just sort of beginning to work our way back to the 1989 level.

Dr Frank: I don't think so.

Mr Darby: In Toronto that's the case, but I think for Ontario as a whole --

Mr Phillips: The numbers from your economic forecasts I think show there were fewer people working in 1994 than there were in 1989.

Dr Frank: I don't have the numbers before me. Well, I might have; I don't know.

Mr Phillips: It's from the Ontario Economic -- it's the government's numbers.

Dr Frank: It's quite possible that's the case because the productivity growth in the manufacturing sector has been quite rapid, so you don't get the kind of bang for the buck, as it were, on employment growth that you'd like to have, even when you get decent output growth. So it may be that we have that situation.

Mr Phillips: I just took the numbers out of the government's Economic Outlook.

Dr Frank: Yes, I think that's probably right. I may actually have the numbers here for Ontario. Yes, here we have employment in Ontario. What year did you want?

Mr Phillips: From 1989 to 1994.

Dr Frank: In 1989 the actual peak on a monthly basis was 5,006,000 people in employment. The current level is what?

Mr Darby: It's 4,955,000.

Dr Frank: Okay. So the answer's yes, to your point. The peak in employment occurred in February 1990 at 5,006,000. The December 1994 is 4,955,000, so you're still below the previous peak.

Mr Darby: Sixty thousand below.

Mr Phillips: I think the rest of Canada's up 240,000 and Ontario's down roughly 80,000, but in 1995 I gather we'll eventually get back to where we were in 1989.

Dr Frank: In 1995 you will be well above where you were before.

Mr Phillips: Thank you.

Mr David Johnson: I guess you've heard the expression of the debt wall --

Dr Frank: Yes.

Mr David Johnson: -- that we're going to hit the debt wall in Canada, and in Ontario, I guess, as part of Canada. When are we going to hit the debt wall?

Dr Frank: I don't know.

Mr David Johnson: Is it your view that the wall is a solid object, that what happens is that people simply stop lending, or is it sort of a flexible object, that bad things happen? Certainly bad things are happening to us right now: Our interest rates are up; the Canadian dollar's down.

Dr Frank: The Conference Board has been very prudent in how it describes this fiscal situation, and the wording in the write-up that's done in that viewpoint is not a casual exercise. What we feel is that as we have continued to add these large amounts to the debt stock, working in a 100% world is different than a 55% world: Your degrees of freedom are a lot less. We are not prepared to say that tomorrow or the day after or whatever all of a sudden foreigners stop loaning you money. It's very unlikely it would happen that way for Canada. However, Doug, if you could maybe just talk about Mexico in a moment, it's an interesting situation there as to how quickly the market said, "No, we are not going to play games with you on this." I'm not persuaded that we would have that same experience here.

But that said, the biggest risk we have is that the political debate could get out of control over the next six months, foreigners could get spooked, interest rates would likely have moved up quite sharply, and then you precipitate something that becomes very hard to manage.

Now, hitting the wall, as it were, where people say, "We will not loan to you," is not in the cards, at least in our view, because as a country we are still rich enough to be able to afford to pay higher interest rates on our outstanding foreign-denominated debt.

Now, on Mexico.

Mr Doug Nevison: Although there have been some comparisons with Mexico, and certainly the Wall Street Journal article tried to draw the parallels, I think much of it comes down to capacity to pay, and as Jim said, Canada's capacity to pay its debt is certainly much greater than the Mexican situation was. So in terms of hitting a wall, I don't know. I think it's a gradual situation, but you do realize how vulnerable you become in terms of interest rate swings, as we've seen in the Mexican crisis. The spreads that we were talking about before widen quite considerably; now they're starting to narrow back a bit. It's that vulnerability, I think, that is the issue.

Mr David Johnson: What bad things would happen if the assumptions you've made with regard to a reduction in transfer payments from the federal government to the provincial governments, and I think you said a 10% reduction in goods and services --

Dr Frank: Total.

Mr David Johnson: Total. If that didn't happen, because there are people making deputations and saying, "No, don't cut funds to us; we recognize that the deficit is serious and the debt is serious, but don't cut our funding," and if those voices are listened to and these kinds of cuts don't happen and the debt-to-GDP ratio keeps climbing, what then is our outlook in the few years ahead?

Dr Frank: The obvious answer there is that your interest rate profile's going to be a lot higher. We don't know what that number would be. It's pretty clear now that we're paying higher interest rates than our underlying relative inflation performance would justify, or than our relative competitive position would justify. The Canadian economy is doing very well, we are very competitive internationally, and yet our interest rates are way higher than the United States. In real terms, they're very high within Canada. Why is that? I think the answer is because we are asking markets to give us a fairly significant chunk of change every month.


Mr David Johnson: Just looking at Ontario, I think the problem we've faced is -- go back to 1985 and the expenditures were about $28 billion in the province of Ontario. They've doubled since that period of time, counting capital programs, operating expenses, crown corporations, to about $55 billion today. Not surprisingly, taxes have gone up considerably during that period in an attempt to pay for the expenditures. Of course, they haven't succeeded, so we've had deficits.

As a result, as we sit here today, expenditures are far too high in the province of Ontario and taxes are too high. That's why the question of a tax reduction has come up. That's why the program we're putting forward, the Progressive Conservative program, is to cut expenditures back by $6 billion, which still leaves them, in terms of 1985 expenditures adjusted for population and inflation, above 1985 figures, and to reduce taxes by $4 billion.

You said in your comments that incrementalism will not work. I think you would agree that that sort of program is not incrementalism.

Dr Frank: I wouldn't call that incrementalism, frankly: $6 billion dollars in Ontario?

Mr David Johnson: In Ontario.

Dr Frank: In one year?

Mr David Johnson: No, over a three-year period.

Dr Frank: Even over three years, $2 billion a year is a lot of money in Ontario.

Mr David Johnson: It still would leave expenditures in the province of Ontario well above 1985 levels.

Dr Frank: Yes.

Mr David Johnson: Maybe without commenting on the magnitude, is that the kind of direction you think is necessary to get government spending and revenues back in line?

Dr Frank: Looking back, I've lived through enough of these budgets, and in working in the area for 10 years now, you start to get a feeling for the politics and the economics of the kind of change that's going to happen. When I look at all of the budgets of the last decade, federally and provincially, there are hundreds of tax increases and hundreds of expenditure "cuts," and still you can see the record there. Nobody can argue with that; those are facts. That's why I say that incrementalism won't work. You can't add half a point here or a cent a litre there, you know, two bits on a bottle of whisky or whatever.

The problem with the tax side of it, to deal with it in terms of raising taxes, for example, or even cutting taxes, is that unless you've addressed the spending side, the next recession you get hit with leaves your spending relationships intact, so the structure of your spending does not change. As sure as we're sitting here, there will be another recession -- I may not be able to tell you when, but certainly before the end of the century -- and if there's no change in the structural relationships of spending, then simply raising taxes or trying to deal with it by tax cuts to play the Laffer curve game of Reaganomics is not going to address the fundamental imbalance that's there.

You've heard the term "structural deficit." It's a deficit that exists when you've got reasonably full employment and so on. It's probably quite large in Canada. You could pick a number, $20 billion dollars -- I don't know what it is -- but it's too large simply to leave this to go on for a long period of time. That's why -- we've been doing this forecast now for about six months -- we're saying this is the budget where we will see the big changes. We're forecasting that.

You're right, there are a lot of people advising not to do this, but I don't think the choices are that broad to avoid it. I think what Mr Axworthy's gone through in the last week and a half pretty much demonstrates that, of the views within the Liberal government, the Finance department is going to prevail on this issue, at least for the time being.

The Chair: I'd like to thank the Conference Board of Canada for making its presentation before the committee this afternoon, and I apologize one more time for that mixup with respect to the time.


The Chair: The next presentation this afternoon is by the Canadian Federation of Independent Business: Catherine Swift, the executive vice-president, Judith Andrew, the director of provincial policy, and I see there's an additional person.

Ms Catherine Swift: Yes, we have a third person with us. In fact, last time I think we had a third person, but it was Judith's two-month-old baby at the time. This time we're sticking to the adult route.

I'm Catherine Swift, executive vice-president of the Canadian Federation of Independent Business. My colleagues are Judith Andrew, who's our director of provincial policy with special responsibility for Ontario, and Ann Smith, our director of communications for the federation.

Since we only have a very brief amount of time, we have distributed our written brief. We entitled it Seeing Red, partly because of the volume of red ink that we seem to be swimming in in this province unfortunately and partly because I think it very accurately represents how our members feel right now, our small and medium-sized business members, about what is going on in this province and has been going on for quite a number of years.

I don't know that we're going to really say anything new here today that we haven't said in many other appearances for many years before this committee. We may put a little more updated data to it, we may tailor it a little more to present times, but we have for a long time now, not only in Ontario but across the country because we are a national group, very much emphasized the need to structure our policies in the economic sphere and the financial taxation sphere better to that constituency that is creating the jobs right now. For at least the last 15 years or so, in Ontario and in Canada, that has been the small and medium-sized business sector.

Just recently, actually, we got some data I'd like to distribute -- I don't think we have quite enough copies, but we probably are pretty close to having copies for everyone -- on some of our recent job creation data. I hope I still have a copy; yes, I do have one.

This is Statistics Canada data. They just came out with 1992, which is unfortunately fairly normal for Statistics Canada. Nevertheless, it does happen to be the only database we've got that we have job creation disaggregated by size of firm. These data, which literally just came out very recently, show that even in a very, very bad recession year -- if you look under the second set of columns there on the page, under 1992 -- even in that very, very difficult year in the economy, we saw -- and these are just Ontario data, this particular one, and we do have data for other provinces as well -- the less-than-five-employee size of firm creating jobs.

Even though we had, on a net basis, a massive loss of jobs from our economy overall, we still had this very small group creating employment, and our past data would suggest that about half of these jobs come from existing firms expanding and about half come from new firms that start up and employ other people. What we found different in Ontario, which is kind of interesting -- and we only found this through the last recession; we hadn't found it in previous data -- was that in other provinces we had both the less-than-five and the five-to-19 employee groups; in other words, those two smallest groups in the economy, and they do represent, by the way, about 95% of the total number of businesses in Ontario.

In other provinces those two groups were both creating jobs. In Ontario it was only the less-than-fives, and we found this kind of interesting and we believe it to be very directly related to the kind of policies that we have seen put forward in this province for a number of years now which are very punitive to the smallest firms and these 5-to-19 firms in particular. You'll think of things like pay equity, things that click in around a certain employee size; things like occupational health and safety clicks in around 20. We recently have employment equity which comes in at a higher level of 50.

We also have the fact that an awful lot of our tax system is disproportionately burdening the smallest of firms, and the matter of things like relatively high costs of doing business, whether it be wage levels, benefits etc.


The cumulative effect of all of these policies among our membership has unfortunately been very much to dampen expansion, dampen job creation, and this is what we believe is the reason behind this rather unusual profile for Ontario as we compare it to other provinces. So it's just interesting to observe those relationships.

The way we've structured our actual submission this year is just a series of one-page notes, so that hopefully they're brief and to the point. As you probably know, we've often got full briefs on many of these subjects, which are certainly available to anyone who might be interested, but we thought we'd take the quick-and-to-the-point route this year and just do one-page briefs on a number of the key issues that our members tell us are most important for them. Judith, I wonder if you could just highlight some of the really important ones among these issues.

Ms Judith Andrew: We cover our members' number one problem, which is total tax burden, and that's in the first one, including the chart, and then a range of other taxes, employer health tax, corporate minimum tax, local taxation, and an interesting field that's growing, fee and non-tax revenue. We also deal with deficit-debt-government spending, red tape, regulation, paper burden, workers' compensation, health and safety, minimum wage, unfair competition and Ontario Hydro.

Obviously we can't talk about all of them today, but I wanted to emphasize some particular points in the area of taxation, which, as I mentioned, is the primary problem facing small business in Ontario. Our members cite ongoing concern with this, and it's unacceptably high at 87% at this point, as compared to 55% just a few years ago. Our studies show that the tax structure is biased against small and medium-sized business. The chart in the brief shows that total tax burden is heaviest on the small and the medium-sized businesses and, even worse, the composition of that tax burden is heavily skewed to the profit-insensitive payroll taxes and local taxes. Of course, in the payroll tax category is the employer health tax. Local taxes represent property and business taxes, including the education component.

We are updating these tax studies. This particular chart is somewhat dated, but we have some preliminary results for Quebec with some new data, and they tend to confirm the same general picture, and I expect that will be the case when we finalize the Ontario ones.

We noted that yesterday the Ministry of Finance made a presentation and dealt with the issue of tax competitiveness. They tend to try to show that Ontario's tax environment is competitive. Yesterday's presentation referenced a study done by KPMG Peat Marwick which was done for the state of New York. The minister's chart which he put up, entitled "Effective Corporate Tax Rates," showed that the total effective tax rates, including federal income taxes, put Ontario in the second-best position after Quebec.

We found it curious that there wasn't another chart which showed that, according to the same study, Ontario actually stands in the second-to-worst positioning on the state, provincial and local tax level. So the effect of it is that the federal income tax is the item in the tax mix that the study includes that in effect puts Ontario in a good position relative to the other states that are compared there.

I guess this goes to show that, as always, the results of these studies depend on what is included in the tax mix. We find that if payroll taxes are included at all, and we don't believe they were in the KPMG study, the tendency is to exclude the important WCB payroll tax, which is a substantial one here in Ontario, and it is a mandatory tax; it's not something that's voluntary.

If payroll taxes are compared, we would argue that WCB payroll tax ought to be included. When the minister put up his payroll taxes chart yesterday, it certainly appeared as if WCB was not included there. Also, we noted the large US levies for payroll taxes of course include their social security payroll taxes, which generally reflect a different approach to financing retirement in that country. Again, it's very hard to make these comparisons.

I guess when all is said and done, we continue to believe that Ontario's tax structure is uncompetitive, particularly for small businesses. Since small businesses are responsible for the bulk of job creation, we feel that the tax structure is indeed a barrier to job creation, and any government that's interested in creating jobs would do well to heed that point.

Our general recommendations with respect to tax burden are, of course, to alleviate the total tax burden, preferably by reducing the payroll tax and local tax burdens and certainly by freezing other taxes and charges and by refraining from introducing any new ones.

Our specific recommendations with regard to the EHT -- and I should say that last year's relief was welcome, but it certainly isn't the ultimate solution to the regressive burden of payroll tax on Ontario business. Last year's relief could be improved with our recommendation of replacing the EHT graduated rate structure with a small business allowance set at the level of $400,000 of payroll. This isn't a new recommendation from us but it's one that we want to reiterate.

On the corporate minimum tax front, again this is an area which troubles us because the corporate minimum tax in fact vastly added to the corporate tax compliance burden but really didn't do very much to improve tax fairness, especially for the small businesses wrongly captured in the net. We're arguing here that there should be measures to put into full effect the small business exemption. We would like to see, beyond elimination of the corporate minimum tax, if that's not done, at the very least raising the threshold so that some of the very small firms that are currently captured in the net of the CMT are excluded.

On the local tax front, we have a substantial paper here. Considering that it's one page long, it gets into a number of recommendations on restructuring taxes at the local level. We would certainly encourage the Ontario government to see the need to get involved here and, in effect, deal with what is another punitive tax for small business that is insensitive to income. Property taxes are levied no matter what the business income is, and there really needs to be some restructuring to make them more fair for small business.

On the fee side, we've noted that fees have been a growing item in the budget. Non-tax revenues have more than doubled, from $300 million at the beginning of the decade to over $700 million planned for 1994-95. A whole range of fees has gone up. There are some very troublesome ones, such as the $50 corporate filing fee, that we would suggest should be rescinded. Also, probate fees are excessive. Ontario's probate fees are now in excess of any in the country. We believe there should be a couple of rules guiding the fee-for-service principle. First of all, users must actually receive a service for their fee, and fees ought to be collected as a replacement for taxes, not as an addition to them.

One low-cost way of assisting small business is certainly in the regulatory area, and we would welcome any initiatives to alleviate the regulatory burden on small business. The paperwork burden is a big issue and is a low-cost initiative for government. The Clearing the Path project is a bit of a start in one very small area, that is, people who are registering their businesses, but there's much more to be done for all the existing businesses out there that are seeing a lot of their valuable time and effort taken away from the business in order to push government's paper.

I'll conclude there, and we're happy to take your questions.


Mr Phillips: A very thoughtful presentation and interesting specific recommendations. In terms of I guess cost associated with the various recommendations, have you a feeling on what the cost might be in the corporate minimum tax of your proposal on taking it up from $5 million to $10 million on the assets?

Ms Andrew: On the corporate minimum tax, yes, I do have the numbers on that. If you raise the one threshold, if you raise the asset threshold from $5 million to $10 million, the tax cost to the government is $5 million. If you raise both thresholds, in fact double both thresholds, the tax cost is $7 million. So it would put into effect a full small business exemption, get rid of those businesses in the 5-to-19 size that are currently captured by the tax: relatively speaking -- and I don't like to play with millions here, but relatively speaking -- not a very large tax cost.

Ms Swift: A lot of the problem too with measures like corporate minimum tax is not that it's raising enormous amounts of money or whatever but it's the paperwork that the businesses are forced to go through to elicit often a very small, if any, amount of money from that firm. So it's equally, if not even more so, a paperwork issue as a money issue, I would say, in that case.

Mr Phillips: I remember when it was going through, I think actually the Fair Tax Commission did quite a detailed study.

Ms Swift: Well, they recommended against it.

Mr Phillips: That's right, and did a detailed study on the cost implications for businesses of doing it, and I think on the small business the cost associated with the --

Ms Andrew: The figures I just gave you are new figures from the Ministry of Finance, right up to date, as of last week.

Mr Phillips: The cost associated with the employer health tax recommendation at the $400,000 payroll level.

Ms Andrew: That's fairly large. It depends on how it's done. If you just had the break at $400,000, it's somewhere in the $250-million range. If you exempt the first $400,000 of payroll for everyone, it's closer to $400 million. It's large, but again, payroll taxes are the bane of small business and we would certainly appreciate some relief in that area.

The probate fee one is interesting. We just received some figures on that one. The effect of the new formula that came into effect in 1992 was to double the tax take on that one. So instead of roughly $25 million, $26 million per annum on probate fees, the government now is bringing in about $50 million, a little over $50 million.

Mr Phillips: One of the challenges on the fee one is I think you're saying that it's a replacement for tax, not an addition to them. There's always the challenge that governments use it not as a replacement but as an addition to it and --

Ms Andrew: That's what's been happening here.

Ms Swift: Yes. It's a problem we found in many jurisdictions, because as governments become more broke, they get more creative looking at other ways to raise money, and the tax side becomes difficult to tap past a certain point because we know it just tends to drive activity underground. So that's when you start getting into this fee stuff, and it's often -- well, the corporate filing fee's a classic example. It's not the $50 so much; it's all this stupid paper for some idiotic reason to confirm that they haven't changed their information or whatever, and the $50 was just kind of like a slap in the face.

I'm sure you've heard the Newfoundland example. We've used it many a time. They eliminated about 70-odd fees and diddly nickel-and-dimey kind of stuff and they found they happened to forgo $2 million in revenue. They saved $3 million in administration cost, and that was just for the government. So the business sector, freeing up those resources that no longer had to push those papers and pay that 20 bucks, 50 bucks, 100 bucks, whatever it was -- a big efficiency measure.

We feel for governments in dire fiscal straits, which just about everyone is in right now. It's a cheap way. We view it as really equivalent to a tax cut. If you can simplify the paperwork that business has to deal with, that can have the equivalent beneficial effect on the economy of a tax cut, but you don't forgo the same kind of revenue if you cut taxes on the government side. So we really feel governments that aren't very, very serious in looking at all of these cheap means of spurring economic growth are really missing an opportunity.

Mr Carr: Thank you very much, Judith, Catherine, Ann. It's kind of ironic that you mentioned that. We had spent some time in our small business task force speaking with you as, I think, the first people we met with, and of course we incorporated one of those recommendations. The one you mentioned of Newfoundland I hadn't heard of, and we took that one as well as the employer health payroll tax on $400,000; we used your exact figures. If you look at our small business report -- it was called Creating Jobs Through Small Business -- a lot of what we incorporated in there was not something that was designed by Mike Harris or Ted Arnott or myself or David. We simply listened to you and we've been listening to the members.

I haven't had a chance to speak with you since you've got a copy. I just wanted to see, and so we don't get too partisan here, if a government was to take some of those recommendations, any government, and incorporate them in the next government that comes along, what would it mean for you and your members? Basically what I'm asking is, what do you think of some of those ideas in our small business task force report?

Ms Andrew: Well, to be frank, a lot of the ideas mirror very closely a number of the positions we've been advocating over the years.

Mr Carr: We stole them all.

Ms Swift: So we can hardly find fault with them.

Mr Carr: I know a great idea and an intelligent person when I see one.

Ms Swift: We haven't changed our minds; let's put it that way.

Ms Andrew: We definitely agree and we believe that it is very possible to create more jobs through small business and that Ontario's potential in this regard is currently stymied.

I have brought some extra copies of a recent report that we've done entitled the Small Business Outlook for 1995. It deals with our members' investment and employment intentions and some of the government obstacles. Certainly there is room in Ontario to improve things. We could be doing even better on the job front than we are if some of these obstacles were removed.

Mr Carr: In terms of taxation, as you know, one of the reasons we've called for tax cuts is that we're uncompetitive. I think you've mentioned that and I thank you for your help, because when I looked at the statistics yesterday that the government put up, as I said to David, I was surprised that it was up there. We're one of the highest-taxed jurisdictions in all of North America and in Canada, and one of the problems we've got, as we got into yesterday, with people like, for example, Alberta, is their personal income tax rate is about 30% lower than ours and they don't have a sales tax, as you know. They've been able to deal with the deficit on the spending side, and the problem we face in this province right now is the high tax structure.

As you know, what we've called for is dramatic spending cuts, $6 billion over three years, but also giving, of that $6 billion, $4 billion back to the people of this province in tax cuts to do as they want, and buy and sell and so on. We believe that rather than an infrastructure program like the federal Liberals have done, in giving money to the taxpayers they will then go out and spend money with your members.

I just wanted to see if you could comment on what a $4-billion tax cut would mean to your members. Do you have any idea of what it would do to the small business sector if $4 billion was given back to the taxpayers to go out and spend as they want?

Ms Swift: Are you including businesses and individuals there in that cut, in the $4 billion?

Mr Carr: No, that's personal income tax.

Ms Swift: Okay, this is personal income tax. Well, I guess it would probably be double the reverse of what happened when they took $2 billion out a couple of years ago, and we saw what happened then: a lot of bankruptcies, job losses etc. We very much feel that not only is the tax room exhausted so that even if you want to raise taxes, you're going to find it won't have the revenue impacts you want, and governments have found this over the last few years, and it certainly will further harm the economy as well. We very much believe the opposite prevails: It will create more jobs and so on.

I don't think $2 billion a year is radical either. I only heard the latter half of the previous presenters. When you look at what's happened in business, $2 billion on a $45-billion to $50-billion budget is nothing. Sure, it's harder for governments because their bureaucracies are harder to move etc, but you look at what's happened to an awful lot of companies in the private sector and they have accomplished way larger cuts. So that's where you've got to start, if anything. We're looking at necessary federal cuts of between $10 billion and $12 billion on about a $120-billion budget just so they can stay out of the dead zone in terms of finances. So I would just want to say we don't find that to be radical.


But in terms of the positive effects, it'll have positive quantitative effects as well as positive morale effects. A lot of what's happening right now among businesses, everybody, is simply that everybody feels overtaxed; they feel they don't have the money. Even if they have some, they won't spend it because they're afraid of what's going to happen down the road. Putting more money in people's hands will obviously induce them to spend more of it and will have a psychology change as well that will be positive, so I think we'll see a lot more jobs created.

Mr Carr: I agree with you and I thank you very much.

Mr Sutherland: Just regarding your analysis on the 1992 job figures from Stats Canada, I guess I have some concerns with that because you attribute it to such legislative policies as Bill 40 and employment equity. Of course, Bill 40 and employment equity were not in law at the time, in --

Ms Swift: I didn't say Bill 40 or employment equity, actually. I mentioned occupational --

Ms Andrew: Employment equity was passed in 1987.

Mr Sutherland: What's that?

Ms Andrew: Pardon me.

Ms Swift: Pay equity.

Ms Andrew: Pay equity was passed in 1987.

Mr Sutherland: Sorry. I said Bill 40 and employment equity because you list them in your report here.

Ms Swift: There, yes. But, I mean, let's face it, we had occupational health and safety, pay equity etc.

Mr Sutherland: All right. I just want to be clear. I mean, you attribute it to them. I hear a lot about Bill 40 allegedly being job-killing legislation and yet you're attributing that to before Bill 40 was passed. Now we have these pieces of legislation in here. Ontario had the best job growth last year it's had since 1988. I guess the comment I wanted to make is that I appreciate the concerns you've identified in terms of the paper burden, the Clearing the Path initiative. While we've only done the first step, we've clearly indicated our intention to go further with that, to make one-stop filing and reporting as much as possible in a single business registration number.

You also mentioned here that consumer confidence is sufficiently precarious. We've heard from some of the other forecasters that consumer confidence and business confidence is at some of the highest levels in several years. So I guess the sense of what I'm getting from you is you seem somewhat negative in what's happening, yet the other factor that we're hearing is that for this year people are very positive, both consumers and business, that we're going to have a very solid year of economic growth both for small business and for large business.

Ms Swift: Like most things, it depends what you compare them to. We certainly wouldn't argue that consumer and business confidence is better than it's been in about three or four years because we're coming out of the -- business cycles do prevail one way or the other and you're not going to ever counter them totally. You might give them a bit of a boost on the positive side, drag them down a bit on the negative side. We unfortunately feel -- and we not only feel, we constantly get the feedback from our membership because, as you know, we survey them incessantly. Even with Bill 40 in 1992, that was coming down the pipe and people knew about it, for example.

The substantive effects are one part of it, but I don't think we can ever discount these confidence, or whatever you want to call it, impacts as well on behaviour which ultimately ends up in spending, not spending and so on. What we find right now is there's no question this confidence is better than it has been through the worst part of the recession but we still do find it very precarious. Recent run-ups in interest rates had devastating impacts on the real estate market. That tells you people don't have the confidence, because they react immediately to these changes. So I think it would be foolish for anyone to believe that good times are here again and we don't have to worry about what we do.

We've seen in financial markets over the last couple of months what hot water we've gotten ourselves into with our debt, with our foreign debt and so on and so forth. So although I don't disagree it's better, to think that that's a given and we're not going to put a dint in it by anything we do as governments or whatever is just wrong and it's not the feedback we're getting from our members in Ontario.

Mr Sutherland: I'm sure you'll be pleased by the Finance minister's comments that he's not planning to raise any taxes in --

Ms Swift: Absolutely. That's a minimum, in our view. That's a minimum: Don't make it worse. Debts are high and we don't have any unrealistic expectations about massive tax reductions, but we do feel there are things governments can do, as we mentioned, on the legislative side.

Unfortunately, an awful lot of what we've seen in policies over the last few years has very much increased the paper burden on small businesses, not decreased it, and we need a reversal. It's created new bureaucracies as well within the government, and all of this puts a higher future tax burden on as well as increasing this inefficient paper-pushing that we find our business community is doing. Much better to spend that on growing your business and hiring more people than pushing paper for government.

The Chair: I'd like to thank the Canadian Federation of Independent Business for making its presentation before the committee this afternoon.


The Chair: The next presentation this afternoon is by the Ontario Natural Gas Association. Please identify yourselves for the purposes of the committee members and for Hansard.

Mr Paul Pinnington: Good afternoon and good afternoon to members of the committee. I'm Paul Pinnington, the president of the Ontario Natural Gas Association. Bob Wood is a member of the association's finance committee and also the controller of Consumers' Gas. Gary Lowes is the chairman of ONGA's finance committee. Mr Lowes is also a senior director, management information systems and corporate development, for Centra Gas. Bernard Jones is president of Blue Apple Consulting and a consultant to the association.

We are pleased to be with you once again and thank you for the opportunity of participating in this important proceeding. This is the ninth consecutive time we've appeared before your committee. On behalf of the members of the association, we've prepared a discussion draft entitled Pathways to Prosperity: Public Debt Reduction and Improved Competitiveness. That's the blue text which we sent out to you about a week ago and which I believe has been distributed to all committee members. Mr Jones has prepared an overview of this paper, which he will take us through. A copy of that brief has also been made available to you this afternoon.

With your concurrence, Mr Chairman, I would propose that my colleagues and I respond to any questions at the conclusion of Mr Jones's presentation paper, along with the overheads. The brief has been provided to Hansard and additional copies are available to the press. With your permission, we will start.

The Chair: By all means.

Mr Bernard Jones: Good afternoon, ladies and gentlemen. The title of our brief, which is Pathways to Prosperity: Public Debt Reduction and Improved Competitiveness, expresses two thoughts. One is that we're not going to achieve long-term prosperity unless we better balance the public and private sectors, and the second is that we need to prepare ourselves more for the competitive global economy of the next century, that the world is becoming more integrated and more competitive.

As Mr Pinnington said, this is a regular brief that we make to the standing committee. The association itself has 330 members and the industry serves over 2.1 million customers. Our purpose in providing the brief is to offer constructive input to public policy and our primary focus remains the economic and fiscal health of the province.

Looking at the economy first, there's both good news and what we would call risks or vulnerabilities. The good news, of course, is that everybody knows we're doing better. Employment is up -- 186,000 jobs in the past year by some counts. The recovery is somewhat imbalanced. It's been effectively export-led. We have an export boom which has stimulated the economy. Other sectors are beginning to come around and balance the performance a little better. Inflation remains low. All of that's good news.

But the vulnerabilities are considerable. In the first place, the US economy could very well be entering a slowdown phase. The US Federal Reserve is firmly committed to acting early in the business cycle to avoid a resurgence of inflation. The US Republican-dominated Congress is also likely to support measures that are designed to try to maintain low inflation growth in the US. There are some signs the economy is beginning to slow down. You've all heard about the number of rate increases in the US in the past 12 months, and the US unemployment rate did move up last month. The evidence is not clear at this point, but directionally it would look as though the US economy is approaching full capacity and its rate of growth is going to have to diminish.

So then we look at the other issues. We look at competitiveness.


Pardon me, I'd like to go back to the vulnerabilities. I mentioned the US economy. That was one thing. There's risk on interest rates. As you're aware, the Canadian interest rates are tied fairly closely to US rates and real interest rates are very high. To the extent that we're not able to get interest rates down, this discourages spending and obviously depresses economic growth.

The other area of vulnerability is fragile consumer confidence. I use the word "fragile" because I was interested in the comments by previous speakers about the level of confidence that consumers have. You can look at consumer confidence from month to month, quarter to quarter, year to year, you can look at it over the business cycle. Taking a longer view, looking back several decades and looking, for example, at per capita income, which is what people look at and experience and make their plans around, per capita income in the 1950s grew, I think, by about 27%; in the 1960s I think it grew by about 53%; in the 1970s it grew by about 42%; in the 1980s it grew by 8%, which was a dramatic collapse from the previous three decades of performance. I think so far in 1994 it probably hasn't grown at all.

To the extent that consumers look at their longer-term projects and derive confidence from what they've experienced in the past, this has to be a significant factor affecting the overall expectations of consumers. I think that kind of expectation, the realistic expectation that consumers are facing, has to be translated somehow into government actions.

Turning to some of the key issues that we see, one of them is competitiveness. We've made numerous proposals in previous briefs around productivity and other types of measures and we have a few proposals in this brief dealing with the energy sector, where government and industry can work together to try to improve competitiveness.

We also see an issue in the size of government and the debt, which is an issue shared by many. We do not feel that it's possible to address the debt problem without somehow shrinking the size of government.

Another issue is budgets, the federal and Ontario budgets that are due. Will they deal with the deficit problem? Will they increase taxes?

There's also the issue of Quebec. We haven't addressed that here, obviously, but we hope there will be a resolution in Canada's favour, and a clear resolution.

In summary, with the economy, our feeling is that the economic recovery we all see can be sustained for a period of time, but the risks are quite substantial and the recovery could be in jeopardy. Clearly, the committee has to weigh carefully the advice it receives from all the people who appear before it, and the experts are not always right. We're all experts of one kind or another, and we can all be wrong. We seriously urge the committee to consider the risks that the provincial economy faces over the next few years in framing its recommendations, particularly on the fiscal front.

In a March 1990 report of the standing committee -- that was prior to the last recession -- the committee report stated, "All invited witnesses who appeared before the committee stressed that, while the rate of growth was moderating, the economy did not appear to be headed into a recession." Two months earlier, in our submission in January 1990, we had said, "Growth in the provincial economy is slowing.... There is a distinct possibility this descent to a so-called `soft landing' could accelerate into a hard landing and produce an economic recession." So I think you would be wise to consider the range of advice and make your own mind up, based on the weight of the evidence, about where you think the economy is headed.

Turning to the fiscal situation, Ontario and federal budget deficits have been adding to the public debt at unprecedented rates. The Canadian public debt-to-GDP ratio, as you all well know by now, is second highest in the G-7 countries. Because of large government borrowing, domestic saving is insufficient to finance private sector investment. It's as simple as that. Canada and Ontario must therefore borrow large amounts of foreign funds, and the foreign component of the Canadian public debt is by far the highest in the G-7, at 44%, so we're very vulnerable to investor sentiment abroad about the viability of our economic future.

Some have said that Canada and Ontario could hit a debt wall. What that means simply is that we quite suddenly would find ourselves in a position where we could not borrow the amounts of funds that we had been used to borrowing. That would mean that we would have to react in a crisis atmosphere and deal then with taxes and with public sector programs.

Another thought we'd like to leave with you is that even if budgets were balanced, the public debt-GDP ratio would continue to grow as long as the interest rate remained higher than the rate of growth in the nominal dollar GNP. All that means is that you have to reduce the debt if you want to solve the problem.

Another thought we deal with in our document is that behind all this fiscal problem is the reality that you have federal and provincial government debt, and that what ultimately is going to be needed is a new approach to what we call fiscal federalism -- the C.D. Howe has recently written extensively on this topic -- and there must be rational restructuring responsibilities and taxing powers to deal with the problem. We have heard some proposals from Ottawa and from Ontario. We call those piecemeal approaches; they're not going to solve the problem. And we'd like to see the restructuring eventually accomplished without increasing the tax load.

Our feeling is, after we reflected on the fiscal situation -- and remember, we've done this I think honestly and we've done it objectively and we've done it for some years now -- that legislation may be required to bring budgets under control and to reduce the debt. The Prime Minister of New Brunswick I believe is on record as saying that he is looking at introducing balanced budget legislation --

Mr Wiseman: No, he doesn't agree with it.

Mr Jones: He doesn't agree with it? Okay. The US Congress is presently examining and discussing balanced budget legislation. The Premier of Alberta has indicated that he is considering referendum-style approaches to addressing the problem.

What we're trying to indicate in here is that while such an approach is never popular, there are formulas -- and I've included one in our handout -- which are a fairly pragmatic approach to dealing with the problem. And unless you can find some other way, this is the way it's going to end up; you're going to have to do something along these lines to solve the problem.

The need for fiscal restraint has been evident to us as an association for some time. In January 1990 -- I won't read the quote, but basically we said there was simply no room in the 1990s for the kind of tax increases that we'd seen in the 1970s and 1980s and that therefore spending restraint was needed to get the deficit under control; otherwise, the deficit could soar to record highs. In our January 1990 submission we produced for the committee an analysis that looked at four scenarios, and we produced the chart you have, this one, which showed that under two quite reasonable scenarios, going from where we were in 1989-90, the deficit in 1994-95, the current fiscal year, could be between about $9.5 billion and $10.5 billion. That's pretty close to where it is today, depending on whether you listen to the Provincial Auditor's estimate or the provincial Finance minister's.

I'd like to echo the comment of the Conference Board that we cannot afford to be caught with high deficits entering the next recession. We just took a look at the 1992-93 fiscal year. In 1990, the treasury put out some projections, a three-year projection at that time, and said that there would be a $2.4-billion deficit in 1992-93. That turned out to be $12 billion. In the numbers I've given you on this table, of the handout, you'll see the principal reason was because expenditures were a little bit higher than what had been projected but revenues were about $9 billion less than what had been projected. That's because we entered the worst recession we've seen since -- well, since anybody can remember, I guess. I wasn't there for the Great Depression.

The way we read this is, we all know that government revenues suffer cyclically during a recession. The problem is that at the end of fiscal 1992-93, there was no evidence of spending restraint -- none at all. Two years on, the deficit stands, as I say, in the $9-billion to $10-billion range; $40 billion has been added to the provincial debt, which you're all aware of; and interest payments have grown from 8.8% of revenues to 16.2%. Clearly, we came out of the recession, from a debt point of view, far worse than when we went into it. That's why we think that legislated solutions may be required.


I'd now like to turn to something we do know something about, which is the natural gas industry in the Ontario economy. Gas plays a major role in the economic health of the province. You may not be aware of the fact that natural gas provides more energy than either oil or electricity to the provincial economy. The industry was a source of stability during the last recession when jobs were being lost. We created 18,000 man-years of employment on capital projects alone during that period.

We think and believe that the industry helps the competitiveness of the economy. We've identified areas in the document where we believe we could make more progress. If you look at the contribution of the natural gas industry, the real gas price today is lower than a decade ago. Gas customers will enjoy lower gas costs this year. We have introduced technologies that are helping to lower energy costs in environmentally preferred ways.

Just as an aside, you could contrast that with the situation at Ontario Hydro, where in fact they had very large increases in energy costs and had massive layoffs. We were able during that period to deliver to the provincial economy much more competitive energy costs and job creation. We think there are opportunities for the government and the industry to work together so that we can add to that contribution.

We've identified two areas, for example. One is cogeneration, which is simply the simultaneous production of thermal energy and electrical energy using natural gas; it's highly energy-efficient and cost-effective and environmentally beneficial relative to coal generation. The other is natural gas vehicles. Ontario has about 44% of the stock of natural gas vehicles in Canada at the moment. There's a cluster of industries in southwestern Ontario, because basically the nucleus of development of natural gas vehicles in North America is presently here in southwestern Ontario. The industry would like to work with government to try to develop that potential, so that we get an export industry developed out of what we have now as a basic infrastructure.

Another thing that we've noted in our document that would help competitiveness is restructuring of the electricity market, and here there's no slight to Ontario Hydro. Ontario Hydro supports the notion that the electricity market should be opened up, needs to be restructured, and that the future lies in providing more competition in generation and wheeling power. We think that would be very helpful to widen the range of choice for energy consumers.

Finally, to the question of the environment and energy, we very much appreciate the fact that the Ontario government and the federal government have taken the approach of adopting voluntary initiatives on the part of industry so that we can produce cleaner and more viable environmental technologies and practices rather than having thrown at us from every angle economic instruments that could be damaging to the economy, such as carbon taxes.

What we'd like to do is leave you with the message that this industry would like to work with government to try to develop whatever potential we can find to help prepare the economy for the future.

Very quickly on our recommendations, basically what we say is:

Balance the budget while the economy is growing. Don't miss it this time around, because we missed it in the 1970s and the 1980s, and if we miss it in the 1990s we're going to be in a lot more trouble.

Implement a debt reduction program. If the government introduces new programs, it shouldn't do that unless it finds offsetting savings somewhere else in the system.

There should be no net tax increases.

The government should review its user-fee policies. Some of the companies in the Ontario natural gas industry face fee increases up to 16 times over three years, which is simply way beyond -- I mean, we just don't comprehend why these are happening.

The government should encourage public debate on the future of fiscal federalism.

It should make more progress in reducing the barriers to internal trade.

We would hope the committee would support the Ontario Investment Service. We were involved in the creation and implementation of that service, and the importance of competitiveness to the economy is front and centre in the Ontario Investment Service. We believe it will be a useful instrument for helping to increase investor interest in Ontario, so we'd recommend your support of that.

We would like your support for the consultative approaches to environmental questions when it comes to energy, and we would like your endorsement of the fact that it would be good if government and the industry could work together and see what we can do about improving competitiveness.

Mr David Johnson: I appreciate your information. I'm sure you know a great deal not only about natural gas but about the economy in general, and I appreciated your comments today.

Looking at the deficit, the Provincial Auditor has clearly indicated that the real deficit, what we're adding to the debt of the province of Ontario, is over $10 billion this year, and that includes operating costs, that includes the capital costs, that includes money to crown corporations.

Now, starting from that deficit, which, I agree with you, we must eliminate -- frankly, I have no concern with regard to balanced budget legislation. Many of the states in the United States have balanced budget legislation. Municipalities, including Metropolitan Toronto with a $4-billion budget, which is not as big as the province of Ontario but nevertheless a big budget, have to balance their budgets each and every year.

However, how do we eliminate the deficit in the first instance? You've indicated in your brief that you expect the GDP to grow at 4.2% this year, 3.9% next year, and I think I heard you say that you expect the GDP to probably drop off at that point, with the United States perhaps having reached its peak and a slowdown at that point. Starting from a more than $10-billion deficit, with a GDP that I would estimate would be in the 3% range over four or five years on average, is it possible, without significant expenditure reductions in the province of Ontario, to balance the budget, starting from a more than $10-billion deficit?

Mr Jones: Not unless the economy puts in a very strong, sustained performance for a longer period of time than we're used to seeing.

Mr David Johnson: Is that even within the realm of possibility, the kind of growth we would need to eliminate a more than $10-billion deficit?

Mr Jones: I think rather than talk about whether it's possible, you have to look at the risks. The odds are that it won't. I'm not saying it can't, but the odds are that it won't.

Mr David Johnson: Exactly. The odds are that it won't. And then to balance the budget, which is essential, as you've indicated, going into the next recession, expenditure reductions would certainly be required over the next few years to get that budget in order.

Mr Jones: That's correct.

Mr David Johnson: These would be fairly sizeable expenditure reductions. We're not looking at tinkering around the edges. Indeed, if you look at a budget that has doubled since 1985, from $28 billion in 1985 to over $55 billion today, increased by some $27 billion or $28 billion over a 10-year period, is it not feasible that there would be ample room within a budget that's increased by that sort of magnitude to find the kind of expenditure reductions that would be required to balance the budget?

Mr Jones: You would hope so. It will be painful for many people, but if we wait, the problem could be a lot worse down the road. Either we do it now and it's less painful, or we do it some time in the future and it will be a lot worse, a lot more painful.


Mr Wiseman: I'm interested in your non-utility generators, and I'm curious: At what megawatt level does it become economically feasible for cogeneration gas to be used? Have you done that kind of work? At the lowest end, not at --

Mr Jones: I think the smaller-size projects right now are economic, or can be economic. For example, we're developing the hospital market. The universities have been installing facilities. These are the smaller-sized facilities, often where the operator is changing existing capital plant, you know, wants to replace existing equipment. It really is, at the moment, only economic in what we call the low end of the scale, the load displacement cogeneration, and part of that is because of the way Ontario Hydro administers cogeneration. It will not accept purchased cogeneration at this time, as you know.

Mr Wiseman: That's because they have such a capacity and such a huge debt. They're not the only ones wrestling with that.

Mr Jones: Yes, they don't want stranded assets.

Mr Wiseman: And if they wind up having large sectors of the economy tipping out, they will never get their finances under control either.

That leads me to the next point. If cogeneration is allowed in a large area and then you get one area that has lower energy rates than another, then you've got a real problem in the economy, where industry will move and that kind of transfer will take place.

Mr Jones: I think you're going to see a debate on the whole question of the structure of the electricity market and the question of power pool and wheeling and all of that kind of stuff. That'll be a healthy debate, and as an industry we're kind of anxious to get started on the debate. We don't think, in many cases, consumers have to be disadvantaged at all. We think it's to the benefit of consumers.

Mr Wiseman: What kind of a job growth potential would you project in this area if there were some way to move forward in terms of this partnership that you're talking about? How many jobs do you think might be created?

Mr Pinnington: If you're moving from just cogeneration now to NGV and other technologies, I don't know that we're prepared with a specific number. There is a number in our text relative to every X millions of dollars of expenditure.

Mr Jones: If you're interested, we could get you some numbers.

Mr Pinnington: How many in the NGV industry alone?

Mr Jones: I can't remember how many jobs we have in the NGV industry.

Mr Pinnington: This is a small industry that's just really started up in the last eight or 10 years. I think it's something like 1,500 jobs directly within that industry, and Mr Jones had about 18,000 jobs over the period of 1988 to 1993 in development of the gas industry.

I think it's more than jobs, though. On the cogen side, it's a far more efficient use of energy. It's far more environmentally acceptable.

Mr Wiseman: That's one of the reasons I'm interested in. We've heard from --

The Chair: Mr Wiseman, we have to go on. I'm sorry.

Mr Wiseman: I'm out of time, and I couldn't ask about trucks and whether they've solved that problem with the --

The Chair: It won't be on Hansard, but you can ask later.

Mr Phillips: I've got a more general question. In terms of our energy cost in Ontario right now -- I'm thinking of natural gas and electrical energy and other energy -- what's the trend? I'm just thinking now of the competitiveness particularly of our industry. Can you be helpful to us in what's happened to cost to industry over the last five or six or seven years?

Mr Pinnington: I think we can quote the National Energy Board's recent documentation on the longer-term prospects for the price of natural gas, and the expectation is only nominal increases. There is something like a 15-year supply of natural gas at present rates of offtake. That includes domestic and export gas. The assumption is that we will continue. This is conventional gas that we continue to produce at about the same cost we're at.

Mr Phillips: I'm interested in this: our competitiveness versus neighbours, the US neighbours and what not. Are we getting more competitive, less competitive, on energy costs in Ontario?

Mr Pinnington: The very fact that we've almost quadrupled our exports of gas to the United States would suggest to you that we have a substantial resource of low-cost gas. Just to maybe put some other numbers --

Mr Phillips: The interesting number you gave us today was that you supply more energy than electrical power --

Mr Pinnington: That's correct.

Mr Phillips: -- and what other power? Gas power?

Mr Jones: Oil.

Mr Phillips: Oil. Just in terms of comparison versus what someone would be paying in a factory in Michigan, in Ohio --

Mr Jones: We've put together data which we're supplying to the Ontario Investment Service on the system and we'll be happy to share that with you.

Mr Phillips: Are we lower, higher?

Mr Pinnington: Absolutely lower.

Mr Phillips: And are we trending lower?

Mr Jones: I don't know about the trend.

Mr Pinnington: We've been steady for -- I think the term we're using is no real growth in the last 10 years. On average, the price of natural gas to an industrial customer in Ontario now is probably somewhere around the $3 range to a large industrial account. I would suggest to you it's probably at least $1 more for 1,000 cubic feet to customers in the United States. We enjoy a substantially lower price for natural gas.

Mr Phillips: Yes, you are the largest supplier of energy, then that's a competitive advantage for us, I gather.

Mr Pinnington: Possibly another comparison, and it is an Ontario comparison, but home heating -- the average residential customer -- the differential between natural gas and oil was about 32% more expensive and gas is approaching 60% more expensive.

Mr Jones: You mean electricity.

Mr Pinnington: Electricity, yes. Electricity is about 60% more expensive than natural gas, so there is just no question that natural gas is a very economic fuel and also a very positive environmental position.

The Chair: I'd like to thank the Ontario Natural Gas Association for making its presentation before the committee this afternoon.


The Chair: The next presentation this afternoon is by the Canadian Tax Foundation. Please let us know who is who.

Mr Tom McDonnell: Thank you, Mr Chairman. My name is Tom McDonnell and I'm the director of the foundation. David Perry is with me today and David is our senior research associate.

Your clerk suggested that we might make a formal presentation of about 15 minutes, leaving time in the balance of the allotted time for questions, should there be any, and I propose to stick to that schedule. I think the clerk has distributed copies of our submission and you will find attached to that a couple of charts with some information on comparative tax rates in the OECD countries.

A word, if I may, about the Canadian Tax Foundation. We are an independent research organization committed to impartial public education rather than policy advocacy. We try to provide a forum for expert analysis and discussion of the Canadian tax system both by its members and others. We've been in existence for 50 years; 1995 is the 50th anniversary of the establishment of the foundation. Over those 50 years, our research program has provided the benefits of what we believe to be the best academic investigation of tax and public finance matters, all with a view of fostering the best tax system for Canada.

In our submission to you today we will not address expenditure policy or the issue of debt and deficit reduction, obviously important issues but ones which, given the independent nature of our organization, we do not feel we should comment on. We will also not propose particular tax policies for the province in the next fiscal year.

We are an impartial body; we do not engage in lobbying or policy advocacy. We hope, however, to call to your attention some of the underlying problems that we think will shape provincial tax policy over the next six months, and the comments that follow do not specifically address the situation only in Ontario but reflect our view of the situation facing all provinces as they face their 1995 budgets.

Over the past year, it has become almost trite, I think, to warn against tax increases as a way of addressing the federal and provincial deficit problems. What perhaps is surprising, and I think worth noting, is the extent to which moderate observers have stressed their concerns about the advisability of such a deficit reduction policy. I think it's clear that there is a widespread feeling that the overall tax burden should go no higher. Leaving aside for a moment the implications of this sentiment for budgetary policy, let me examine what we see as the factual basis for what we're calling tax fatigue.


My comments for the next moment or two will address the period 1980 to 1992 and 1993. What we see during that period is that after more than a decade of regular tax increases, and these by all levels of government, Canada's overall tax burden as a percentage of GDP has increased by about 23%. During that period, federal taxes rose by about 19% and provincial and local government taxes rose by about 27%.

At the same time as we were experiencing substantial tax increases, no new major spending programs had been introduced. Indeed, a number of existing programs have either been curtailed or have been cut back significantly. Thus, to the average Canadian, his or her tax burden has gone up while at the same time services have gone down. And all this apparently for naught, because apparently federal and provincial deficits are now substantially higher than they were in 1980.

There are, we think, sound technical reasons why deficits in fact have gone up -- these include rising interest costs and the two severe recessions in the intervening years -- but these reasons, I think, to a large extent have been lost on the general public. They have clearly soured on current tax policy and, as importantly, those who form it. I think the question facing us as we enter budget season in 1995 is, how strong and how pervasive is this sense of tax fatigue and how is it going to affect tax policy for this year and beyond?

This brings me to the question of limits on taxation. The determination of the maximum tax burden is not an exact science, but there are some indicators that we may have reached that level. In 1992, the foundation published an article in its Canadian Tax Journal and the author identified three main guidelines to identify the critical limits to taxation. These were: First, we're at the limit when governments tend to incur deficits rather than increasing taxes; secondly, we're getting to the limit when governments tend to use non-tax resources such as user charges and lotteries rather than increasing taxes; and, thirdly, we're at the limit when we find more open public opposition to tax increases. I invite you to reflect on recent experience. It would seem to me, by all three measures, we are very close to the limit.

Quickly, two examples: In 1993 in British Columbia, a proposed surtax on property taxes for more expensive properties was part of a budget. The strength and the breadth of the outcry against that led to the withdrawal of that proposal.

Then this committee is familiar with the problems of the underground economy. It studied it a year or so ago. The underground economy seems to be rising and to some extent, at least in terms of popular perception, it's suggested that this is due to the GST because it was seen by many as a large tax grab, which in our view it was not, and to the fact that it seemed to be fatally flawed in design, and again in our view it was not. But here, in our view, facts are not necessarily determinative. The important thing is perception. What the GST did was crystallize attitudes to taxation, drawing the average Canadian's attention to taxes every time he or she opened wallet or purse.

So what does this mean for tax policy options? Well, the sense of tax fatigue and the prospect of antipathy to further tax increases, in our view, severely restricts those options for provincial budgetary and tax policy in 1995. If you will allow me, for just a couple of minutes I'd like to review briefly the main tax sources available to the province of Ontario and our assessment of how this concept of tax fatigue may affect your options with respect to those sources.

First, the personal income tax: It seems to us that the prospect for general acceptance of personal income tax increases is, to put it mildly, not rosy. Canadian income taxes, as I'm sure you've heard, amounted to about 14.5% of GDP in 1992, and this is the highest percentage of all G-7 countries. This ratio was also higher than in all OECD countries, with the exception of the Scandinavian countries and New Zealand. But I think most importantly for Canadian and Ontario tax policy, we are well above the ratio in the United States of 10.1%.

The problem with higher tax rates is that they make deductions more valuable and cheating more profitable, thus enhancing the attractiveness of tax avoidance and tax evasion. As a consequence, the personal income tax system offers, in our view, little relief for provincial treasurers.

But what about corporate income taxes? Contrary to some popular belief, corporate income taxes in Canada are well below the level in other OECD countries. However, they're only slightly below our major trading partner and competitor in the United States. Our collections -- and I emphasize "collections"; I'm not talking about tax rates here -- of taxes on corporate income were equivalent to about 1.8% of GDP. The OECD average is about 2.5%, so you can see we're quite a bit below it, but the US ratio is about 2.1%. However, despite these figures, we think that here in Canada if anything there's even less room to manoeuvre on the corporate side than on the personal income tax side.

The problem here is that with an age of full mobility of capital and extended free trade zones, companies are now freer than ever to choose the most hospitable sites for new or expanded facilities. Of course, of equal concern is the ability of multinationals to use transfer pricing to minimize the tax burden suffered in high-tax jurisdictions. While some public opinion would seem to favour resort to higher corporate income taxes as a solution or partial solution to the problem, we think the reality is that such a policy in the borderless society in which we now live and operate would be counterproductive.

Let me refer to another source of revenue, social security levies. Now, this is an area in which jurisdiction is divided between the federal power and the provincial power, so some of what I say will not be directly relevant to Ontario. Taken together, social security levels in Canada in 1992 were about 6.0% of GDP, again below the OECD average of about 9.9% and even below comparable figures in the United States, which we have at 8.8%.

These are levies basically for unemployment insurance, Canada and Quebec pension plans and workers' compensation, so it's only the workers' compensation levies that really fall within the purview of the province. But all of these together are seen today as job killers. At a time when policymakers are concerned, and rightly concerned, with finding work for the large number of unemployed, any move that seems to make it more expensive to hire new employees will not likely meet with public approval.

A word about property tax: Property taxes in Canada are the highest in all of the OECD countries, 4% of GDP in contrast to an average of about 1.8% for the 24 member countries.

The tax protest movement that we've seen on the rise in Canada really began, we think, because of the concern over rising property taxes. They certainly continue to be a sore point in many provinces, this one included. As a consequence, provincial policies that force local governments to increase their property tax burdens will probably meet with very spirited resistance.


Consumption taxes: Again, contrary to some perceptions, consumption taxes in Canada are low by comparison with most OECD countries, but again, and I emphasize this, well above comparable US figures. Even if there is tax room, if you will, in the general sales tax system for increases, the present situation in which we find ourselves in Canada, where most transactions are subject to independent and different federal and provincial general sales taxes, makes a general increase in these taxes inappropriate this time, because both levels of government, as you know, are discussing possible reforms to this two-tiered system.

This is a unique system in industrial countries. It's our view at the foundation that the resolution of the current impasse between the federal and provincial levels on this consumption tax issue is vital, so any significant move at the provincial level to change the base or extend the tax during these delicate times would be unadvised.

This broad discussion shows, we think, how narrow has become the room for provincial governments to raise additional taxes without creating tension that could harm their ability to govern. Widespread discontent with tax policies would weaken support for what we believe are necessary expenditure reduction measures.

It's appropriate, I think, to say a word about non-income taxes on business. We have some specific concerns about the direction of provincial tax policy in the rest of this decade. We have seen the increased use of business taxes not related to income, especially capital and payroll taxes. They're popular because they tend to provide a more stable revenue base than the corporate income tax system and they often serve as a proxy for a minimum corporate tax.

But over the past four years, seven provinces have increased their capital taxes on corporations, three have introduced or raised their general payroll taxes, and these in addition to the increases imposed by workers' compensation boards, the Canada and Quebec pension plans and the unemployment insurance program.

While the ultimate incidence of these types of taxes may rest primarily on shareholders and employees, their immediate impact is to reduce the competitive advantage of Canadian businesses in domestic and international markets.

In addition to that, these specific types of taxes also have an uneven incidence across industry sectors, so companies that are highly labour or capital intensive are particularly hard hit and these taxes form a major part of their costs. Increases in these taxes may also be inappropriate at this time because, again, the federal and provincial governments are still negotiating the deductibility of these taxes under the Income Tax Act.

Where do we turn? Let me say a word about special provincial incentives, because this is another troubling trend emerging from provincial budgets over the past few years. As provinces strive to attract new businesses or new investment, they are turning to tax incentives. We did a brief review of provincial budgets over the last four years and it shows at least 52 special incentive measures introduced or significantly expanded. Another illustration is the extent to which the provinces have, in the same period, lowered tax rates for small business and medium-sized businesses.

While such incentives may initially be successful in attracting new businesses, we think they must be used with caution. The smaller, so-called have-not provinces have introduced most of the concessions to date. They court a similar response from the larger provinces that, frankly, have more resources to outbid them for new investment.

Ontario provincial economic policy, as we see it, has long contained an implicit sense of restraint in engaging in direct competition between the large and small provinces. Frankly, we hope this can continue. It would be counterproductive in the extreme, we think, to have a large province like Ontario or British Columbia, for example, matching or attempting to outdo the tax incentives offered by Newfoundland or Nova Scotia. It would also weaken the tax system by shifting the burden increasingly to individuals and existing businesses.

We think any provincial budget must be designed to relieve the pressure on budgetary deficits, but without destroying the fragile economic recovery that we have recently enjoyed. It must also enhance the public sense of the legitimacy of government and the tax system. To weaken either would reduce the strength of our system of voluntary tax compliance. Taking it all together, the 1995 provincial budgets must tread a very fine line and we think with little room to manoeuvre on the tax side.

It's fortunate that the economic recovery is producing additional tax revenue and reducing the pressure on social assistance spending. We think this presents an ideal opportunity to reduce the deficit without imposing an additional tax burden on provincial taxpayers, who, as I guess all of us being taxpayers, are already feeling overburdened by our other responsibilities or roles as federal taxpayers and municipal taxpayers.

That concludes my formal remarks. David and I would be pleased to try to answer any questions you might have.

Mr Wiseman: I'm very interested in some of the work that you've done. I'd like you to comment, if you could. I come from a high-growth area where we have urban sprawl and where we have huge pressures for municipalities to put into place recreation complexes, where we have pressures on the provincial government to add additions to hospitals and to put in additional beds all throughout the region of Durham.

This means that there are more kids in the school, more teachers need to be hired. We keep getting told that's good for us. It's so good for me that my property taxes have doubled in eight years. Have you done any work in the area of trying to -- you see, all I've got is anecdotal evidence that urban sprawl causes me to have my taxes increased. Have you any data that you've done and any work that you've done that would either refute that or prove it?

Mr David Perry: There's not very much recent stuff on the effect of regional development -- urban sprawl, if you wish -- or straight city development on the tax rolls. You're not alone in seeing your tax bills go up, though. If you're looking at the provincial aggregates for personal income tax, there's been a significant growth, especially in the last four or five years. This is the downloading that goes from the federal government to the provincial government, from the provincial to the local.

The local governments have found themselves facing more responsibilities and a greater proportion of existing responsibilities than they had in the past. In Ontario, the increase in overall tax burden has been significant, from a relatively low 3.3 in 1977, and it was virtually flat until about the mid-1980s, at which point it started to rise. So we've gone from 3.3 to 4.3. That's a 33% increase, and that's really over the past 10 years, I guess, now. That's downloading. There's a problem with the elasticity of the base. You know, it doesn't respond to inflation, so the rates have to go up as local governments are coping with inflation, plus the fact that local governments have been under some form of expenditure restraint for a long time and the ability of local governments to trim and to cut expenditures back to meet their resources is much more limited now because there's less fat and there's more muscle that's being cut.


Mr Phillips: I too thank the group for its thoughtful presentation. I guess two questions, just in case I don't get them both in. The one is, any sense of whether in the mix of tax one is out of whack with the other? I listened, I thought, as carefully as I could because I kept thinking on the next page there would be one.

The second one: I don't want to draw you into a partisan debate, but you're experts in this area. It's no secret the Conservative Party is proposing a 30% reduction in the level of personal income tax, which is an interesting proposal -- but just any advice that you care to give us on whether, if you are looking at the tax mix, that's the area that we probably should be looking at? If you choose not to comment on the second one, I could understand that.

Mr McDonnell: Let me pick up your invitation on the second one and then I'll ask David to make a comment, because there is some evidence as to where the tax mix is in Ontario relative to our trading and OECD partners.

We would be very reluctant to be on the record as recommending any particular policy, and that reflects our position as an independent body. I think at this stage we will say that we recognize the difficult political choices, but we are not in a position to directly help you with that. David, would you comment on where we're going on the tax mix?

Mr Perry: Yes. The international comparisons that are enclosed with our brief would seem to indicate that property taxes and personal income taxes are at least as high as you want to go, if not too high, and that should be the area where you'd see reductions, and that social securities, which are virtually off limits for the province, and consumption taxes would be the areas to concentrate on.

You can see that happening in the Peterson committee report of last December where they reduced the surtax a little bit. So they're lowering income taxes and they picked up the money from the gasoline tax. Ideally, if you look at all the figures we presented, what you do is raise the rates on WCB to the point where they're generating a profit and use that profit, turn it back to the provincial treasury and lower income tax rates. But that's not the sort of thing that is really reasonable policy.

The problem is that you either have high tax levels or you have some other problems, like the reform of the sales tax system. The sales tax system is relatively low compared to most of our trading partners, except the US. That's really off limits because of the issue of GST versus retail sales tax and the hope that something may be done to resolve that issue.

Mr Carr: I think, to explain, the reason we've called for the tax cuts is very clear, if you look at other jurisdictions that we have to be competitive with. Our tax rate cut that we're calling for will make us the lowest-taxed province in Canada, marginally lower than Alberta, with the 30% tax cut. We've gone up higher and higher over the last little while and we recognize it's only personal income tax.

We get 19% of our revenue from the retail sales tax, $8.9 billion out of the $45 billion. So even if we become competitive, marginally better than Alberta on the personal income tax, we still have loads of revenue, 19% of it coming in from the retail sales tax, which Alberta does not. The tax cuts that we're proposing are only trying to make us competitive with other jurisdictions. As you know, we're not even talking about New Jersey, where Governor Whitman has come in with a 30% tax reduction.

So the reason for the tax cuts isn't because we, as consumers, believe that we need to have a tax cut. The reason we're doing it is we need to be competitive with other jurisdictions. It doesn't even have anything to do with fairness, because if you asked anybody in the province, they'd think they would be overtaxed from a fairness issue. We believe that lower taxes will mean more jobs, and the problem we have is that we're uncompetitive in our tax structure -- and we can get into who's to blame and so on; that doesn't help. That's why we need a tax cut.

I recognize the fact that you aren't going to be political and say you want to do that, but I want to explain to you where the tax situation stands. Now, as I've laid that out to you, am I wrong? Because I know you're basically in an education mode of trying to educate people, not, say, politically, although I'd love to hear how you'd vote next time. From the standpoint of what I've laid out to you, are there any wrong assumptions that I've made?

Mr McDonnell: Let me make a brief and quick comment on that and then again I will invite David to be a little more technical. In this area, it seems to us, you're really talking about political choices, and political choices are ones that reasonable people will differ on. We understand, I think, where your party is coming from with its proposals and why you feel the way you do. The difficulty we have in engaging in the debate, as I indicated in response to the first question, is that we see our role as laying out the background, the numbers and inviting those who are engaging in the political debate to do it on a rational basis.

Mr Carr: I see.

Mr McDonnell: Beyond that it's inappropriate for us to get much further into the actual debate as to what those choices might be. David, do you want to add to that?

Mr Perry: One of the things about tax mix which touches on what Mr Phillips said as well is that you get a different incidence from different kinds of tax. We have two studies in a recent tax journal on the actual incidence of Canadian taxes. They're slightly progressive when you look at everything combined, and the reason they're slightly progressive is because of the personal income tax. The others are either flat or regressive. The less weight you put on the income tax and the more weight you put on something like a retail sales tax, the more you risk flattening out the distribution more than you might want to.

The other thing is that the retail sales tax, if it becomes relatively more important, would beg more measures that would fine-tune the incidence. So you may want to, for instance, significantly increase the refundable credit that Ontario provides for the retail sales tax. You may want to change the base of it.

Mrs Haslam: I'm sorry. I can't hear. Mr Chair, I can barely hear that last sentence.

Mr Perry: I'm sorry. It's a question of how you alter the tax incidence, and as I said, we have two studies in the Canadian Tax Journal that show that our system is overall, all three levels, only moderately progressive, and the main tax that provides that progressivity, the main tax that helps at the bottom end, is the personal income tax. As you change the weight and as you make retail sales tax more important, the danger is you're changing the overall incidence of the tax, and then you have to look at changing the retail sales tax through increasing the refundable tax credit or through changing the base to somehow restore the degree of progressivity that you want in the tax system. And that progressivity is basically a political and a community decision. It's not a technical decision in any way.

The Chair: I'd like to thank the Canadian Tax Foundation for making its presentation before the committee this afternoon.

This committee stands adjourned until 10 am tomorrow morning.

The committed adjourned at 1659.