Committee Transcripts: Standing Committee on Finance and Economic Affairs - 2000-Feb-02 - Pre-Budget Consultations

Pre-Budget Consultations
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PRE-BUDGET CONSULTATIONS
CANADIAN FEDERATION OF INDEPENDENT BUSINESS

UNITED STEELWORKERS OF AMERICA
ONTARIO ALTERNATIVE BUDGETWORKING GROUP

ROYAL BANK OF CANADA

CENTRE FOR SOCIAL JUSTICE

WARREN JESTIN
ARON GAMPEL

NESBITT BURNS

ONTARIO SECONDARY SCHOOL TEACHERS' FEDERATION

COUNCIL OF ONTARIO CONSTRUCTION ASSOCIATIONS

CONTENTS

Wednesday 2 February 2000

Pre-budget consultations
Canadian Federation of Independent Business

Ms Catherine Swift
Ms Judith Andrew

United Steelworkers of America; Ontario Alternative Budget Working Group
Mr Hugh Mackenzie

Royal Bank of Canada
Dr John McCallum

Centre for Social Justice
Ms Armine Yalnizyan

Warren Jestin; Aron Gampel

Nesbitt Burns
Mr Douglas Porter

Ontario Secondary School Teachers' Federation
Mr Earl Manners
Mr Dale Leckie

Council of Ontario Construction Associations
Mr David Surplis
Mr Andy Manahan

STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS

Chair / Président
Mr Marcel Beaubien (Lambton-Kent-Middlesex PC)

Vice-Chair / Vice-Président

Mr Doug Galt (Northumberland PC)

Mr Ted Arnott (Waterloo-Wellington PC)
Mr Marcel Beaubien (Lambton-Kent-Middlesex PC)
Mr David Christopherson (Hamilton West / -Ouest ND)
Mr Doug Galt (Northumberland PC)
Mr Monte Kwinter (York Centre / -Centre L)
Mrs Tina R. Molinari (Thornhill PC)
Mr Gerry Phillips (Scarborough-Agincourt L)
Mr Toni Skarica (Wentworth-Burlington PC)

Substitutions / Membres remplaçants

Mr John O'Toole (Durham PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)

Clerk / Greffier

Mr Tom Prins

Staff / Personnel

Mr David Rampersad, researcher, Research and Information Services
Ms Elaine Campbell, researcher, Research and Information Services

The committee met at 1003 in room 151.

PRE-BUDGET CONSULTATIONS
CANADIAN FEDERATION OF INDEPENDENT BUSINESS

The Chair (Mr Marcel Beaubien): If I can get your attention, please, I would like to bring the committee to order. It's a little after 10 o'clock, and if we want to get done on time, we might as well get started.

Our first presenter this morning is our representative from the Canadian Federation of Independent Business. For the record, could you please state your name and position.

Ms Catherine Swift: My name is Catherine Swift. I'm president and CEO of the Canadian Federation of Independent Business. I'd also like to introduce my colleague, who is probably known to most, if not all, of you, Judith Andrew, who is CFIB's vice-president for Ontario and appears here a lot more frequently than I do. In fact, Judith will be back here in a couple of weeks representing the CFIB-specific perspective on some particular policy issues.

I've been invited today as a so-called expert witness. My background is also as an economist, which is probably one of the reasons I was invited as well, so I want to speak to some of the more macro-economic issues for the province and even some national issues as well, as they affect the province.

We have provided everybody with a kit with a few items in it. We have a PowerPoint presentation today, not too extensive, but a black and white version of it is contained in the kit. Also in the kit, on the left-hand side, is a letter I recently wrote to the Prime Minister which addresses some broader policy issues that I believe are relevant to this province as well. Also, I've included our latest pre-budget presentation, which was made last fall to the federal finance committee, and, again, a number of the recommendations there are germane to Ontario.

Another inclusion in the kit is a study called Small is Big. This was actually a study that we conducted jointly with Scotiabank last year. We were the co-hosts of an international small business congress in Canada, and this was actually a public opinion poll on Canadians' views towards small business owners.

Finally, the last item is our national economic outlook for 2000, and a little later in my presentation I'm going to be speaking to some elements of that as they pertain to Ontario.

A couple of years ago I was also asked to appear in this role as an expert witness, and in preparation for coming and speaking to you today, I looked back at what I said a couple of years ago, something that economists maybe should never do. I was at least pleased to find that most of the prognostications in that presentation turned out to be pretty true.

We poll our small business members regularly. We have about 40,000 in Ontario and about 97,000 nationally, so we have a good, solid chunk to get feedback from. I have found, of all the data sources that we use, our small business members' views of what they believe is going to happen in the economy and their business are pretty accurate. We often call small businesses the ca-naries of the economy because they tend to feel downturns fastest. They're not as insulated as our large firms. They also experience positive developments in the economy quickly as well. So we find they're really quite good predictors over time, and that was indeed the case.

It was interesting, too, to look back a couple of years ago and look at what some of the other expert witnesses were saying. John McCallum, the chief economist at the Royal Bank, was one of them. I understand he's going to be here this afternoon. He was waxing eloquent about bank mergers at that time, as you may recall, and obsessing about Y2K and all the problems that was going to cause for the economy. So it was interesting to look at that retrospectively and how changed things are today.

In terms of the outline of my presentation today, I'd like to briefly touch on what we believe the impact of some recent past policies in Ontario has been on the small business sector. I'd like to give you a perspective based on our survey data of the current views of Ontario small businesses as to what they believe is going to be happening with the economy and their businesses, look at some future concerns in a number of areas and, finally, address some medium- to longer-term issues that we see.

In terms of past policies, certainly we very strongly advocated, and have for the duration of our existence as an organization, which is almost 30 years now, lowering income taxes and notably the employer health tax in Ontario. Payroll taxes generally, as we have said endlessly before, are very much the bane of small businesses for a number of reasons. Small business is more labour-intensive than larger firms, therefore payroll taxes hit them harder proportionately. They are also profit-insen-sitive. Naturally, in rougher times when firms aren't making money, these taxes really bite. They don't bite as much in good times, because firms are profitable, but nevertheless, they still are a disincentive to increasing employment. As a result, we've focused a lot of our efforts on payroll taxes generally, and here in Ontario the EHT is a notable payroll tax. The elimination of this tax for businesses with payrolls of less than $400,000, which again was something we recommended for years and years and which was implemented a few years ago by the current government, was definitely a winner. The feedback we had from our members was that this was very much an inducement to hire and a positive development in terms of income tax reduction. As it hits the consumer positively, that naturally also affects the business sector via consumer spending.

However, as we know, we did see overall federal income taxes increase, largely because of phenomena such as bracket creep. The fact that tax brackets and the basic personal exemption are not indexed to inflation has added billions and billions to federal tax coffers over the last few years and certainly, to some extent, offset the benefit of income tax reductions in Ontario.

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Given that these policy changes coincided with a pretty strong and enduring period of economic growth, it was a happy coincidence because we did see extremely robust job creation in Ontario over the last few years, and we see it continuing. Naturally a lot of events contributed to that, but we believe the policy mix was very timely when we saw the economic growth. Of course governments typically don't cause recoveries or recessions, but they can make a recession worse or they can make a period of economic growth better by their policies.

Outside the tax area, we also saw a number of other legislative and regulatory changes-I'm not by any means trying to be exhaustive here, but some of the key ones. Changes to the Labour Relations Act were positive. We still see quite a bit more that needs to be done there, and we believe there is the intention to do that. We still have an imbalanced environment in Ontario with respect to issues such as successor rights. We still see employers very much hobbled in certain respects. Again, that is another disincentive to expanding or growing their business, as has been cited many times by our members.

Red tape is again another bane of small business, and the ongoing red tape review has been very positively received as well, although much remains to be done. General fiscal restraint is also a positive development, and some tax relief on the capital tax and corporate tax front has also been welcome.

The key tax area that remains a huge, looming problem is property tax. I know Judith is going to talk about that exhaustively in a couple of weeks. You might have seen that we released a report yesterday in Ontario that was aimed at municipalities. We compared key municipalities across the province and how our members believed they were or were not welcoming to businesses. The average rating was quite dismal, although naturally some were better than others. We still see immense inequities in the residential property tax burden versus the business tax burden, for which there is no justification on any business or economic basis, but there is on a political basis, which of course is why it's there in the first place.

In terms of the current views of our members, we conduct a survey of our members every fall, usually around November, to ask them their views in terms of their expansion or contraction intentions, their hiring intentions and investment intentions for the coming year. In our last survey, done late last year, we were pleased to see that our members were the most optimistic they have been since the peak of the previous business cycle, which was 1989.

Getting into some of the more specific results-and this is an index of business expectations of our members. Since 1988-it was based at 188 and, as you can see, it has surpassed its pre-recession peak fairly recently. So our members generally are quite upbeat about their expectations. These are Ontario-specific data, by the way. For the sake of reference, the national data are contained in the other report that is in the folder.

We ask firms what they expect for the economy and what they expect for their own business. Here, as you can see, almost 60% cumulatively believe that their own business will be much stronger or stronger in 2000 than in 1999. Of course, 1999 was a pretty good year, and so it's worth keeping these things in mind relatively. Almost 40% feel it will be roughly the same. Very few see weaker fortunes for their own business in 2000. So, obviously, there are extremely positive findings here that should bode well generally for the Ontario economy.

Just aggregating this by industry sector, we see the manufacturing sector especially strong and business services next. This has been the trend for a few years, so this isn't different from anything we've seen for a number of years. As you can see, going down, the weakest sectors are construction and agriculture. But generally speaking, overall there's a pretty positive forecast in all sectors, with some relative differences, as you can see.

We also broke this out for some Ontario regions. Again, the Toronto-central Ontario part of the province was most optimistic, with the north the least optimistic-not shocking, I guess, seeing what's happening. Nevertheless, we're still seeing more than half of the northern Ontario economy believing that they will see a stronger business performance in 2000 and roughly another 40% saying the same. So it's just relative differences, not that any one part of the province believes that things are going to be worse by any stretch in the year 2000.

We also ask what our members think they are going to be doing in job creation. Here we have all the provinces across the country. As you can see, Ontario is in second place, behind Alberta, in terms of its expectations for job creation. Again, we found these predictions on the part of our members have been pretty accurate over the years, so we believe we will be seeing another year of strong job creation. This is in full-time equivalents, by the way. We already have seen, over the past couple of years, a strong trend towards the conversion of part-time jobs into full-time jobs, which is typical in any economic growth period. In the first couple of years of a recovery, firms have a higher tendency to hire part-time, not surprisingly. Once they see the recovery establish itself and they have confidence that they won't have to lay people off or downsize, then they convert those into full-time jobs. So again, we're seeing that trend continue very strongly.

Something else we always ask the members is what factors they believe would encourage them to boost their own job creation plans above what they are currently thinking. Again, these are consistent results in terms of their ranking. Number one, increase in customer demand, is simply a proxy for a growing economy. Naturally, a growing economy is always a precursor to expanding employment in your business. Payroll taxes come in as a strong number two. Although we have seen in Ontario some lowering of the EHT, we still see things like workers' compensation premiums creating huge grief, for some sectors more than others. Although we see some reductions on an average basis, some individual sectors are still seeing significant increases in workers' compensation premiums. Other taxes are number three on the hit list, and we go down from there in terms of reduction in the firm's debts, access to credit issues and so on.

Overall, these numbers provide us with quite a good picture. However, I think we shouldn't feel all is great and that we can all rest on our laurels.

What's very interesting about this period of economic growth, which has been strong and quite lasting relative to other periods, is that there seems to be, certainly in our membership and even in the general public in terms of public opinion polls we've seen, this underlying malaise that things are pretty good now but there's a lot of concern over the future. I think this is caused by things like prevailing high public debt levels. Provincially we're still carrying a whacking big debt here in Ontario. Federally we have an immense debt. We've seen very little movement in any of these factors over time.

I think the pace of change in our environment is definitely a factor affecting business and affecting everybody. Technology is just barrelling ahead, everyone seemingly grasping to keep up. I think, to varying degrees in different jurisdictions, there is still a sense of governments not getting it with respect to small business. Although positive changes have been made, in some places more than others, there still is an overwhelming feeling that it's an uphill battle to have a successful small business.

We hear more and more from business members-and this is anecdotal, so it's not scientific and it's hard to measure this kind of thing because it is subjective. But we have never before in our time heard this level of underlying malaise in a period of the kind of strong economic growth we're seeing now. We hear more and more the sentiment from our members: "Yes, I'm doing well right now, but I'm not really making a lot of money. I'm getting by, I'm expanding, but not a lot is going to the bottom line. I worry about my future personally. Our policies in our country do not really permit me to save enough for my own retirement, to make me feel a comfort level." There's worry about everything from the Canada pension plan and so on. I just cite that as something that we're trying to get a handle on.

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There was a public opinion poll that came out late last year, you might recall, that stated the same thing, that people felt that yes, they're employed right now so they're generally OK, but they had an overwhelming concern about the future. I don't think this is something any of us should ignore in our respective capacities.

In terms of some future concerns-tax issues, which are always the key preoccupation of our members, from a business standpoint anyway. GST-PST harmonization: We've certainly been accused of beating this drum many a time, and we're continuing to beat it. It hasn't gone away but continues to crop up unsolicited on surveys we do with our members. As you know, we sought harmonization of the GST-PST in three Atlantic provinces a couple of years back now. We were waiting for the fallout to be negative; it hasn't been. Granted, how you do it is hugely important. I know many Ontario officials, including the finance minister, have said they don't want to increase taxes on Ontario consumers or any part of the Ontario constituency. That doesn't have to happen.

Every jurisdiction has the freedom to set a blended tax rate where they choose to set it. The notion that it has to increase taxes isn't true. How it's done is hugely important. Here in Ontario we have a large tax base, much more so than those Atlantic provinces that harmonized successfully. It's an ongoing irritant to our members to have to administer two different tax systems, so I'll just put that one back on the table yet again.

In the last budget, a business tax review was promised. We're wondering where it is, because we haven't seen any follow-up or mention. We welcome it. We think a comprehensive review of the whole series of taxation issues for business is a good idea. The federal government has been making noises about it as well for a while and they came out with that Mintz report, as you know, a couple of years ago. Anyway, we would like to see that move forward and would of course be delighted to provide as much help and information as we can to that from the small business side.

I mentioned property tax earlier. It's a looming problem because, when the caps come off relatively imminently, we're back at square one. This is a very challen-ging issue. Successive governments have backed off taking it on because of the huge politics and complications involved. Nevertheless, although some of the property tax issues have been dealt with from the small business side, a lot of the serious ones are yet to be dealt with.

Payroll taxes, as I mentioned earlier, continue to be an irritant here in Ontario. If we just look Ontario-specific, yes, the EHT was very welcome. Workers' comp is still a problem for many business sectors. At the federal level we've seen some reductions in EI, but still nowhere near as much as we need to see. We're still seeing accumulated surpluses around $5 billion to $6 billion in the EI fund on an annual basis, and the cumulative surplus must be around $26 billion right about now, so obviously way more than is ever necessary to counteract an economic turndown. Naturally, it's just being grabbed for whatever purposes seem to be appropriate at the time by the federal government.

The other federal payroll tax, CPP, naturally is going up on an annual basis, as we know, for the next couple of years and has been for the past couple of years. Even though this is viewed as a federal tax, all of the provinces agreed to these increases. We don't let the provinces off the hook when it comes to what has happened with the Canada pension plan over the years. These kinds of large increases, it must be said, were necessitated by the fact that this plan was grossly mismanaged for so long by successive provincial and federal governments which never bothered setting up a proper pension plan.

So-called "pay as you go" was laughable because it basically meant governments spent any monies that should have been invested in a fund for future claims. For governments to pretend now that they're surprised that this big bunch of baby boomers is going to be retiring sometime in the next 10 to 20 to 30 years is laughable. Everybody has known that. Demographers were saying that back in the 1960s. Obviously we need to fix that.

The worrisome part as well is not just that we're imposing this higher payroll tax burden year after year from the federal standpoint, but also that recently there have been concerns coming up from the actuarial community that even with those significant increases, which amounted to a doubling of CPP premiums over about a five-year period, the plan could be in big trouble. So there's something where provinces and the feds are both very integrally involved and need to focus on that, obviously, in the next little while.

The issue of effectively decoupling provincial personal income tax systems from the federal system-Quebec has done this for years, as they've done in so many areas, and now it's being not only discussed but planned by a number of provincial governments, Alberta and Ontario being two notable examples-the way this current system works, as everybody knows, is that fed-eral taxes increase via bracket creep or whatever we want to call it and provincial taxes naturally go up as well, as they're based on the federal portion.

Decoupling this system is not a bad idea, the caveat being, with a government that has the right responsible tax policies, that it's sensible to decouple the system so that they can have more control. If we had a government that wanted to see maybe more tax brackets or increases overall in the tax system etc, then I guess we'd be considerably more concerned. When we make these policy changes, we make them in a certain environment, and right now we know the intention of this government is to decouple the income tax system so that they can pursue a lower income tax strategy in Ontario. We might not be quite as sanguine if we had governments with the opposite intentions in power. So although, like I said, we don't have a problem with the theory, in practice it could manifest itself in a very different way-something to keep an eye on.

Finally, the whole issue of fees levied on businesses, and individuals, for that matter, is proceeding apace. The fact of governments being strapped for cash generally over the last number of years has meant that a lot of emphasis has been placed on levying fees, as we've said before. True fee for service we've never minded, but we've noticed that when fees go up, nothing else seems to go down. So it's definitely not an offset; it's an incremental level of revenue collection. Fee reviews are very difficult to do because they're a lot of work, it's a micro type of analysis that has to be done, and governments can get discouraged because they're not those big headline-grabbing issues that some other things may be. Nevertheless we feel, from a fairness standpoint, transparency and also from a good business standpoint, that increasing that level of fees is really just increasing taxes by another name and should not be pursued and will have negative effects on the economy overall.

The whole financing area is an ongoing challenge after we saw a few years of improvement in the availability of financing. That's something we track over time with our members, so we have a very good time series over 20-odd years now. Just from 1991, we see this problem increasing notably. It peaked back in probably the worst of some of the recessionary periods there in the early 1990s. We tend to see availability-of-financing problems sort of lag a business cycle right at the beginning of a recession. They won't click in for a little while and then they tend to creep up as the recession continues. That's what we see with these data. They went down again, as you can see, for a few years when our economic growth was a little stronger in 1995, 1996 and 1997.

In the last couple of years we've seen an increase again, and this is pretty worrisome, because we've had a pretty good economy over the last couple of years. Why is this happening? We believe there are a number of reasons for this: The trend in the financial sector generally towards consolidation is happening in a number of ways. Technology is driving some of it; it's not necessarily a policy choice. We see much more automation in lending processes, much more decision-making being taken away from the local branch manager, from the local presence.

This might be good for some sectors. I think it's not a bad thing for mortgage lending, for example, which is very formulaic. You can plug three numbers into an equation and spew out, "Yes, that's a good loan; no, this is not." It's much harder to do with small business, with, as the bankers themselves say, the three Cs, so called: credit, collateral, character. Character is very tough to measure-the character of the business owner, in other words, the likelihood that they will pay their bills-when you're in Toronto and the borrower is in Timmins or somewhere else.

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We have found this centralization of the whole financing sector to be very negative for small businesses. Of course, we saw just this week yet another merger, the final trust company bite the dust: the Canada Trust takeover by TD. This is a big issue for Ontario. Canada Trust has a much larger presence in this province than it does anywhere else in the country and often was the only other player in some communities, so we see this being a notable issue for Ontario. We also wonder how it will predict the possibility of future bank mergers. We're hearing rumours that not necessarily in the next month or two but probably a year or two down the road we're going to see further big-bank-to-big-bank mergers proposed. We've heard the receptiveness in Ottawa has changed for this. It hasn't changed in the small business sector. We still think that without viable competition, which we still do not have-not just in Ontario but elsewhere in the country, but notably here in Ontario-there's a big problem with pursuing further consolidation in the big banks.

I guess, too, if we see concerns increasing now, when the economy is still very good, what are we going to see when the economy slows? In the last recession, bankers have admitted to us-and again this was particular to Ontario-that there was a very knee-jerk, negative response, where a lot of businesses that were, granted, having some rough times but were not in danger of going out of business were nevertheless cut off credit and forced out of business, as a result, by bankers who overreacted to negative economic circumstances. So I think we really should be worried about this issue, unfortunately, once again, and the solution, to our mind, is to try to promote alternatives. That's not easy-I'm not trying to pretend this is something that can happen quickly or easily-but right now we have a legislative environment that does not encourage that in many respects.

The whole question of equity, not simply debt, has to be focused on. Our tax system, which continues to take a lot of earnings away from small businesses, and others for that matter, deters the building up of equity in the small business sector. Many of our members feel that they still haven't recovered their equity levels that they had before the 1990s recession, and that's very worrisome, again down the road, for a period of economic slowdown. Of course bankers will look at that and say, "Your equity isn't strong enough; I can't grant you any debt," and that exacerbates the problem.

We've been focusing very much on the need for tax incentives which will free up some equity at low levels. Venture capitalists do nothing for our members, or for a very small segment of our members. We see huge tax benefits being given to these labour-sponsored venture capital funds, which can't seem to even spend the money that they're given, and we have oppose those for the duration. We find them outrageous and a misuse of taxpayers' money. We feel some loosening up-and this is more of a federal issue when we look at things like RRSPs, but things could be done at the provincial level as well to promote people to invest the smaller amounts of money-typically $30,000, $40,000, $50,000, not big bucks involved here-that are needed in an equity position in small businesses.

Some other future concerns: The general direction of government policy deserves a couple of comments. We've seen a lot of events at the federal level lately: misuse of employment insurance monies, notably in this transitional jobs fund, which was predictable years ago and I guess finally made public recently; something we term "second-term syndrome"-the current Ontario government is also in its second term. Governments over time get more distant from their constituents. They tend to have much more affinity for big spending policies, more interventionist policies, whatever their partisan affiliation. We don't find there's an absence of so-called second-term syndrome in any one party, say, versus another.

We bring these issues to light for the Ontario government, for example, to start getting back into a highly interventionist approach. We look at things like the SuperBuild fund. Our members are very supportive of so-called real infrastructure. We definitely need some infrastructure investment; nobody would question that for a second. But let's confine it to real infrastructure and not some of the strange infrastructure spending we saw prior to the last election, which went into a lot of questionable recreation facilities and all manner of things that really could not be termed infrastructure and was politically oriented spending, not economically based spending.

I think, too, that we need to really take this opportunity of continued growth, which happily we seem to be going to enjoy for at least the next couple of years or so, to consolidate some of the gains we have made-whether in government finances, in the economy generally, getting rid of deficits, starting to work on public debt-because we will see another slowdown. We all like to think we have banished the business cycle, but I don't think we have yet.

When we look at things like corporate profitability right now-and of course there are notable examples; we see the Nortels, the banks etc in the headlines-overall profitability in the corporate sector is down considerably from the last business cycle. It's down for a lot of different reasons. The competitive climate is way more intense now than it was even a decade ago, and it's probably going to get more so.

From the small business standpoint, we have a tax system in Canada that over the last 15 to 20 years has increasingly relied on the profit-insensitive taxes-property taxes, as I mentioned earlier, payroll taxes, capital taxes and so on. The more we lay these taxes on the corporate community, and notably the small business community, the more we will decrease profitability, reduce the ability to add to equity and weaken the corporate sector generally. Small business profits-some recent data has come out of StatsCan-nationally are consistently lower than large corporate profitability, and the tax system and the way it falls more heavily on small firms is a key reason for this.

We've heard some musings about our productivity challenges. A lot of this has been focussed at the federal level, but I don't think the provinces can afford to ignore it either. Our standard of living, as we know, has at best been flat over the last decade or so. The tax environment, the lack of productivity gains, is the main reason for that. Finally, we see an emerging focus on a large corporate agenda. We don't necessarily have a problem with this, but all we would say is: Do not focus on the large corporate agenda to the exclusion of the small business agenda. There are elements in common and then there are elements that are different.

I have talked more than enough. I welcome any comments you have at this time.

The Chair: On behalf of the committee, thank you very much for your presentation. We have approximately seven minutes for each caucus, and I'll start with the official opposition. Mr Kwinter.

Mr Monte Kwinter (York Centre): Catherine, as I mentioned to you just before we started, I just got back from the World Economic Forum in Davos last night, and the theme that dominated that meeting was the new economy and e-commerce. When you listened to what was being discussed, there is really going to be a total revolution in how small and large businesses actually function.

I notice there's no mention at all of that. From your perspective of small business, should we as a government be doing something to prepare these people for this economy? Is something being done? Is there something that should be done by your organization? How do you see that playing out over the next couple of years?

Ms Swift: I agree completely, and I didn't not mention it because it wasn't important. There were probably a lot of things I didn't mention that I could have. You just need to make these things three hours long, that's what you need to do, and really torture ourselves.

As an organization, we have been promoting with our members for quite some time. A number of years ago, it was: "Get hooked into the Internet. Understand what it means for your business." We have a segment of our Web site, which we have had operating for a couple of years, which is constantly changing and which offers online education courses to our members. A number of them focus on e-commerce issues: why you as a business need to think about it, what you need to do, advice to facilitate, links to help people and so on. So, we as an organization agree it is an ongoing challenge. I believe governments also can take a role and promote. It's partly an education process and it's partly a facilitation process.

Right now there are a lot of questions about how the e-commerce environment is going to evolve. A small firm, unless it's hooked up-and many are now, of course, as suppliers or somehow linked in-with a larger firm, is not likely to make the investment to put an e-commerce platform unique to them on their Web site, for example.

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It seems that we're probably going to be moving towards a utility type of environment that smaller firms can access, not unlike the telecommunications system or whatever. Nobody is going to set up with their own phone system; they're going to pay to hook into an existing phone system or e-commerce system, or whatever. Of course, that's all evolving right now, and there's a lot of pushing and pulling as to who is going to be the standard and who is going to provide these types of infrastructure, I guess you could say, for e-commerce. That being said, I do see a role for government. I see a role for organizations like ours and so on in the education and facilitation side and encouraging firms.

There was a recent report that came out of a federal task force on e-commerce and related issues. Governments seem to be happy to focus on the trendy, interesting developments in these areas, but what is holding back our productivity is that we're taxing the pants off these businesses so that they don't have some of the resources they need to devote to some of these new areas.

The US, as we know, is moving ahead in leaps and bounds. A lot of business people have expressed concerns in Canada that we're falling behind, and that we might be falling behind to the extent that it will be hard-some say impossible-to catch up if we don't watch it. I don't like to be that pessimistic. I don't think it's true. I think we have to keep in perspective that Canada is also ahead of a lot of the rest of the world. However, that big neighbour to the south does tend to direct a lot of what we do in Canada so we do have to keep up to date.

In addition to government's role in education, promoting and encouraging the development of e-commerce, I would also like to see them focus on the policy infrastructure. Let's get the tax mix right. Why are capital gains in Canada taxed at twice the US rate, and the US is talking about lowering theirs yet further? Again, that's not a provincial issue exclusively, but provinces could levy some strong support with the federal government for reductions in some of these tax areas. That would definitely be a more favourable business climate and would free up businesses and resources to be able to devote more to some of these areas that you're talking about.

Mr Gerry Phillips (Scarborough-Agincourt): I appreciate, as always, your presentation. The concern that many of us have is, will we be able to sustain the essential services in the environment of-without question, tax cuts are the in thing. It's very difficult, as a politician, to even raise a cautionary note.

Do your members give you any indication of concerns on the delivery of health care, of education, of municipal services? What advice would they give us? Should we be looking at further cuts? Or are you getting any concern by your members that maybe the things that distinguish Canada are at risk?

Ms Swift: There certainly is. Our members are very reflective of your average Canadian, we've noted in a lot of our polls. We compare them to a public opinion poll and on many issues they're virtually interchangeable. In the most recent survey we've done, which is included in that federal pre-budget that I put in the package, on priority areas for cutbacks versus spending and so on, the only area in which our members see any justification for spending increases is health care.

We're not experts in health care and don't purport to be for a minute, but we've certainly been looking at it a lot more lately than we've ever looked at it in the past, because it is such a huge area of expenditure, and we know it's going to be more and more important in the future to everybody, no matter what venue they're coming from.

We spend a lot already in this province and in this country, relative to other systems around the world, and we certainly don't seem to be getting value, and there are a lot of reasons for that. I do think some of the policy initiatives-the federal government is at least trying to get some good and consistent data on a national basis. That's something we need. We've never had that.

While our members have expressed their view that they believe the only area that warrants more spending is health care, they also know a lot is already being spent there and a lot of it isn't being spent terribly well, so throwing money at it is not the only route to follow. But yes, they are concerned.

In the education area, that has become so politicized it's almost difficult to have any kind of sensible position on the whole spending area. We've seen, as you know, study after study showing that resources are not going to the classroom per se in anywhere near the same proportion as they were 25 to 30 years ago. The whole unionized environment has radically polarized that environ-ment. My kids come home with union propaganda. I get pretty ticked off, I have to tell you. That's what happened through that whole period of strife there.

That being said, I think there's a lot of constructive work. Despite all that turmoil, which was very unfortunate for everyone, I think there was a lot of constructive questioning being done by a lot of the education community, as well as others. We're certainly, as an organization, quite active in encouraging businesses-the provin-cial partnership council is one area we are very active on-to participate even more in co-op programs, for example. Our members are acutely interested in the education system. They are usually parents, so they have that interest anybody would, but also they're interested naturally from a business standpoint. They do notice, and small firms, as you know, are the biggest employer of young people in their first jobs. Anything that can assist the business, and of course, the prospective employee, is something that they are pretty willing to put some time and resources into.

So the answer is yes, there are obviously some serious questions in both of those areas as to how we go about it. The money solution is only part of it. I think they see some things starting to improve in the education system, generally, but we're still a long way from seeing the kind of co-operation we need among all the different stakeholders, business included.

The Chair: With that, I have to go to Mr Christopherson.

Mr Christopherson: Thank you, Catherine. Good to see you again. Obviously, I want to talk a bit about the issue of taxes and explore the other side of what happens when there are tax cuts. I agree with Gerry that it's not always the most popular ground, but there are two very clear ideologies on how to approach this.

When it comes to small business, I know one of the first things that I heard-I represent the inner city of Hamilton-from a lot of small business, neighbourhood stores, neighbourhood service companies, was that, for instance, the cut that was made to people on social assistance affected corner stores in many neighbourhoods in a dramatic way, because that was a good chunk of whatever disposable income a family in poverty had. The stores were feeling it, big time, and didn't see that the macro-politics that the current Premier was talking about was a good trade-off for them.

In addition, you mentioned user fees. I spent five years on Hamilton city council before coming here. I would think that a lot of the user fee issue would be what happens when small business goes to city hall. They would interact there more than the average citizen as a rule. I can assure you that the transfer cuts that were made to municipalities have resulted in a lot of user fee increases, introduction of user fees that didn't exist before, and when I was on council it was still the philosophy that you generated enough money to provide an administration that provided efficient service to all the citizens, so that one business that was maybe more profitable at a given time than another didn't have an edge in terms of dealing with their own government because they had the means to pay for these costs.

That world is gone and you can lay that problem right at the feet of the provincial government in cutting transfer payments, in cutting social service costs and other things in the interest of giving a tax cut-the infamous 30% tax cut. How do you square that in terms of your concerns-quite legitimate; I understand them and I can assure you that any councillor I know is concerned about them too-what those user fees mean and the fact that whole problem is exacerbated by the notion of having to cut provincial income tax and therefore provincial transfer payments in the interest of making the provincial bottom line look good, which this government has been very successful at. But if you take a look at municipal government, for instance, and what's happening there and the amount of problems, pressure, increased costs, cuts in services that they've had to make, through no decision of their own, it really does provide a different point of view as to what all this means. I don't personally see where the small business in my community has benefited from this trade-off. Can you give me your thoughts on that please?

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Ms Swift: Sure. Certainly any change, whatever it may be, has its detractors. As you know, all of our policy positions are based on feedback from our members in Hamilton as well as elsewhere. I'm sure there is a minority and, like you say, if there's a convenience store in an area that happens to have a certain average income level or whatever, I am sure they would notice the difference. I don't doubt that for a moment. Nevertheless, the overwhelming majority of our members in Hamilton and elsewhere are supportive of these tax cut policies.

I guess, to look at the converse, we saw welfare increased by numerous governments. No particular group was more gung-ho than others. That orientation on the part of a number of governments over the years seemed to, in good times and in bad, just produce more people on welfare. In terms of that being an enduring strategy, I can't see that it is.

I think we have a lot of problems. Our members are crying for people to work for them right now. There's a huge shortage of labour right now with an unemployment rate, nationally, of 6.7% or something or other? In Ontario, it is somewhat lower. I don't think anybody would like to think we can't bring that unemployment rate down further.

I would like to believe we could do a lot more in bringing people into the workforce, maybe into the workforce on a more permanent basis. I'd like to see the focus there. There will always be a need for social assistance-we all know that-and that is something we should be concerned about.

I think right now there's a lot happening on the homeless issue. As we know, it's very complicated. It's not as simple as welfare, or whatever. It's got a huge number of factors, as the Anne Golden task force and whatnot showed. I'm not questioning what you're saying, because I think that's true, but we do some pretty comprehensive surveying. We can disaggregate it by postal code if we really want to and we still find overwhelming support overall for these policies because we believe, in the long run, they will be the ones that will keep people most prosperous on an ongoing basis and not in a dependence cycle that we've seen so starkly demonstrated in some parts of the country, Atlantic Canada being a notable example, where they have not much of a real economy there any more because that dependency cycle is so terribly well established.

The second part of your question was-

Mr Christopherson: Municipal user fees.

Ms Swift: More the municipal side. I guess the problem with municipalities was they couldn't pass the buck anywhere. The feds passed the buck off to the provinces, the provinces passed the buck off to the municipal level and they don't have anybody to pass the buck to and it has to stop there, which is unfortunate.

Our members do feel it at the municipal level, but by the way, user fees have been happening everywhere. There's no level of government that has been without sin on the user fee front. It hasn't been exclusively municipal by any stretch of the imagination.

If we had to name one area where the most botches happened over the last few years, it was that whole muni-cipal restructuring area in Ontario. Everybody played a role and nobody should be particularly proud of what happened, including municipalities. We saw some of the upload-download scenarios where some municipalities-it was different for different municipalities-actually ended up with more money. I don't even know if they knew it sometimes because it was such a complicated mess and there was a lot of misinformation flying around, as you probably know. Again, I don't think we would necessarily put the blame-we'd put the blame on everybody, not any one level of government. We've seen some pretty reprehensible behaviour from a spending side and fiscal responsibility side on the part of municipalities too.

We still see municipal employees, for example, paid on average-I think some of the worst discrepancies are at the municipal level relative to the private sector, just to give you an example. Aren't they, Judith? You're probably closer to this than I am. We still feel that shouldn't be terribly out of whack. That should be roughly in sync. A comparable job in the private sector versus the public sector should be roughly in sync. That's just one example of many. I don't know if you want to say anything, Judith?

Ms Judith Andrew: I just happen to have it here. I'm taking Hamilton by example. The public-private sector gap for municipal employees in Hamilton as of last census date-and updates suggest that things wouldn't have changed that much-is 16%, so the public sector workers have a 16% advantage before you add in other benefits such as pensions and so forth.

As Catherine was saying, I think some of what went on with the upload and download and the calls on both sides is still very unclear, but we've been told, and muni-cipalities will deny this, that really no municipality is out money in that exchange of services and costs. Then we hear rumours that some municipalities have been squirreling away money in certain other accounts and so forth.

There is so much lack of clarity in this area it almost calls for some forensic accounting. But what Catherine was saying about our members expecting their governments to work together on these kinds of things rather than engaging in finger pointing-there's been far too much finger pointing on both sides of the fence. We really need to get to the bottom of the financial arrangements between the two levels of government and then have that play out in a fair and even-handed property tax system and a fee regime.

The Chair: With that I have to go to the government side because we've exhausted the time.

Mr Doug Galt (Northumberland): Thanks for an excellent presentation. I just wish you had another hour because I have a pile of questions I'd like to ask.

Interjection.

Mr Galt: You may get a turn.

Just a couple of comments, one on user fees. I hear so much emotionalism about user fees. I've yet to have an increase in user fees that I've paid, and anybody that I've asked, including Mr Arnott here this morning, has not had an increase in user fees to pay. I'm not sure where all that emotionalism is coming from. Just a clarification on small business "crying for people to work." I think that's what I heard you say. I hear it regularly in the riding. I'm sure the opposition would appreciate knowing that out there because those people are crying for people to come forward and give an honest day's work.

The question I really have for you relates to the federal government and what you're doing with the federal government to get them onside. We have proven that tax cuts create jobs, tax cuts increase the revenue. The opposition said our tax cuts would cost $5 million when in fact we've increased it by $10 billion a year. That was a $15-billion mistake, which is factual. It's in Hansard.

My question really is about the federal government. If they'd just go onside with tax cuts, imagine what it would do to the economy of this country. We'd just become a whirlwind. What are you people doing to get the federal government onside to have some tax cuts?

Ms Swift: We're constantly in the media on this very issue and have been for a very long time. It's kind of interesting that small business was called kind of the lunatic fringe, right-wing loonies, back around 15 years ago when we were saying exactly what you're saying now. Now we seem to be kind of mainstream. I don't know whether that means everybody's loony now or whether we were never loony in the first place.

Interjection.

Ms Swift The loonies have taken over the asylum; maybe that's it.

We survey our members incessantly, as you know, and that's how we form our positions on issues, and tax has been number one forever. The particular tax may change. At one point it's GST, at another point it's EHT, at another point it's income tax, capital gains, whatever, but tax is number one.

In high tax jurisdictions, which we are-and we're cumulatively increasing our tax level. There are a lot of examples of lowering taxes. The feds have substantially increased their tax level since 1993, since this government came into power, and it's documented all over the place. It's a fact. They wiped out their deficit. We favoured the approach your government took, which was a measured tax reduction and deficit reduction. The feds eliminated the deficit very quickly by taxing us all in a major way, as you know. Now they're awash in cash, so much so that they can give it out without accounting for it, as we know.

Mind you, it must also be said that if we hadn't had the economic period we did, you wouldn't be looking at eliminating your deficit next year. That's something nobody can control. Happily, in hindsight, it's worked out well. You will eliminate your deficit and we believe the tax cuts have been one factor that has helped in that.

Mr Galt: This tremendous boost in the economy of Ontario is probably why the federal government has been able to balance their budget.

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Ms Swift: No question. When you look at the revenue, there's no doubt that a lot of it is coming from Ontario. It's 40-odd-percent of the national economy, so how could it not? We feel, though, just as a concluding comment, that confidence is hugely important. We know that consumer confidence and business confidence are important-creating a climate of confidence and making people feel that entrepreneurial initiatives are rewarded, not punished. A lot of our members in Ontario and elsewhere still feel, on balance, that they have put in a lot of sweat and their own equity and money, and put up their own house or whatever, and they still feel they are being hit on the head more often than not. That's where there's a way to go.

Mr John O'Toole (Durham): Just to follow up on your most recent comment, yesterday Minister Eves said that Ontario workers and employers will pay $560 million more in federal payroll taxes in 2000. That translates into 22,000 jobs. Whenever we hear Mr Martin talking about what progressive steps they are taking to reduce the burden of tax, clearly, whether it's CPP, UI or the personal income side specifically, they have increased taxes. They still don't get it. I'm really seriously-

Ms Swift: They get it. They just have no opposition, and Canadians aren't giving them a clear enough message.

Mr O'Toole: They think it's free. Whether it's user fees-

Ms Swift: They know exactly what they are doing.

Mr O'Toole: Quite honestly there is a certain communication problem with "user fee." Technically, every user is creating a fee for someone. I think the debate is the lack of transparency. If you were to make the fees at the municipal level so onerous that the local business community or the contractors or whoever will get together and find some way of providing some competition for that consulting fee, that licensing fee-that's where it should be. Don't hide it in some bureaucracy so you can't find out who is really charging, because nothing is free.

The idea that we had a society of entitlement is the whole over-arching philosophical problem of making it more clear to the user that it does cost for that visit to the doctor, that consultation with the education community. Whatever the service, it isn't free. We should get it, and we should figure out the priorities of who pays for what. That disentanglement has been going on for two decades. And what it's really about is driving it down to the area where the service is provided. That is the area that should pay for it, whether it's the library or the research centre.

Ms Swift: We have no problem with that principle. It's just that the experience has been that user fees have just been layered on top of everything else. There's no transparency.

Mr O'Toole: I really want to follow up perhaps with Judith. I have met with her a number of times during the transitional period of property tax reform. I agree it's still, if you will, unresolved. I'd like some feedback with respect to: We harmonized the business tax and realty tax, which was an outstanding issue for many years. But we ended up with the short-term solution, the capping of 10, five and five. I'm not sure how we'll get out of that outside of assessment growth itself.

But there is another philosophical argument that is not getting clarity, and that is the shifting or the intended shift from the non-residential side of the assessment base to the residential side. Your ultimate goal is to switch the burden of municipal tax from the commercial residential side more progressively. You know how they do the percentage, the ratio between the commercial side and the residential side? You want to shrink that gap, because they really don't consume the services. If people in business use the library, they pay for that at home, wherever they live. Are you saying to us that you want to reduce the assessment tax burden further on the business side and load more of it on to the residential side? That's the issue in Toronto.

Ms Andrew: No question. Our view is that the business-residential gap is too wide. That fact has allowed a situation where there is no accountability for spending at the local level. That is why Ontario is the property tax capital of the OECD world. We extract more in property-

Mr O'Toole: Do you think any provincial government has the courage to do that, though, to set those ratios?

Ms Andrew: We're looking for a courageous person to step forward and do that, because the way it's playing out in the municipalities, they never will. It's a political accounting of who has the votes, and it's just not going to happen.

The Chair: With that, we would like to thank you, on behalf of the committee, for your presentation.

Ms Swift: Thank you.

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UNITED STEELWORKERS OF AMERICA
ONTARIO ALTERNATIVE BUDGETWORKING GROUP

The Chair: First of all, sorry for the slight delay, but this is the year 2000 and we do have modern technology, so we have to accommodate it.

The next presenter is the research director for the United Steelworkers. Could you please state your name for the record.

Mr Hugh Mackenzie: My name is Hugh Mackenzie. I'm the research director for the Steelworkers. I'm also co-chair of the Ontario Alternative Budget Working Group.

The Chair: Welcome. You have an hour for your presentation.

Mr Mackenzie: I'm going to try, to the best of my ability, to move through the presentation relatively quickly, because I recognize that much of the value of this comes in the question and answer session. But there are a few things I would like to try and put in front of you as a starting point. I'm going to highlight the issues I'm going to address this morning.

The first is to address the question that has become a constant refrain of people in the government, namely, that the personal income tax cuts that the Harris government has brought in have been responsible for Ontario's economic performance. I note in the record from yesterday that there was further discussion of that question then.

Secondly, I want to review some information that it's been possible to generate just recently because the federal government has released the 1996 personal income tax data, which allows us to draw some conclusions in more detail about who has benefited from the income tax cuts that have taken effect to date.

Thirdly, I want to talk about the fiscal impact of the income tax cuts.

Finally, I want to address the impact of the reduction in Ontario's fiscal capacity that has been imposed by the income tax cuts on services, and I want to focus particularly on education funding. One could have picked any one of a number of areas of funding. It happens that for my sins I've spent a bit of time thinking about the way the school system is funded, and so I thought I'd spend a bit of time talking about that.

I want to put a slide up that I think really underlines the point as clearly as one possibly could as to what has been the real engine of growth since the Harris government has been elected. What this chart shows is the growth in exports from Ontario as a percentage of total GDP growth using the quarter in which the Harris government was elected in 1995 as the base. What it shows, for example, is that in the third quarter of 1997-I'll pick that as a low point, because it crosses one of the lines-growth in exports since that base year amounted to 60% of all the growth in GDP. This is international exports, not exports in total.

The reason I picked international exports is because that's a much more solid figure than the total exports from Ontario. Obviously reliable data on interprovincial trade aren't calculated from border crossing points, and so I have focused particularly on that. If you drill into those numbers even further, you find that that growth is almost entirely concentrated in exports of goods. In other words, if you look at the export numbers, what they're telling you is that the engine of growth in Ontario is sales of goods, primarily to Americans. I think that's a critically important piece of information.

I noticed from my reading of the discussion that took place yesterday that the committee is being encouraged to ignore the effect of exports on their own and instead to look at the balance between exports and imports. If you were looking at this strictly from the perspective of a balance sheet, that would make sense; if you're looking at it from the perspective of what drives the economy, it doesn't make sense at all. I'll use an analogy of a car, partly because the analogy fits and partly because much of the growth has been in automobile and parts production. If you want to think about the economy as a car, exports would be described as the engine. The growth in imports would really, by analogy, be the rate at which the wheels are spinning. In other words, exports are what are driving the economy forward and imports grow as the economy grows.

When you look to explain something like the acceleration of growth in the Ontario economy, you have to look around for things that could be seen to have an independent impact on the economy. An economist will tell you that when you're looking around for those independent impacts, the key areas you look for are drivers of the overall competitive position of the economy, like the exchange rate, drivers of the cost of borrowing, drivers of business investment and exports and the net effect of government on the economy. The net effect of government on the economy over the past four or five years has been negative. The net effect of exports has clearly been substantially positive.

I'll finish off this part of my remarks by saying that I can't find any evidence anywhere that would suggest that the decision of somebody in Kansas City to buy a car, which after all is what is driving Ontario's export perfor-mance, has anything whatsoever to do with an income tax cut in this province. That's not to say that income taxes don't do anything. We'll see as we go through the presentation that they have substantial effects in a number of areas, but that's not one of them, in my view.

I want to put this chart up just briefly to highlight who has actually benefited from the Ontario tax cuts to date. The red line describes the cumulative share of taxable returns in Ontario, the bottom scale represents income ranges and the scale on the left represents the percentage of returns that's reflected in that number.

I think this is an important reality check for the debate. We read all too often in the newspapers claims like the rather ridiculous claim of the chair of BC Hydro reported in the Globe and Mail or the Star on Saturday to the effect that it's tough to raise a family in Canada on an income of $100,000 a year. Let's take a look at what that really means in terms of distribution. At $100,000 a year, 98.5% of taxpayers have incomes below that number. We're talking about a very rarefied percentage, a very rarefied group in the economy.

So when people talk glibly about an individual making an income of $70,000 a year as kind of a normal income-and maybe it's a normal income for a member of Parliament; it may even be a normal income for somebody who works as the research director of a trade union-the data tell us that it's not a normal income for 95% of the population; 95% of the population earns less than that. I think it's important to keep that reality check in mind as we're talking about the distributive fairness of these kinds of tax measures.

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The dotted line represents the cumulative share of the savings from the Harris tax cut. I'll just give you a little bit of a guide to this by looking at one particular spot. If you look at the bar that's opposite $45,000, which represents an income range between $45,000 and $50,000, if you look to the red line, you can see that 80% of Ontario taxpayers had incomes below that number but people with incomes below that number receive less than 50% of the benefit from the tax cut. So you can see how the benefits of the tax cut are heavily tilted towards the upper end of the income distribution.

One of the things that I draw some attention to is the paradox that because Ontario introduced its income tax cuts at a time when the budget was in deficit, in effect, to this point every cent that we've provided in income tax cuts in Ontario has been borrowed. That gives rise to something I've talked about in previous appearances before this committee, but I think it's important just to keep reminding people of it. That gives rise to a rather odd phenomenon that I would describe as the tax cut debt. That's the amount of debt this province is incurring or is failing to pay off as a result of having given away a huge amount of fiscal capacity.

You can see that by the end of this term, the debt attri-butable to the tax cuts that either have taken effect or have been announced to take effect this term will accumulate to about $70 billion. Even when you factor in the government's promise in its Blueprint to start paying off the debt at the rate of half a billion dollars a year by allocating a contingency fund to paying off the debt, you still end up with a net debt attributable to the tax cuts by the end of this term of office just shy of $60 billion and a carrying cost for that additional debt of something on the order of $3.5 billion a year. In other words, we're going to be paying a carrying cost by the end of this government's current term of in excess of $3 billion a year just to pay the interest on the debt that has been incurred to finance the tax cut.

I want to spend a few minutes bringing this down to the level of fiscal planning and trying to focus the discussion on what this may imply for Ontario's fiscal balances in the next few years, because, obviously, one of the primary roles of this committee is to give the Minister of Finance some advice about his overall fiscal strategy.

I want to note two potential risk factors that face Ontario; one is various proposals for substantial cuts in income taxes at the federal level. Because of the way the income tax system works in Canada at the moment, Ontario's taxes are driven by the federal basic tax base. If you reduce the federal basic tax base and leave Ontario's rates the same, Ontario's tax revenue will go down. Just to put this in perspective, the 20% cut that Premier Harris advocated that the federal government undertake as part of his lobbying effort leading into the next federal budget, due in about three weeks, the implication of that would be a cut in Ontario's revenue of $3.4 billion, unless Ontario raised its rates to offset the revenue loss driven by the reduction in basic federal tax.

I just note in passing that the flat tax proposal that is favoured by the Premier's friend Tom Long would, if fully implemented, reduce Ontario's revenue base by approximately $6.1 billion, again unless Ontario were to respond by increasing its own tax rates to offset that revenue loss.

The other risk factor that I think is of particular concern is the potential for a US economic slowdown. We have been riding on the back of what everybody says is an unprecedented economic boom in the United States. When I say riding on the back of it, I mean that literally and I'll hark back to the comments that I made about exports. It's the US economy that has been driving the growth in the goods export sector in Ontario-period.

We have been operating in Ontario-when I say "we" I mean the provincial government-as if this is going to go on forever. Every time the Minister of Finance looks at projections two and three years in advance-which, I note from yesterday's transcript, he won't share with the committee-and sees a little bit of extra money appearing on the horizon, money that might permit him to accelerate the rate at which the deficit is being reduced and/or start to repair some of the damage that has been done in public services, it gets larded into another tax cut. The result is that we are spending our fiscal flexibility. Our fiscal flexibility in this province is being spent out of existence in the form of tax cuts. It's not quite a Ponzi game but it's close to it. It's like a chain letter: As long as it keeps working it keeps working, but when it stops, boy, it really collapses.

I want to just share with the committee a couple of little simulations that I did to illustrate the impact of these things. The line that's up on the screen now is a projection to the end of the next fiscal year of what would happen if the provincial government were to decide to suspend its tax cut program; in other words, stick with the one that has been implemented so far and stop right now until Ontario's finances are improved, and use the money to repair some of the damage that has been done in the cuts that have taken place in the last little while. As you can see, we end up with a pretty substantial surplus emerging in a couple of years-a great deal of fiscal flexibility.

The second one is a projection I've done that takes the current fiscal situation as it exists, assumes that the government continues to implement the tax cuts that they announced just before the election, as they've laid them out, and differs really only from the projections that the government is currently using by abandoning the 3.7% growth projection for 1999, which is clearly ridiculous. The government continues to base its fiscal projections on the basis of 3.7% growth for the calendar year 1999. We've already had 4.4% growth in the first three quarters of the year, so clearly that's ridiculous.

When you incorporate that, you end up with only a very slight deficit in 1999-2000-and I want to come back to that in a moment-and then a surplus emerging in 2000-01 and 2001-02. These are all assuming that the economy continues to grow at a reasonable rate.

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The note I wanted to come back to is that I'm showing here a slight deficit still in the year 1999-2000. That deficit gets wiped out entirely even given some of the financial manipulation that's been done in generating the most recent version of Ontario finances. That number disappears if you assume that the government doesn't spend the remaining contingency fund that's buried in the Management Board of Cabinet numbers for expenditure. If you take that out, the budget is actually projected to be in a slight surplus in 1999-2000.

The third line I've got here is based on the assumption that a US recession happens in the year 2001, so that a year from now we end up with a recession in the United States which has its corresponding impact in Canada. This is based on Mr Eves's current estimates for 1999-2000 and then assumes there's a US recession in the year 2001. As you can see, you end up with a persistent deficit of about $1 billion. In other words, we don't end up with the budget balanced next year or the year after as a result of that recession assumption.

That's not to say that there's going to be a recession in the United States. What it does say, though, is that it just illustrates the importance of the phenomenon of the government spending our fiscal flexibility in the form of tax cuts rather than using it in a prudent way to protect public services and to bring the province's finances into balance.

The last chart I've got here illustrates in one way the extent to which the numbers are being manipulated here. If you take the current estimates for revenue and expenditure for 1999-2000 that were presented to the committee yesterday and project those forward, you end up with the budget not balancing in the year 2000-01, primarily because we're assuming here that the income tax cuts continue to proceed, and we note here that the $1.6 billion that was in the revenue base for 1999-2000 for the Highway 407 sale isn't available next year.

That gives you a range of the risk factors. As you can see, it's actually quite a substantial range from a very healthy fiscal balance in 2000-01 if the government were to decide to suspend its implementation of the tax cuts at one extreme and at the other extreme a persistent deficit of about $1 billion if the US economy were to go into recession in the year 2001.

The last thing I want to turn to is I want to spend a few minutes talking about one particular aspect of the impact of the expenditure cuts that have been brought in by the government on the level and quality of public services in Ontario. I'm going to focus on elementary and secondary education.

To start off with, I want to draw attention to a misperception that is being repeated over and over again about the nature of the introduction of the education financing formula. The new education financing formula is being characterized as a revenue-neutral shuffling of resources from large urban boards to small rural boards and separate school boards. While it's true that large urban boards have been hit very hard in terms of forced expenditure reductions as a result of the introduction of the funding formula, and while it's true that particularly rural separate boards have benefited from the introduction of the funding formula, the fact is that when you look at education funding on a real per-student basis, the funding formula actually disguises a cut in education funding overall of about $700 million in 1999-2000. That substantial funding loss we have seen has, frankly, exacerbated the problems that the large urban boards have experienced in trying to adjust to the introduction of the funding formula.

I want to put a picture up for you that gives you a bit of a sense of what has happened to per-student funding and how it has been concentrated in various boards.

The dotted blue line represents the cumulative share of total enrolment. What I've done here is that I've taken all the boards in the province and arranged them from the smallest to the largest and then looked at the impact of the funding program on them. You can see the concentration of the impact on the large urban boards.

The blue bars represent the average funding change per student, and you can see that for the smaller boards you're seeing increases in funding typically in the range of $500 to $1,000 per student, but in some cases higher than that, and for the larger boards, reductions in funding that vary, again, from relatively small amounts of $300 or $400 per student up to relatively large amounts in the case of the Toronto board.

The red line represents accumulation of the changes in total funding. As you can see again, you see increases in funding for the smaller boards, and then as soon as you get to the relatively larger boards, you see fairly dramatic reductions in total funding allocation. The question really becomes, is it defensible that you have these very large reductions in funding for the large urban boards?

I want to focus on a number of elements of the education funding formula, just to highlight some of the difficulties that have been created.

First of all-and these are not in any particular order-the funding formula, because of the way it's structured, actually does not permit many of the school boards to pay even the amount of money they're contractually committed to pay to teachers and other staff that the funding formula permits them and requires them to have in order to maintain instruction in the classroom. The reason for that is because the funding is based on a reference salary grid which is not the same as the salary grid for any board. It represents what the ministry calls a representative average grid. The result of it is that boards that have different grids or different demographic characteristics of their teachers-more older teachers, more teachers with higher qualifications-actually find that even with the teacher compensation adjustment in the funding formula, they're not able to afford to pay the teachers whom they're required to have under the funding formula the amounts of money they're required to pay under their contractual commitments. I'll note that the Education Improvement Commission identified that as one of the weaknesses of the funding formula.

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The second issue I want to focus on is special education. The government claims, as recently as last week, that the funding formula has resulted in a substantial increase in the amount of funding that's available for special education in the province. The fact is, though, that the expert panel that was created by the government before the funding formula was introduced to make recommendations to it about the funding formula did an analysis and discovered that school boards were spending anywhere from 23% to 85% more than the government had earmarked for special education under the previous funding formula. Depending on whether you take the low number of 23% or the high number of 85% higher, you end up with a base number for 1997 of between $1.056 billion at the low end and $1.560 billion at the top end. If you take some sort of median between those, what I think you'd find when you look at the numbers is that the current funding allocation, even topped up as it was last week by the minister, still will probably fall short of what the boards were actually spending in the last year before the funding formula took effect in 1997. The EIC indicated in its report last week that even at this higher level of funding, higher than the government was officially providing in 1997, boards are spending money on special education that they have had to reallocate from other areas because the funding isn't adequate.

The learning opportunities grant, for those of you who aren't deeply enmeshed in the intricacies of education finance, is a component of the funding formula that is designed to address additional costs incurred by boards because of demographic and other characteristics of their students. This grant was also the subject of an expert panel report. It was chaired by Enid Slack, an economist who is an expert in this area. The expert panel actually went to the extent of including in its recommendations a recommendation for a level of funding, based on 1997 numbers, of $400 million a year. That's what they considered to be a basic minimum level of funding that was needed in order to achieve the objectives of the learning opportunities grant. This is the grant that compensates for the extra costs associated with having high rates of poverty among students, high rates of turnover, inadequate housing and various other things like that.

The actual funding that was committed under the learning opportunities grant was $185 million. I'd note for comparison that in 1996, the Toronto board estimated that it alone was spending $175 million on what the Toronto board called compensatory education, which is captured by the learning opportunities grant. Not surprisingly, given the fact that the government's own expert panel highlighted this as a potential problem even before the funding formula came into effect, the EIC has identified that as a shortcoming of the existing funding formula.

The last thing I want to focus on is the question of English and French as a second language. The funding formula is extremely restrictive in this regard. It does provide additional funding for English-as-a-second-language instruction but it is strictly limited to children who have been in Canada, having emigrated within the last three years from a country whose first language is not English. So it's an extremely restrictive allocation and it's a funding allocation that diminishes with each year that the child is in Canada. I haven't encountered anybody expert in the teaching of young children who come to Canada without any ability in English who considers this to be adequate. Again, the Education Improvement Commission has fingered this as another inadequacy of the funding formula.

I'm going to pass over the next two charts and just review what the Education Improvement Commission has identified as problems with the funding formula. The Education Improvement Commission, while hardly a vociferous critic of the government in the work that it's done, has in fact identified weaknesses in the funding formula in the following areas: teacher compensation; special education; pupil accommodation, even with the top-up provisions; and English and French as a second language.

They've made recommendations suggesting that the funding formula is inadequate in the way that it deals with in-school administration in small schools, remote-area school administration, the funding of transportation of pupils, the learning opportunities grant, as I've highlighted, and the last one, which I want to spend just a couple of seconds talking about, the funding for social services delivered by school boards. This is one of the interesting recommendations or concerns that was raised by the EIC in its most recent report. There's an interesting element to this that I want to put on the table for the committee.

The implication of the analysis of the Education Improvement Commission is that one of the reasons why some of the large, urban boards are in financial difficulty as they confront the exigencies of the funding formula is because those school boards have been providing services that in other areas are provided by municipalities or by another level of government. They are saying there are immigrant adjustment services, psychological services, social services of various kinds that have been delivered traditionally through boards like the Toronto board and the Windsor board and the Toronto catholic school board that really don't fit within the four walls created by the funding formula and that this is an issue that ought to be addressed.

The point that occurred to me as I was reading this, finally acknowledging that there were broader services that were indirectly relevant to education that weren't covered by the funding formula, is that if it's true that these are services that really ought to be provided by municipalities, then presumably the province ought to give the tax base that funded those services in the first place back to the municipalities so they can provide them. The province's takeover of the residential and commercial-industrial tax base to fund its education takeover included the money that was being allocated for those social services. If it really is true that that money was funding things that ought to have been paid for by municipalities, then logic suggests that the province ought to give the money back to the municipalities to enable them to provide those services.

I've gone on a little longer than I expected to, but I did start a little bit late because of the technological problems.

The Chair: Thank you very much for your presentation. We have approximately seven minutes per caucus.

Mr Christopherson: Thank you very much for the presentation. There are so many areas. I just want to go back to something I raised yesterday to see if there's a different take on it.

In the statement of financial transactions in the quarterly report handed out by the Minister of Finance yesterday, page 11 talked about an interesting line called "cash timing adjustments." This speaks to a line item in the budget plan of $3.192 billion, almost $3.2 billion. The current outlook is that they're only going to spend $961 million, meaning that there is over a $2.2-billion change in that line item. When I asked the deputy about it, he and his assistants talked a lot about the fact that much of this was just a money transfer, a paper transfer of money depending on whether money had actually flowed out to areas where it was to be spent or not, maybe money they received back from municipalities, from transfer partners, if they hadn't spent it.

My focus was whether or not there was anything real in terms of its impact on our economy, given the large dollar amount. I said to the deputy that if it were a few hundred million-not that that's not important-I wouldn't have raised it as a priority issue. To be fair, they did agree to get back to me in writing with a further detailed explanation. They didn't give me a definitive answer, but certainly the impression, I think it's fair to say, is that this is not a huge deal. It has to do with accounting practices. I would like to get your take on that, whether you agree, and, if not, what you think this says.

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Mr Mackenzie: The cash timing adjustment number is a balancing number. It balances the way the government keeps its books for budgetary purposes with the actual cash flows of the government. So when there is a positive cash timing adjustment it means there is more money being spent by the government in one form or another during the year than appears in the budget. When there's a negative cash timing adjustment, it means there is less money being spent by the government, actually flowing out, than appears in the actual budget.

When the cash timing adjustment number goes down, because it's a balancing number, it can only be the result of one of two things: Either there is money that the government has put into the budget for this year that it turns out will not flow this year, or there is money that had been previously budgeted and accounted for in a previous budget year that they thought was going to flow this year that did not. The bottom line is that something in excess of $2 billion that was originally projected to be spent is not going to be spent.

To give you a highlight to this, in the most recent update of Ontario Finances, it shows additional spending of about $1 billion compared with the previous iteration of Ontario Finances. My guess would be that although that's been booked, a lot of that actually won't be spent; it will be spent in some future year. So some of the expenditure that's been booked in this year as an adjustment in this most recent issue of Ontario Finances is actually phantom money that won't appear until some time in the future.

That can only account for a maximum of $1 billion of that difference, though. The rest of it has to be that expenditures of various kinds, both capital expenditures and other expenditures, that they were anticipating they were going to be making in this year, they are not actually making.

What measures the impact of the budget on the economy is not what's in the budget, it's what flows in cash. So in terms of economic impact, the cash timing adjustments have gone from pushing an extra $3 billion into the economy to pushing an extra $961 million into the economy.

Mr Christopherson: Thank you.

On page 2 of your handout, you point out the personal savings rate. Again, I raised this yesterday with the deputy. Those are not political discussions; they're technical presentations and we keep it at the technical level, or try to. I noted that over the years, their own figures had shown that we'd gone, at one point, from about 16% or 19% to about a 10% savings rate when the government took power and that now we're down to about 3%, less than 4%. I asked what the significance of that was should the economy burst and, again, their full answer is in the Hansard; I don't want to misrepresent them.

To paraphrase, they answered, as I suspected, that people are looking at the amount of money they have in mutual funds, in their RRSPs, as they ride the stock market wave and saying: "Gee, I've got enough money there. I don't need to worry as much about having cash on hand because I'm doing quite well. The books are looking good and we're making money year over year."

I said, "What happens in the event that the bubble bursts?" The answer I received was that if that happens, "Then individuals would just reallocate money back to their savings." My point was that that's not possible for a lot of people who don't have that many discretionary funds. If you have a big enough income, you can make that kind of a dramatic move.

Can I ask your opinion of what it means to be at this low a personal savings rate if indeed the bubble bursts and there's a recession, let alone any kind of a major downturn in the value of the current stock market? Where does that leave people?

Two things: One is, where does that leave people in terms of their future, their retirement plans, middle-class working families that are planning to retire on this growing nest egg in their mutual fund RRSP portfolio? Secondly, what are the implications of such a low savings rate on families and on the overall economy if we get into that recessionary mode? Even Catherine Swift acknowledged it's not a question of "if," just "when."

Mr Mackenzie: I think my explanation or my characterization of what's going on would be similar to the one that was given to you yesterday. I noticed when I was looking at the Hansard response that the officials noted the fact that this is a phenomenon that's taking place in the United States as well.

The implications of it are quite serious. In my view, the consumption bubble that is based on consuming out of unrealized wealth, which is essentially what's going on-what's going on is that people's perceived wealth has gone up because their mutual fund holdings have gone up in value dramatically in the 1990s and they have made expenditures, borrowed money, whatever.

The other phenomenon of the 1990s is that in the longest continuous expansion in American history, levels of personal indebtedness have soared. So what's going on is that we've got the 1990s equivalent of margin buying from the 1920s. We've got people consuming out of wealth that is not realized, that is accumulating in a mutual fund account.

It concerns me that we may have built into our financial and economic structure exactly the kind of vulnerabilities that many people attribute the rapidity of the collapse after 1929 to in the context of the 1920s. In the 1920s people accumulated large amounts of wealth on the strength of money they borrowed to buy stocks. You can't do that any more, so what people are doing now is borrowing money to consume out of those assets. If those assets were to diminish in value, we're going to see a return to-just to back up a second, one of the things that happened in the 1930s, 1940s, 1950s and 1960s is that the real economy got insulated from the paper economy. What we're seeing is people starting to consume out of unrealized wealth building up in mutual funds. We're seeing a reconnection of those two in a way that I don't think is going to be terribly helpful if we do get a rapid turndown in stock values. As to the implications for people's retirement income, it's potentially an extremely serious problem.

The Chair: Thank you very much. On the government side, Ms Molinari.

Mrs Tina R. Molinari (Thornhill): Thank you for your presentation. I could talk about and focus on some of the areas you've talked about with respect to education and some of the inaccuracies that I've noticed in your presentation. Some of them have to do with the fact that boards are spending more for the teacher compensation package, and that's because they have a portion of the budget where they have flexibility. If boards are choosing to spend that flexible money on the teachers' compensation package, then it's the option of the board.

One of the things the government has done is taken away the ability to increase taxes to the already overburdened taxpayer, so that boards can no longer increase taxation to provide for the compensation packages that they have.

I want to focus on some of the other points that you've raised. You said that we borrowed to introduce the tax cuts. The money already belongs to the taxpayer; it's not money that is borrowed.

We've heard from the previous presenter that governments don't effect a downturn in the economy, and they don't do the good economy, but obviously the policies that the government puts in place can either make that better or make it worse depending on what the government's policies are. Certainly some of the benefits the US economy has had on us is a factor, but it's been stated that if it weren't for the tax cuts the economy would not have increased to the point that it has.

One question that I have for you is related to your comments on tax cuts. Do you believe that governments can spend money better than you as a taxpayer? In essence that's what you're saying, that the government can spend the money better than you as a taxpayer. The tax cuts are putting money back in your pocket, giving you the option and the opportunity to spend the money the way you see fit. What I'm understanding is that you believe that governments shouldn't introduce tax cuts because governments can spend money better than you as a taxpayer.

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Mr Mackenzie: The short answer to your question is yes. I think the reason why is that Ontario society, the Ontario economy, Ontario businesses benefit enormously from the public services we provide. Canada's medicare system is far and away the most important competitive advantage that Canadian businesses have relative to American businesses. Anything that we do that jeopardizes that jeopardizes a fundamental piece of Ontario's competitive advantage.

To pick another area, education at the elementary, secondary and post-secondary levels, every analyst that stargazes about the future of the economy underlines how important it is for our entire society and our entire society's economic future to ensure that we maximize the effectiveness and the quantum of our investment in the skills and education of our young people. That is going to be the economic foundation. When those expenditures are cut back we are jeopardizing our economic future.

My answer to your question would be that at the margin where we're sitting here in Ontario right now, Ontarians are better off if the government were to take that money and invest it in improving public services. The fact is, curiously enough-maybe not curiously enough-that when you look at the public opinion surveys, that's exactly what you find. What you find is that a significant majority of Canadians and a significant majority of Ontarians, when they look at the choices in front of them, would choose to reinvest in public services, to reinvest in health care, to reinvest in education, to make investments that will enable our society to deal with homelessness, to make investments in the quality of life of poor children. They would make those investments before they would take a tax cut. So, yes.

Mrs Molinari: I won't take up much time. I'd like to leave some time for my colleagues.

We also believe in health care and education and the quality of those very important areas. Our plans are for the long term. For the economy to continue to improve and for us to have the money to fund essential services such as education and health care, you need to have a growing economy. We agree on what the end results should be but I guess we have different ways of approaching that.

Mr Mackenzie: I would say that my point was a long-term point. I wouldn't pretend at this point that the cuts that have taken place in education to date have had a measurable impact on Ontario's competitive position, on Ontario's ability to generate the skilled and smart people who are going to be needed to make this economy thrive in the future, but I think we are introducing some cancerous elements into the education system in this province and we're going to be paying for it 10 and 15 years from now. Likewise, I think we jeopardize the effectiveness of the medicare system at our economic peril. You're sowing the seeds now of problems that we're going to be dealing with in the future.

Mrs Molinari: There were problems already in place. It's an evolving thing that over the years will continue to be improved.

I'll leave time for the rest of my colleagues.

The Chair: I think the time has been exhausted and I have to go to the official opposition.

Mr Kwinter: Mr Mackenzie, as always I've enjoyed your presentation and the effort that you put into it. I was quite interested in your-

Mr Mackenzie: Just to interrupt, I was hoping that Mr O'Toole would get to ask a question because I was going to ask him what he thought the user fee should be for making a presentation to the committee.

Mr Kwinter: I wanted to just pick up on your initial graph which was the international exports being the real driver of the economy of Ontario. I had occasion to listen to the federal Minister of International Trade a few weeks ago and it was quite interesting to me that he was pointing out that Ontario and Canada are 45% dependent on trade for the GDP as opposed to the United States, which is 11%, as opposed to Japan, which is 15%. The thing I found strange is that he was trying to portray that as a real plus, in that, "Just look at how much more competitive we are than these other jurisdictions, that we've got 45% of our activity through international trade."

The question I ask of you in your studies is, what happens if the exchange rate changes? During the free trade discussions, I had several leaders of industry come forward saying that if the dollar ever exceeds 80 cents we're in trouble, big trouble. Secondly, what happens if there is a downturn in the US economy, which is our major trading partner, and how is that going to impact on the ability of Ontario and other jurisdictions in Canada to carry out the programs they're embarked on now and to deal with their debt?

Mr Mackenzie: In a nutshell, that's disaster times two. You don't have to invent anything. All you have to do is look back at what the factors were that changed in the 1990s to get us out of the deep recession that developed in 1991-92. What happened was that the value of the Canadian dollar dropped from the high 80s down to the high 60s, which was an almost instantaneous, dramatic improvement in the competitive position of Canadian exporters in the United States, and an equally dramatic change in the import price that people were facing.

The gradual increase in integration of Canada into the US economy means that our economy is far more vulnerable to fluctuations in the US economy now than it was 10 years ago. For all the talk and the Team Canada exercises that go to this, that and the other place in the world, the reality is that our dependence on trade with the United States has increased dramatically over the period of the 1990s. Our economy is much more closely tied into that of the United States and we are much more vulnerable to fluctuations in the US economy than we were.

Mr Phillips: Thank you. I appreciate your being here. I'm very interested in your revenue forecast.

Mr Mackenzie: I read the exchange.

Mr Phillips: Just for the record, I write down my predictions. I've always predicted that with the tax cut, tax revenue in Ontario still would continue to rise. I've always said that, and that's the reality. The issue is, how much has it cost us in lost revenue? The federal personal income tax revenue has gone up about 30% over the last five years and Ontario has gone up about 5%. That's about $5 billion in forgone revenue. The government itself, when it published its budget, said this will represent forgone revenue of $4.8 billion, I think they said. So it's not a number that I or any of us in the opposition have made up. The government itself has said, "Listen, we think it's a good idea to forgo $4.8 billion of annual revenue." The personal income tax revenue shows it: federal revenue up 30%, provincial revenue up 5%; that's close to a $5-billion difference.

The issue for me is that we are trying to make some decisions on the budget. The government has not given us one estimate of revenue, not even for next fiscal year.

Mr Mackenzie: You don't even have an accurate forecast of revenue for this fiscal year, the one we're in.

Mr Phillips: That is also true. The minister said he's betting that when the books are closed, the revenue will be $600 million higher, or something like that. We do not have that, so we have to rely on our own resources to prepare that, and people like yourself. Can you help us out in terms of how we should be looking at how we can predict revenue for next fiscal year and the following at least couple of fiscal years?

Mr Mackenzie: I guess my starting point would be to look at the forecast for Canada that the Department of Finance has released. Keep in mind a couple of things. One is that partly because Ontario's economy is so much more tightly tied into the United States than the economy of any other part of the country, these numbers are exaggerated a little bit. In the last few years, Ontario's rate of growth has been running about one point above the national average. I'd take those and I'd increase them a bit to reflect the fact that Ontario is likely to be growing more quickly as long as the US economy continues to boom. The other side of the coin is that Ontario will shrink more quickly if the US economy starts to slide.

As a rough rule of thumb, income tax revenue tends to increase about 10% more quickly than a strictly proportional increase would. You can just go through the budget items. There are some that you know are not going to increase because they're one-time-only items; there are other things that are going to increase basically in proportion to the total value of goods and services in the economy. Things like employer health tax revenue, for example, increase basically in proportion to growth in employment. It's not rocket science. It would be nice if the minister were prepared to release the numbers that he's basing his analysis on. That would certainly help you. But there certainly isn't a shortage of other sources of information out there. There are various agencies that do forecasts for the province. The Conference Board, for example, generates-actually, the legislative library is a subscriber, so you could send somebody up to the legislative library to take a look at what the forecast is for economic growth in Ontario for the next couple of years. That would give you a reasonable ballpark.

My understanding is that although the minister is now saying that the rate of growth in the province is expected for 1999 to be about 5%, the revenue projections are still based on the original forecast of 3.7%, hence his statement that when the numbers finally come in it's going to be $600 million higher. My guess is that if the minister is prepared to say the number $600 million sitting here at the beginning of February in a partisan environment, the actual underlying numbers are going to be even higher than that for this fiscal year.

So it's kind of a mixed story here. On one hand you're looking at what I consider to be a significant underestimate of the revenue base for this year, which translates to reduced forecasts for next year, but then over the horizon we're seeing some real risk factors. I think at the very least it would provide some comfort to people who are feeling anxious about this if the minister were to indicate that once the budget is balanced he will not proceed with any of the future instalments of the tax cut if it appears that the introduction of the tax cut is going to cause Ontario's fiscal situation to deteriorate or public services to deteriorate.

The Chair: With that, we have run out of time. On behalf of the committee, thank you very much for your presentation.

This committee will stand adjourned until 1 o'clock this afternoon.

The committee recessed from 1214 to 1303.

The Chair: It is slightly after 1 o'clock. I would like to bring the meeting back to order.

First of all, I have a brief announcement. One of the members requested some information yesterday from the research department; that is in front of you.

ROYAL BANK OF CANADA

The Chair: Our first guest this afternoon is the chief economist from the Royal Bank of Canada. I'll give you the opportunity to introduce yourself for the record. Welcome to the standing committee on finance and economic affairs.

Dr John McCallum: It's a pleasure to be here. My name is John McCallum and I'm chief economist for the Royal Bank. I'd like, if I may, to talk for not more than 20 minutes or so, and then there will be lots of time for questions and discussion.

I do think we live in interesting times. On the one hand, every living, breathing economist seems to be very optimistic about the outlook, which is itself perhaps cause for concern.

One personal example: The Globe and Mail, every year-end, does a debate between an optimist and a pessimist on the economic outlook. They called me up just before Christmas and they invited me. I said: "Oh yes, sure. Just out of curiosity, who is the pessimist?" The answer came back, "You are." Well, I'm not a pessimist but that gives you a sign. I was the most pessimistic person they could find.

There's great optimism on that front. At the same time, I think there's a certain amount of pessimism or gloom and doom in terms of the longer-term future of the country, partly because we've had a pretty dismal 1990s, where the average households faced declining take-home pay.

What I'd like to do is talk a bit about the outlook, the risk to the outlook, starting with the US, talk about Canada, come to Ontario, including the budget outlook, and then say a few words about taxes in general.

The rest of the world, outside the US, is picking up more than we thought they would. The US economy is booming, but we, like most, think it has to slow down. It's growing at an unsustainable pace. We're already seeing inflation on the rise. It's absolutely certain that the Fed will raise interest rates in about an hour's time, probably by a quarter, possibly by a half, and another quarter probably in the coming months.

We, like most people, think that the US economy will continue to do well in the coming year, maybe 3%, which is quite a lot lower than the previous year but still quite respectable.

Just to offset some of this huge optimism, let me talk about a couple of things that could go wrong in the US. This is extremely important for Ontario, because Ontario far more than any province is highly dependant on the United States, with over 40% of the province's GDP going in exports to the US.

The first thing that could go wrong is what you might call a boom-and-bust case in the United States where the economy refuses to slow down. The economy for three years has refused to slow down, refused to obey economists' forecasts, and so it might happen again. If that did happen, if the US were to continue growing at 4%, 5% or even 6% for awhile, you would clearly have rising inflation and you would clearly have a situation where the Fed would have to go up, not by half a point but by a full point or even two percentage points, at which point you would clearly have a slowdown, but we'd land abruptly rather than softly, because Ontarian, Canadian and US households have record levels of debt and there's nothing like a two percentage point hike in interest rates to bring considerable distress to North American households.

That's the first risk of boom and bust, where we'd have high growth for two or three more quarters and then an abrupt landing, and that wouldn't be good for Ontario, except for two quarters of the boom part followed by the bust.

The other thing that could go wrong in the United States is the stock market correction. As you all know, the US stock market is grossly overvalued according to most conventional measures. I'm not predicting this, but a severe stock market correction cannot be ruled out. I would say if it's just the stock market that corrects, the economy would slow, but it wouldn't throw us into a recession. I think bubbles that burst that cause huge damage usually involve real estate as well as stock market, as in Ontario in the early 1990s and it isn't much of a real estate bubble in the US. I think the stock market correction would give us slowdown. We'd have slower growth than what we're forecasting but not a recession. Our best-case forecast though is 3% growth to the United States in the coming year.

Coming to Canada, the fact that the global economy is doing better is good for commodity prices, therefore good for our resources sector, good for the Canadian dollar-"good" meaning higher, which isn't what everybody regards as good.

I think the Canadian economy will grow at maybe 3.2% this year, a little bit faster than the US, as long as those bad things I mentioned don't happen, because we have a continuing good US economy. We have higher commodity prices, as I said, which is good for the resource sector. We have good conditions for investments. We have most governments in surplus, providing tax cuts or spending increases rather than the fiscal drag which we had through much of the 1990s. Put that all together and I think we'll have pretty robust growth in this country in the coming year.

I think, by the way, the Bank of Canada will follow the Fed in its hike today and probably next month, not because it really wants us to slow too much but because the Canadian economy at this time is growing very fast and the Bank of Canada will want to impose certain speed limits.

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Let me come now to Ontario. As you all know, there is no doubt whatsoever that this province is booming. Just to give you a few statistics for the year to date: 3.1% employment growth-unemployment rate lower than it's been in a long, long time; retail sales up 7.4%; housing starts up 20%; manufacturing shipments up 12%; exports, which are critical to this province, up 14.2%; manufacturing shipments up 12.3% etc. I don't need to tell you more. You know very well that this province is booming.

In answer to the question why, I would put primary emphasis on the booming US economy, because as I said before, over 40% of this province's GDP is going to the US. The US is absolutely critical. Also, the weak Canadian dollar has given a further boost to Ontario exports to the United States. Lower taxes have given a bit of help as well, but I would put the primary emphasis on those first two factors.

The question we're all interested in is, what's going to happen in the future? We think as our base case forecast that the Ontario economy will continue to do well this year, will outperform the Canadian economy. Our estimate for growth is 3.8%, which is not far off the consensus, but I would draw your attention one more time to these risks, to things that could go wrong, especially coming from south of the border, and that these events potentially coming from south of the border, because of what you might call structural imbalances in the US, would have a major impact on this forecast.

Turning now to the budget of Ontario: A while ago we produced a document called Relative Fiscal Power: Ottawa versus the Provinces, which made somewhat mechanical assumptions and projected forward the surpluses of the provinces. Five years from now, the estimated surpluses or fiscal dividends were estimated for each province. Ontario had about the lowest and BC the second lowest, something like $3.5 billion in 2004-05. The reason was the starting point. It's not a criticism of Ontario or BC. Both of those provinces started with a deficit, Ontario primarily because of the tax cuts and BC because they decided to increase spending to offset the impact of the Asian crisis. In a sense, Ontario had spent a part of its fiscal dividend in advance, but these estimates, which were done some time ago, in September I think, now are somewhat too pessimistic because the economy has become much stronger than we thought it would.

I did just a back-of-the-envelope calculation as to what would be the largest possible surplus, if you like, under somewhat rosy assumptions. My assumptions are very simple. Assume that Ontario's tax revenue grows at 6% per year, which is high-2% inflation, 4% real, something like that-and over three years, in rough terms, that's a 20% increase. Assume that Ontario expenditures and non-tax revenues, like transfers from the federal government, grow at 3% a year-that's like inflation plus population-or roughly 10% over three years. I think those are pretty rosy assumptions. If you make those assumptions, then we get a $5.3-billion improvement in the surplus by 2002-03. Assuming the government is right in the sense that there's a $1-billion deficit in 1999-2000, that would mean a $4.3-billion surplus in 2002-03, which would give you some idea, under what I would call optimistic assumptions and without any allowance for prudence, as to how much room there would be for either lower taxes or higher spending.

Finally, let me just say a few words about taxes in general. I'm not just talking about Ontario; I'm talking about Canada. I think there's always something of a balance between our desire as a country to be what you might call a kinder, gentler society versus the need for competitiveness to foster economic growth.

There's a balance between those two things. I think the 1990s have been a pretty rotten decade. It ended with a boom, but in the decade as a whole, we've seen declining Canadian living standards as measured by per capita disposable income, both absolutely and very much relative to the United States. We've seen productivity growth that's at best mediocre. So it's very important that Canada not continue this not only absolute decline but decline relative to the US. If we keep on at our present rate, the US lead over us will get bigger and bigger, and this can only be bad news, both in terms of attracting business and people to work in our country and in terms of keeping up with the Americans in areas like research, health, education, that depend on the overall growth of the economy.

For these reasons it seems to me, as a general statement, I would favour a little bit of a tilt in terms of this balance, that we really have to have policies to foster growth and productivity, more so than we have had in the past. For this reason, I myself would put more emphasis on lower taxes than I might have in the past, and I agree with Jack Mintz, for example, president of the C.D. Howe Institute, that you got quite a lot of bang for the buck from lowering business taxes, and I also think that a good share of the revenues available ought to go to lower personal income tax. I think that we'll always have higher income tax than the Americans-unless perhaps we have the 17% flat tax, but that's another issue-but I don't think we can afford to have a rising Canada-US tax gap. Don't forget the Americans have surpluses. Undoubtedly they will be cutting taxes, so if we are just to preserve the big gap we already have, we also have to work in the direction of lower income taxes. I'm saying that from the standpoint of the country as a whole. I certainly am not opposed to some expenditure increases, certainly in areas of greatest social need, homelessness etc, but I do think that a considerable chunk of any impending fiscal surpluses ought to be directed to a lower tax burden.

Mr Chair, that's about 15 minutes. I'll leave it at that. Thank you very much for listening, and I'd be happy to answer any questions you might have.

The Chair: We have about 15 minutes for each caucus, and this time I'll start with the government side.

Mr Ted Arnott (Waterloo-Wellington): Thank you, Dr McCallum, for your presentation. Thanks for coming again.

Dr McCallum: Thanks for listening to me.

Mr Arnott: It's my understanding that you have suggested that with the expected surplus that we're looking at for the federal government, they have room to cut personal income taxes by between 15% and 20% over the next five years. Is that correct?

Dr McCallum: I believe what I said is that if they used all of their fiscal dividends for personal income taxes, they could cut by 20%, but then I said, "which they won't," so the maximum personal tax cut, if you used all of it, under my assumptions, would be a 20% income tax cut. But they'll certainly use some of it, maybe for EI premium reductions, some of it for business tax reductions, some of it for investments etc, so-

Mr Arnott: Transfers to the provinces.

Dr McCallum: Transfers to provinces. So it won't all go there. That's more an upper limit than a statement of how much I think they will cut by.

Mr Arnott: And they're politically committed to doing something totally different as well. This 50-50 idea of-

Dr McCallum: My impression is the Minister of Finance is not desperately keen on that 50-50, and there are certainly accounting manipulations one can do to present things as spending or as taxes, depending on one's preferences. There is also the case that this 50-50 rule only goes to the end of the mandate, and if you are thinking of a five-year plan, then you are not bound by it. But one doesn't know what will replace it, of course.

Mr Arnott: Getting back to the provincial jurisdiction, I was interested in what you said about the pending surplus for the province of Ontario, presumably $3.5 billion by 2002-03?

Dr McCallum: My back-of-the-envelope, rosy calcu-lation would be, if you'd take it as a given that there's a $1-billion deficit in 1999-2000, it would be roughly $4 billion in 2002-03, but that's based on pretty rosy assumptions. I would call that kind of an upper limit.

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Mr Arnott: People in my riding tell me they want debt reduction to be a higher priority in the provincial government as well as the federal government. Would you concur that should be an important priority of the provincial government as we get into these, hopefully, continued years of surpluses?

Dr McCallum: Yes. It's a question of how much. Obviously, the more you put into debt reduction, the less you have for tax cuts or higher social spending. But Ontario has a relatively high debt, so that would be an argument in favour of it.

I think the general argument in favour of debt reduction, whether federally or provincially, is partly that Canada has one of the highest debts in the world, but it's also an intergenerational argument because we have a 10- to 15-year window before all the baby boomers retire en masse. At that time, the spending needs for health care and pensions will be higher and the tax base will be weaker because there will be fewer people working to support more old people. So the last thing that younger generation needs is to be saddled with a high debt and interest carrying charges in addition to the burden of supporting the elderly.

You could argue-I don't think I argue this, maybe because I am a baby boomer-that all these calls for tax cuts today, which will favour the baby boomers who are in their peak earning years, are kind of like pigs at a trough from a younger generation's point of view. It's these people who have benefited from the deficits, and they will be saddling their children with a higher debt when it comes to their retirement 10 to 15 years from now. That's the argument for a big focus on debt, and there's a lot of truth in that.

But I do think there are some very high priority spending needs. I would be highly selective. I do think that, given our need to be competitive with the United States, there is also a pressing need for tax reductions. So it's always going to be a balancing act. I would put significant money into debt reduction. I certainly wouldn't put the whole thing, but I would probably have more emphasis than we've heard so far.

I think at the federal level their $3-billion contingency reserve, if it's not needed, is the minimum. Assuming the economy grows nicely, the debt-to-GDP ratio will come down. But if you agree that we are living in the best of times, economically speaking, now is the time to have significant surpluses.

Mr Arnott: Thank you very much. I have more questions, but I want to allow my colleague-

Dr McCallum: Maybe my answers are too long.

Mr Arnott: No. Thank you.

Mr Galt: Thank you for the presentation. I want to question around your giving so much credit to the Ameri-can economy when in fact we are leading most of the states and leading all the G7 countries. You're giving an awful lot of credit to them, that we're riding on their coattails, when in fact we're leading.

There are several things that run through my mind. First, I understand that you did not support the tax-cut approach that we were going with, the government, and later on you came on board. That's all part and parcel of economics of the Laffer curve and where it goes. We understand that in the beginning of our term a lot of it was export-support growth. More recently, 80% of our growth relates to consumption within the province.

In the first half of the last decade, across Canada there were 350,000 net new jobs created, while in Ontario we lost almost 50,000-a total turnaround. I can't believe those who wrote our platform, the economists, could be so accurate on deficit reduction and also with creation of new jobs. We're right on target. Maybe they read into that what was happening with the American economy. I don't know.

In viewing all those things, plus BC going downhill in the last few years, is that related to the American economy or is that related to the policies and the tax structure of BC? I have difficulties giving so much credit, as you are giving, to the American economy for what's happening in the province of Ontario, particularly comparing with the left coast, out in BC, and what's happening there.

Dr McCallum: First of all, I wasn't aware that I'd ever commented publicly one way or the other on the tax cut.

Interjection: It's in the dossier.

Dr McCallum: I don't believe in the Laffer curve, if that was your implication. I don't believe that if you cut a dollar of tax, you'll get more than a dollar back in revenue. That is the extreme of what an economist would call a free lunch. If that were the case, why didn't governments have massive tax cuts years ago if they'd get more money back than they cut? So I don't believe that; I don't think many economists do. You'll get some of it back, but nowhere near dollar for dollar.

On the question of British Columbia, I've put a lot of emphasis on the US for Ontario, because Ontario is uniquely dependent on the US for its trade and Ontario trade is huge relative to GDP. British Columbia exports about a third of its exports to Asia; Ontario exports about 3% of its exports to Asia, virtually nothing. So when Asia tanks, obviously BC gets affected by that.

I would also agree with you that the extreme-what shall I call it?-hostility between business and government in that province, which is unique to this country-Glen Clark no longer is the Premier, but he was, and if you go and talk to business people in British Columbia, and it doesn't matter what the topic, within three minutes they're into bashing Glen Clark. I'm not denying he possibly deserves bashing. I'm just saying the climate there is-you can't quantify the impact, but certainly it isn't good. That is an unquantifiable negative, but Asia certainly had a big impact also, given the exports of Brit-ish Columbia.

On Ontario, I mentioned the US a lot, yes. A second factor which helps to explain Ontario's more rapid growth than the US would be the low Canadian dollar. Ontario is the principal exporter of manufactured goods. We've certainly benefited immensely from that weak dollar in terms of export generation.

I did mention as well the tax cut. I don't think it's as important as those other two factors, but I do think it played a positive role. If you look at Ontario personal income tax revenues as a percentage of Ontario personal disposable income, it was 7.6% in 1995-96, and according to estimates it will be around 6.9% in 1999-2000. So over four years it's gone from 7.6% of disposable income to 6.9%. That's lower by 0.7 percentage points. I don't think it's lower by enough to have had a huge impact on this province's growth rate, but I did agree and I did mention it upfront as a helpful factor.

Mr Galt: Just as a follow-up supplementary, you commented that disposable income of Canadians had dropped throughout the decade, with a little rally at the end, at least as far as your comments. Why has disposable income gone down so much? Is that related to the taxes? The federal government continued to increase taxes in the first half of the decade. In Ontario they increased taxes. In BC they are increasing taxes now. Is that the reasoning, or are there other factors than taxes driving jobs away, driving the economy out of Ontario and out of Canada, because those taxes have gone up?

Dr McCallum: That's certainly one of the reasons. You heard me say, I think, at the end a plea for lower taxes. I'm in favour of lower taxes. I'm in favour of using a good chunk of future surpluses for lower taxes because I think that will make our economy more competitive, that will help to create jobs, and that will help to attract both people and economic activity to our jurisdiction. So I'm not arguing for higher taxes; quite the contrary.

If you ask me why our relative income position dropped in the 1990s, it's partly taxes: the direct effect of taxes on take-home pay and the indirect effect of taxes on growth and economic activity. But the single most impor-tant factor from a purely statistical point of view is, if you take disposable income per capita, you can break that into two components: income per person employed and the percentage of the population that has a job. So you can have falling per capita income either because of lower income per person employed or because a smaller fraction of the people are employed. The biggest reason for Canada's drop was a drop in the fraction of the people who were employed, especially in the first half of the 1990s when our recession was way worse than in the United States, and especially in Ontario it was way worse than in the rest of Canada.

So part of the reason is the very deep and long recession that we had. And why was that? Well, a number of reasons. We started out with higher inflation. We had sky-high interest rates to fight inflation. We started out with big deficits. We had fiscal drag to tame our deficits. So we had some structural adjustments to do which were painful, and that helped to deepen the recession; possibly also because of our higher taxes.

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The good news is we've made those adjustments. We've turned our deficits into surpluses. We've got our inflation down to a very low level. While those adjustments have been painful, those adjustments have been made. I think from that standpoint, the outlook going forward is positive. A high priority, though, to reduce this living standards gap between Canada and the US is to lower taxes.

Mr Galt: Thank you very much. I fully agree with the lower taxes.

The Chair: I have to go to the opposition for 15 minutes.

Mr Kwinter: Mr McCallum, I was interested in your observation about what we do with this fiscal dividend, whether we reduce taxes, whether we improve services. You went through all the options, and it wasn't until you got prompted by a member of the Conservative Party that you talked about debt reduction.

My concern and the thing I want to ask you about is this: At the present time, in round figures, it takes about $9 billion to service the debt of Ontario, a significant proportion of the budget. If you feel there is a stimulus in reducing taxes, plus a need to improve certain services, how can you even deal with the debt in any significant way that's going to impact on that $9 billion a year?

Dr McCallum: It's always a question of the present versus the future. If you have a big reduction in the debt, let's say over the next five years, then Ontarians will have to have higher taxes than they otherwise would have had because of the debt reduction program and/or less social services than they otherwise would. So there's a cost during the period when you're bringing the debt down. The benefit is that once you've brought it down, that $9 billion of debt servicing will be less, and at that point you can cut taxes more or raise spending more. It's all a question of intertemporal or intergenerational distribution. If you want to have a huge debt reduction in the next five years, then you're penalizing citizens in the next five years to the gain of citizens thereafter. That's why I brought up the baby boomers and so on. But also, if your debt is way too high, then you have the risk of economic instability in hard times.

There is no agreement with economists on exactly what debt is optimum. There is agreement that ours in Canada and Ontario and Ottawa is too high. For Ottawa, I think a $3-billion debt reduction per year plus growth to reduce the burden of the debt is okay, but I think that is the minimum. If they do that, then under fairly conservative economic assumptions the federal debt would go from 72% of GDP, which was its peak three or four years ago, down to less than 50% five years from now. That's quite a significant reduction. It's a matter of opinion whether that's enough. I think it's the minimum.

In terms of Ontario, it would be nice to devote a part of future surpluses to the debt, but I certainly wouldn't say all of them. If Ottawa is $3 billion a year, maybe Ontario could do $1 billion a year. I don't know. I think something on that level would probably be adequate. Others would be more hawkish on the debt. I think it's a matter of opinion. There's no economic law or theory which tells us precisely what one should do in this area.

Mr Kwinter: From a practical point of view, let's say we use your figure of $1 billion a year in debt reduction. That $1 billion a year in debt reduction of a debt that's well over $100 billion is going to have very little effect on the interest charge against it. All it will really do is pander to those who say you've got to do something about the debt. But from an effective point of view, or from a political point of view as well, how do you see any kind of resolution, anyone making any kind of commitment to tackle the debt when, as you say, a billion dollars is not going to make a significant difference? How would you do that?

Dr McCallum: I think time heals many things, and if we are correct in assuming that we will not have a major recession but we will have continuing moderate growth of maybe 3% in real terms per year, well then, what really matters is not the absolute dollars of debt but the debt in relation to the size of the economy. Just like your own personal debt, what matters is your debt in relation to your income. If you're Bill Gates, you can sustain a bigger debt than most of us. So it's debt to income that matters. I think that with modest dollar down payments on the debt, plus continuing growth, we will steadily but surely have that burden of the debt coming down.

Mr Phillips: The government's already announced its plans for the next three or four years in terms of how it's planning to deal with the fiscal dividend. I'd just like your comment on the implications of it. They have said they're going to use $2 billion to pay down the debt, increase health spending by about $2.5 billion and cut taxes by about $5.3 billion, although they're partially into that now. Two of those are annual costs. The $5.3 billion is an annualized cost, the $2.5 billion is annualized cost on health care and it's probably the equivalent of $500 million a year on debt reduction.

By the way, as an aside, I'd be interested in getting both the back-of-the-envelope thing you did there and the other document, because we're kind of flying blind here in terms of any idea of what revenue we should be looking at over the next two to three years. Just on the basis that, as I say, they've already made some very significant annual commitments on how they are going to spend that money in the future, what does that do to your envelope?

Dr McCallum: Well, let's take my back-of-the-envelope ones, because those are the most optimistic. I would say that it would be very imprudent to assume a higher surplus than that. If you assume over the next three years a 20% increase in tax revenues and a 10% increase in spending and non-tax revenues, then by 2002-03 you have a $5.3-billion surplus. So if the list of annual expenditures, including debt reduction and tax cuts, is more than $5.3 billion by 2002-03, well then my numbers say you can't do that unless you have spending go up by less than 3% per year - 3% per year is basically constant real per capita - or unless you raise other taxes, because my back-of-the-envelope calculation says under rosy assumptions you have a $5.3-billion surplus in 2002-03. You add up your numbers and if they come to more than that, then my number says that the government can only do that if it, as I just said, either raises spending less than 3% per year or raises other kinds of taxes.

Mr Phillips: It would be helpful, I think, if you would provide the committee with that, because frankly we're being asked to kind of buy into the tax cut without the government providing any information at all to the committee of what we should expect in future revenues. By the way, the government's told us they prepare these things, details, line by line. There's no magic. You're an economist, you know there's a formula you all use, but we can't get the government to get us that, so I'm interested in your providing that. It would be very helpful to the committee.

Dr McCallum: I won't comment on what you just said about the government, but I'd be happy to prepare-should I send the documents to the Chair?

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Mr Phillips: Yes, I think they go to the Chair. He would circulate them.

Just a comment on the flat tax-we've heard about that-whether you have any comment on the-

Dr McCallum: I gather the Minister of Finance, Ernie Eves-I guess there's not a universal opinion of him in this room, but I don't think anyone would say he's a raving socialist. He said yesterday, if the paper is right, that it was not progressive enough for him or too right-wing for him. My own personal view is that I agree with that. I said that we have to have a balance between a kinder, gentler society and growth, competition etc, but that flat tax is more than the Republican Party in the United States has done. I can do a back-of-the-envelope calculation of what it would do to my take-home pay, and it would certainly be very nice, but my income is quite a bit above the Canadian average.

This is a personal point of view-I'm not sure if the Royal Bank has any view on this-but I would agree with what the minister said. I think most Canadians would favour some degree of progressivity in their tax system.

Mr Phillips: You have commented a lot on the export orientation, and I personally agree with that, and I think the government does agree with it because they always cite it in their documents as the most important economic factor driving Ontario. It's gone from the equivalent of 28% of the gross domestic product to 52%. It's the engine driving it.

Again, maybe to summarize so we have it clear, what are the implications of that? Let me be more specific. We've heard today that we must move our taxes. I think the implication is that we must parallel the taxes in the US because we're now so competitive with them. What I would like is somebody like yourself to give us some indication of the implication of that. If we have the same income tax level as the US, same corporate tax level, the taxes are exactly the same-the productivity and the income levels are lower in Canada-it seems to me that you could conclude that we will therefore, over time, end up with a lower level of service, coupled with the fact that everybody has told us that one of the major competitive advantages that we have here is we fund our health care system in a different way than the US, which gives an enormous advantage, particularly to the auto sector. Any advice you can give us on that? If we follow the direction of mirroring the US to compete with them on taxes, where might that lead us here on the services?

Dr McCallum: I think that's a very good question. Just the first and obvious point: Ontario in particular and Canada in general are extremely dependant on the US for trade and are getting more so, and that's a two-way street. Everything is real wonderful now because the United States economy is booming and is wonderful, but at some point we're going to have a recession, at some point things will go down in the United States. It's a symmetrical thing. Then we too will go down to a significant degree.

On your question about taxes and harmonization, I think there are two ways to go. One is what I would call Americanization, where we harmonize everything left, right and centre. In a North American context, harmoni-zing means we do what they do. It doesn't mean they do what we do. It just means we do everything the Americans do. We harmonize our taxes, our tariffs, our external barriers, this and that and the other, and ultimately our social programs. I think we might end up that way if we continue to deteriorate relative to them.

I for one, partly for economic reasons and partly because I value the differences between the two countries, would not want to see us go that way. I would like to see us not copy the Americans but in some sense do better than the Americans. I think in some areas we can turn our differences into advantages. The health care system, for all its problems, puts us at a competitive advantage vis-à-vis the US. I think Jack Mintz is right. Now this is partly a tilt. He says we could lower our corporate tax to lower than the Americans at a cost of $2 billion to the federal government if we broaden the tax base. That might be an activity-that's not very politically popular, but as part of an overall package it might be possible-that might have a lot of bang for the buck in terms of attracting economic activity to this country. That is where the Laffer curve might work to some extent because it would also give corporations an incentive to change the jurisdiction in which they report profit from the US to Canada.

I think in many areas we should not try to be the same as the Americans but in our own different way do things better than the Americans.

That having been said, my last point is I don't think we can afford to have an income tax gap vis-à-vis the US that gets bigger and bigger and bigger. I think to some extent the border is coming down. People are mobile. We can have some gap-I'm not saying we have to be as low as the Americans-but if the gap gets ever larger, I think we put ourselves in danger in terms of retaining highly skilled people in this country and attracting people from outside the country here. So we don't have a total degree of freedom in these matters. We have some degree of freedom, which we should use innovatively and inventively, but we can't let ourselves get unduly out of line with levels of taxation south of the border.

The Chair: With that, you're out of time.

Mr Christopherson: Thank you very much for your presentation. I've enjoyed it, probably more than the Tories have, I have to tell you. They had a United Steelworkers-

Interjections.

Mr Christopherson: Oh, calm down. Boy, you guys are good at dishing it out, but you can't take it.

Interjection.

The Chair: I won't entertain any cross-discussions.

Mr Christopherson: Fair enough, Chair.

Interjection.

Mr Christopherson: We're going to get a net for you.

Mr Arnott: We hope so.

Mr Christopherson: Yes, his own colleagues say "We hope so." Everybody knows John O'Toole.

To be serious, though, it was interesting that before lunch we had an economist with the United Steelworkers who emphasized again the importance of the US boom in terms of our exports and the implications for Ontario, in particular, and all of Canada. Of course you come in this afternoon. The government would like the world to be that it's their policies alone that are the reason for the boom that we have, and there aren't a lot of economists and others who speak publicly on economics who side with that. That's why they didn't continue that line of questioning with you.

Most people do recognize that it is the main driving thing, and I think the government would be wise to stop trying to defy gravity and just acknowledge that has happened, rather than trying to convince everybody that night is day and black is white. This is not like the naming of one of your bills, where you can just call it whatever you want regardless of what happens. We've got the rubber hitting the road here.

I wanted to ask you a couple of questions. You had mentioned the surplus under this rosy scenario, and we know how often that usually happens, but the figure you gave was roughly what, under the rosy scenario?

Dr McCallum: Assuming that the current estimate of a $1-billion deficit this year is right, the number would be $4.3 billion in 2002-03. It's a $5.3-billion improvement, relative to 1999-2000. So if 1999-2000 is in balance, you'd have a $5.3-billion surplus in 2002-03. If 1999 is a $1-billion deficit, you'd have a $4.3-billion surplus in 2002-03.

Mr Christopherson: Mr Mackenzie, the economist who was here before lunch, just before you, noted in his handout that if the federal government followed the proposal of Ontario's Premier to cut taxes by 20%, it would mean a loss of Ontario revenue, according to Mr Mackenzie's calculations, of $3.4 billion. Even under a rosy scenario, that doesn't leave a lot of room for a government. First of all, do you think that's likely to be the number? I realize you haven't done the calculation, but does it sound reasonable? Secondly, if so, how do you feel about that vis-à-vis it being part of an overall Ontario economic strategy?

Dr McCallum: I said 20% would be a maximum personal income tax cut by Ottawa. I think it will be something less than that; maybe 15%.

Mr Christopherson: But that does affect Ontario revenue.

Dr McCallum: That does affect Ontario if Ontario continues as it is now, with its own tax revenue being a percentage of federal tax. But a number of provinces, including, I think, Ontario, are considering going to the tax on income. If you do that, then Ontario's tax wouldn't be immediately impacted by the federal government. So really it's up to the government to decide whether it wants to continue with the tax on tax or shift to a tax-on-income system.

Mr Christopherson: But that would have the effect of negating the impact, the thing that the provincial government has accused the federal government of doing: Every time they make some tax space, the feds fill it up. This would be the reverse of that, wouldn't it?

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Dr McCallum : It depends on how you look at it. It would be leaving Ontario tax rates the same. It wouldn't be increasing it to undo the federal tax cut. You'd still have the federal tax cut. But from the citizen's point of view, it wouldn't be as big if it was federal only as it would if it was federal plus provincial. It would be up to the province to decide if its priority was in that direction or in some other direction.

Mr Christopherson: Right. But they would almost need the two. Ontario would have to decouple in order to mitigate the impact of the current system if there were an across-the-board cut by the feds.

Dr McCallum: Under the status quo, the way the system works, then a federal tax cut automatically translates into an Ontario tax cut, but Ontario could decouple, as I said, by moving from tax on tax to tax on income.

Mr Christopherson: Right. Another subject, and I've asked this of a number of people and I'd like your opinion on it. I draw attention under Ontario's economic accounts, and I realize you don't have a copy in front of you. You probably know the issue, the issue of the personal savings rate. In 1992, which is as far back as the charts that the province provided go, the personal savings rate was 16.9%.

Dr McCallum: What page?

Mr Christopherson: You've got the document in front of you? Page 24.

Dr McCallum: I think I do.

Mr Christopherson: OK, great.

Dr McCallum: It's a different document, but anyway I'll listen to you.

Mr Christopherson: It's their document and I'm quoting from it. The personal savings rate in 1992 was 16.9%. At the point at which the current government took power, it was 10% even. You go to where we are now and we're at 3.2%. I've heard from a number of speakers that this is not unique to Ontario, that it's happening elsewhere. That really isn't the focus, because I wasn't looking to blame anyone for that. I just wanted to acknowledge that indeed that's where we find ourselves now.

With so much emphasis being put by individuals and families on the value of their portfolio-"unrealized wealth" is what Mr Mackenzie called it-whereas in the 1920s and the ramp up to the Great Depression, the stock market crash in October 1929, part of the cause was people buying further stocks on margin. Then when the value of the stocks dropped and the margins were called, they didn't have it, ergo personal bankruptcy and all that happened.

Because there are laws that prevent that now, Mr Mackenzie was pointing out that the record level of personal indebtedness is sort of the 1990s version, or could be the 1990s version, of what we saw in the 1920s, whereby they can't borrow against the paper value of the stock to buy further stock, but families and individuals can borrow money and go into debt based on the expectation that money would be there.

With such a record low personal savings rate, if we run into the bubble bursting, where could that leave us and where are some of those individuals, from two perspectives: one, those boomers who are looking at their RRSP mutual fund portfolio to provide them with the planned retirement they're hoping for; and two, with such a low savings rate? What does that mean or could that mean in terms of a domino effect on individuals and families right across Ontario and Canada?

Dr McCallum: I certainly agree with you that you can't blame the government for the low savings rate, because it has happened across the country and the continent.

Mr Christopherson: Right.

Dr McCallum: I think it has happened partly, especially in the US, because of the booming stock market. People feel less need to save because their paper wealth is going up so much. In Canada there's some of that, but also because of our declining take-home pay people save less to maintain their standard of living.

You're asking me really what's going to happen if there's a stock market crash. The answer I gave before is the same as I give now. It would slow the economy but it wouldn't throw us into recession. A study by the Federal Reserve System-you know, the mighty Alan Greenspan-suggests that the wealth effect out of stock market wealth is quite low. If you lose a dollar of stock market wealth, your consumer spending only goes down three cents out of every dollar versus 12 cents if it's real estate wealth. The reason for that is partly because the distribution of stock market wealth is extraordinarily unequal; 1% of Americans own maybe 40% of the stock market. The other reason is that it's volatile. People don't respond as much up or down to changes in their wealth when it's very volatile.

If you believe that, then even a very major stock market correction-it will have some effect in raising the savings rate. You're right. People will consume less. The question is, how much? These studies suggest it wouldn't have a major impact. I think the best parallel is 1987. If you think back to 1987, there was a big stock market correction. The Federal Reserve lowered interest rates, and the economy kept chugging along. So it wouldn't be good if the stock market crashed, but I don't think it would throw us into a recession. I think it would slow growth somewhat.

Mr Christopherson: Is it fair to say, though, that it could be a disaster for tens of thousands of families who are planning on the value of that portfolio to provide for their retirement?

Dr McCallum: Yes, it would certainly hurt some individuals. It depends how much it corrects itself and how long the downturn lasts. Some of the high-tech Internet-type stocks, by any conventional measure, are very, very high. The stock market correction could be concentrated on those kinds of stocks. If you are heavily concentrated in terms of your wealth in those kinds of stocks, it's highly risky. If it drops a lot, you lose a lot of money, no doubt about it.

Mr Christopherson: You mentioned the declining incomes. The next presenter will, I assume, be referring to a report she did, The Growing Gap, that talks about the discrepancy between the very wealthiest in our society and the very poorest and the fact that during the recession of the early 1990s-I'm not asking you to comment whether you agree on it or not, but during that recessionary time the policies of the NDP government actually closed the gap. Here we are in the biggest economic boom we've ever seen in North America, and the gap is getting wider.

I just wondered about two things; first, how you feel about that in terms of what it says about the sustainability of continuing to see an increasing gap between the very, very wealthy and the very poor. Second, if you were of a mind to do something about it, what would you do to close that gap?

Dr McCallum: One thing I like about Canada is that we have far less gap between rich and poor than the Americans. In the last decade, for technological reasons and globalization and all that, there has been a very big increase in inequality of pre-tax income. Think of the pay of sports stars, the head of Disney, Bill Gates etc. Pre-tax income inequality has gone up a lot in both Canada and the United States. But when you're doing our tax-and-transfer system, the transfers to lower-income people and the progressivity of the tax system, up until a few years ago I don't think there was any significant increase in inequality in Canada. More recently I think there has been some, but it's been very little relative to what's gone on south of the border.

The way the world is going, over which Canada has no control, with changing technology, internationalization etc, there is this trend towards greater income inequality. Our tax-and-transfer system offsets some of that. Again, it's a question of balance. You can't offset all of it or else you'd have to have punitive taxation of higher-income people. Canada is not a prison; a lot of them would leave. It's a question of balance. I think we have offset a fair chunk of this increased inequality, certainly not all of it but more than has happened south of the border.

Mr Christopherson: We would argue that the tax cuts the government has implemented actually exacerbate that, because it is the very wealthy who would benefit given the progressivity of our current tax system. So when you go in reverse, make tax cuts, those who earn the highest amount receive the biggest dividend. Arguably, that is exacerbating the inequality between the very wealthy and the poorest in our country.

Dr McCallum: Actually, isn't it true that for any income you have over $80,000 you don't really benefit from the 30% tax cut because of the fair health levy or whatever it's called?

Mr Christopherson: There's still enough gain for the very wealthy.

Dr McCallum: So the very wealthy, any income over $80,000, you don't really benefit on the part of your income that's over $80,000. Is that correct?

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Mr Christopherson: No. They would like you to believe that, but all the numbers and all the stats show-

Interjections.

Mr Christopherson: No. Get away. Here you go, writing titles of laws again.

The Chair: Let's have some order on the floor.

Dr McCallum: I believe that's the case, but I can't swear to it.

Mr Christopherson: Fair enough.

The Chair: That completes your time. Thank you very much on behalf of the committee for your presentation. It's been very informative.

Dr McCallum: I just notice that my tax for Ontario hasn't gone down 30%.

The Chair: Thank you very much.

Dr McCallum: And I shall send you that information?

The Chair: Yes. Thank you.

CENTRE FOR SOCIAL JUSTICE

The Chair: Our next presenters are the representatives for the Centre for Social Justice. Welcome. Could you please state your name for the record? You have one hour for your presentation.

Ms Armine Yalnizyan: Thank you very much. My name is Armine Yalnizyan and I'm here representing the Centre for Social Justice as their economist. Thank you for being so punctual, by the way.

First of all, I want to very much thank you for the opportunity of addressing this group. It's a great privilege to have been able to do the work that I've been doing in the last couple of years. The Centre for Social Justice is the new organization that has come out of the Jesuit Centre for Faith and Social Justice. The Jesuits, as you know, have a long tradition of doing work on economic as well as social justice issues.

I've been very privileged in being able to do some of the work with them, for two reasons, first of all because it's an area of economics that is rarely looked at: income distribution. Often we look at economics in terms of dollars and cents and rarely look at the impact that those changes in dollars and cents have on people's lives. Secondly, it's a great privilege because for me personally it permits me to marry my Christian faith with my profession, which is quintessentially secular. That's important. I know we've just been listening a lot to what has been happening to stock markets and whatnot, but all of us here around this room are somehow connected to a sense of community. The thing about Christian teachings, not only the gospel but also the scriptures, is that we are constantly called by this higher authority to build a community that comes together to do the will of God. Of course that's the great challenge for us as Christians in this pilgrimage, to figure out what is the will of God.

Quintessentially for Christians, the issue of faith is about a willingness to remain engaged. It's not about living without doubt or questions. I see institutions like this particular group, this committee, and the democratic process as a whole as being reflective of that same sort of process that we're called to through scripture and through gospel, which is a willingness to remain engaged-not without doubt, not without question, but a willingness to try and fumble our way towards something that's a bit better for everybody. It's in this spirit that I make my presentation to you, with that preamble.

The important thing I want to raise our attention to in the process of my submission to you is that we have come through a remarkable period in the last decade, one that has brought us through a very deep recession as well as a very rapid recovery. Part of our goal as forensic statisticians is to discover what's the net result of this radical transformation of the world in which we live, as defined by the labour market.

We're told that the changes we took part in-and remember, it was a leap of faith we were asked to take about a decade ago, that free trade would improve prosperity for everybody; that if you got governments out of the way by privatizing some of the things that governments deliver, as well as deregulating the market to make it easier for businesses to perform in their best capacity, we would all be better off. Part of our job is to just take a look at the evidence: Are we all better off? It's for that reason that I'm going to be taking us through a walk, in part, of what happened over the course of the 1990s-just strictly what's the evidence on that leap of faith we all took.

But clearly this particular committee is most interested in what has happened in the last few years of economic growth. So first of all, I want to say that what I am going to try and present is based on this period 1989-97. Why 1997? Because we have no income statistics that go beyond 1997. I'm presenting you with the most up-to-date information we have on the distribution of income.

I know that in Mr Eves's presentation he referred to rising disposable incomes. Indeed there are rising disposable incomes in the system since 1997, but it tells us nothing about the distribution of those incomes and how that is finding its way right down to the bottom. Don't forget this whole thing was about, "Prosperity will trickle down to everybody." So part of our test is, has it trickled down to everybody?

The second thing I want to say is that the universe I'm looking at here is about income for families. I'm not looking at wealth. The way I'm defining prosperity, first of all, is what's our ability to make a living, to begin with. Part of the equation is, of course, assets, and this report cannot touch that because in fact we have no up-to-date data on assets in Canada. The last time Statistics Canada did a survey of assets and looked at the distribution of those assets was in 1984. We know there is a study upcoming somewhere down the road in the year 2000, but we have no information since 1984 as to the distribution of those assets.

Finally, the unit of analysis that I'm looking at is incomes of families raising children under the age of 18. You may ask, why choose that group? Statistically speaking it sits in the middle of the entire distribution of incomes. At one extreme you've got unattached individuals whose distributional curve of incomes is primarily much further down the spectrum. At the other end of the spectrum you've got families with adult children or with no children and their distributional curve tends to be higher up. Then you've got seniors. Seniors are a very special case because they've got pensions and all sorts of other things in the mix, so it's not telling you a lot about how the market is interfacing with our ability to make a living.

Families raising young kids are in fact smack dab in the middle of that distribution, so they're kind of a touchstone for what's happening to the whole economy. But maybe even more important than its statistical significance is the fact that these are the families that are raising the next generation of citizens. It's in this context that individual families with better or worse economic opportunities and better or worse systems of support are going to raise the next set of leaders and followers in our society, so that's why I chose that particular group.

Let's take a look at the experiment. More market, less government: Does it deliver more prosperity? It depends, of course, on how you define "prosperity." If you define it strictly in terms of dollars and cents, it's indisputable. There is more money in the system. Over the course of the 1990s Canada's system of national balance accounts shows that there's about $1.5 trillion more in the system in the form of assets. As I indicated, we have no way of measuring how those assets are distributed, but there sure is a lot more money sloshing around.

What's fascinating is that that increased prosperity did not translate its way into the pockets of Canadian families, Ontarian families in particular. What's the most fascinating is that there wasn't a single income category in Ontario that was ahead in terms of earning its own living either measured by what the market strictly delivers in terms of wages and earnings from salaries as well as self-employment or in terms of after-tax income. Every single income category dropped compared to 1989. Clearly, in this period, 1989-97, there was not increased prosperity as defined by people's ability to make their own living and support their own children.

What was startling to me as an economist was that Ontario, which is the economic engine of this country-it represents about 40% of the Canadian economy and had one of the strongest rates of economic growth in the country-was the place where the slide to the bottom was the most rapid, and I'm including provinces like Newfoundland and Nova Scotia. The slide to the bottom was more dramatic in Ontario than it was in the Maritime provinces, both in market terms as well as after-tax terms. That to me was startling.

It was also true that the top 10% of families raising kids were some of the biggest losers in this country, again only outpaced by the losses for the top 10 in Newfoundland and Nova Scotia. That should give us cause to pause. I can't explain all of the reasons why this happened, but I can certainly present the evidence. So it's not just about the poor getting poorer, but literally everybody in the income spectrum took a hit in terms of earning power as well as after-tax incomes in that period.

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Though I'm focusing on the 1989-97 period in terms of incomes, I just want to flag, of course, that we don't think of our incomes every moment of our lives. Part of what we think about, especially when you've got kids you are trying to raise, is the nature of supports you've got in your system, as came home to us very graphically when that young kid was rushed to the emergency room with an asthma attack and his parents couldn't get him in. I bet tax cuts was not at the top of their mind when they were trying to get services.

This is an era in which not only have incomes dropped but also the range of supports that we have to raise our families has been eroded and is in further jeopardy. I'm not going to deal with that part of the context. I'm saying that just looking at incomes is only part of the story about what this period has been about. Again, in overestimating the role of the market to deliver more prosperity for all citizens, my assertion is that government has neglected its own very critical role in providing security for everybody. It isn't just about more prosperity. Surely part of prosperity has to translate to more security for people.

What I want to first of all do is walk us through the slippery slope and the degree to which families in Ontario have actually fallen to the bottom. Both in market income terms-this is page 2 of the brief-and in after-income terms there were more families who found themselves at the bottom of the distribution than in the middle or at the top over the course of the period.

There's often a lot of dispute as to whether-when you talk about the poor, it's always a relative measure. So my idea was to hold things constant at 1989 levels and see how we compared by 1997, taking into account that we went through both recession and recovery. When you do that, you see that the very bottom decile grew the most rapidly-deciles are 10% slices of the population-and that our population of families with after-tax income thresholds of less than $40,000, $39,500, actually grew to 39% of the population. Let me try this out again, just in case this is confusing. In 1989, 30% of the population of families raising kids had after-tax incomes of not more than $39,458. That's the trigger after which you end up being in the 40% of the population. Average incomes are much, much lower than that threshold. I'm just saying that's the cut-off.

Using that same cut-off in constant dollars in 1997, we find that 39% of the population has fallen under that threshold, there are fewer families in the middle, and there are even fewer families at the top. As you can see from the numbers that I presented here, all of the incomes are falling, both in market terms and after-tax terms. So not only are there more people at the bottom, but their incomes are falling, and there are not more rich. So as a social experiment of delivering more social prosperity, the evidence at least raises questions that it was worth doing this.

I want to point us to page 3 of the brief. There was some discussion with the previous presenter about whether after-tax income inequality is growing, and I heard him say things that I have frequently heard said about growing income inequality: first of all, that it is inevitable; second, that economic growth is all we need to get rid of it. What the evidence shows is that growing income inequality is not inevitable even under poor economic conditions, and income inequality, again the evidence shows, is not necessarily reduced by a good dose of economic growth. I don't want it to appear that I am against economic growth. I'm just saying it's not the only critical lever for reducing income inequality.

Marketing outcomes definitely play a strong role, but at the end of the day the critical role remains in the hands of government decisions with regard to how much inequality is acceptable or unacceptable.

I have a sheet called "Amazing Facts," and you can see by just looking at the chart on the other page-what the gentleman previously was saying is that there is growing income inequality in market terms, just in people's ability to earn their own living. You can see in the top chart on page 4 that that is not true. In fact, when economic times start to recover, more people at the bottom get jobs, right? The quintessential hallmark of recessionary periods is that people lose jobs, so some income is better than no income. Market income inequalities in fact fell in Ontario very rapidly in the recovery period. What is fascinating by this story is the second chart on page 4, which is slightly below it, which shows that contrary to what you would expect, in the recessionary period the after-tax income inequality did not rise despite the fact that more people were out of work. In fact, it fell. Yet in a period of economic growth which did reduce market inequalities, we seemed to be unable to actually cash in on that market trend, and after-tax inequalities ballooned.

The question was raised as to whether tax cuts were the culprit. Indeed, it's partly tax cuts but it's also transfer cuts, because if you're cutting supports to the people at the bottom as well as cutting taxes-I'm sorry, the evidence indicates that the combined effects of all the cuts as well as transfer changes have benefited the top income groups the most strongly. We can talk about the numbers later, but they do include the total combination of all surtaxes, all health levies, all income taxes. Clearly the tax cuts most strongly benefited people at the top of the income distribution. Transfer cuts most strongly af-fected people at the bottom. Presto bango, you get growing inequality even in a time of economic growth.

The next page is "Making the Links." I just want to bring us back to the chapter and verse of what this whole period has been embedded on, that there are certain causal links that lead to greater prosperity for everybody if you get economic growth, so clearly all you have to do is boost the rate of economic growth to make things better for everybody.

The four links in the chain are: Once you get more economic growth, you get more people working; once you get more people working, that leads to higher incomes; once you have higher incomes, because there are more people working at the bottom, you have less market inequalities; and once you've got market inequalities, you're in from the races and you've got less after-tax inequality.

Looking at the evidence for Ontario, you don't see necessarily that any of these links in the chain hold. First of all, did economic growth mean more jobs? Clearly in the 1998-99 period you've had more jobs. I've tried to update these numbers, but you have to understand that for me to walk you through every link in the chain, I have to end in 1997. We know nothing about the distribution of income after that. But I knew there were concerns about how the economy has performed in the labour market in the last few years, so I wanted to run some numbers by you.

Yes, it's true that more people are working. That's indisputable. There are more jobs in the system. But the fastest-growing trend in the labour market of the 1990s has been self-employment, not employment. Though that has been reversed in 1998 and 1999, I want to caution you that the number of temporary jobs is growing at a faster rate than we've ever seen before, and the number of contract and term jobs has grown at an unprecedented rate.

Why is this important? Because even though you've got more people working, it doesn't mean that you've necessarily got more economic security. You may in fact have more economic insecurity. You could have lots of people working full-time but they don't know if they've got a job next month or in six months' time, which is devastating for families that are trying to raise young children.

More jobs don't necessarily mean high incomes, according to the data. It does depend on where those jobs are being created. Are they being created at the bottom of the spectrum? Are the jobs that are lost being replaced by jobs further down the income spectrum or are they being created in the middle and upper ends of the spectrum? So part of the story is, do more jobs create more income? The answer to that question is, first of all, are the jobs that are being created more lucrative than the ones that were lost? Secondly, it depends on whether those jobs have longer or shorter hours or the same number of paid hours of work.

Clearly in Ontario we have had a period of massive restructuring of economic activities. The 1990s have been predicated on downsizing: downsizing of the public sector, downsizing of major private sector players. The merger, downsizing and reorganization of activities has meant less jobs in those big firms and certainly the creation of more private sector full-time jobs, indisputably, because people are being spun off from the core businesses. This has led to fewer stable jobs, more contract and precarious work, as seen in the previous comments, and greater downward pressure on wages. So it's not a surprise that even though we've got a lot of the hallmarks of an economic boom, we appear to be sliding down the income spectrum.

The third point is about market incomes rising the most rapidly for those at the bottom of the income spectrum. Indeed, market incomes in a period of economic growth rose most dramatically for people at the bottom of the spectrum. As you'll see, the number is a staggering 244% increase. But look at the actual numbers we're talking about. Average family income of the bottom 10% rose to a high of $1,962 worth of earned income by 1997. This was a huge erosion from their position in 1989, which was an average earned income of just over $7,000. By the way, all this is in constant dollars, controlling for inflation. It's even worse than it was in 1984, at the height of the recession.

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Market incomes for the richest 10% of families also fell in the period between 1994 and 1997, and that is the only upper-income group to post a decrease in market income. That was a bit of a mystery to me, but we can discuss some of the things that might have led to the top 10% dropping.

Every other income decile which is the middle of the spectrum was posting very modest income gains, in the order of about 2%, in this period of economic growth. Of course, these gains come nowhere near restoring what they lost over the course of the period, because the gains are on the order of hundreds of dollars and the losses are on the order of thousands of dollars.

The after-tax income gap: Even though, as I mentioned, we have a smaller gap between rich and poor in market terms, we have a wider one in after-tax terms. Why? We cut taxes and transfers in this province between 1994 and 1997. You can see the numbers; they're quite staggering. The single biggest change was the average amount of transfers to the bottom 10%. You know what I mean by transfers, don't you? They are income support programs, primarily social assistance for this particular group. All transfers for families raising children under the age of 18 would be unemployment insurance and social assistance. In 1989 it would have included family allowances, or what was becoming the child tax benefit. By the end of the period, that amount gets captured in the tax side of the equation, because it's the child tax credit. So we're really looking at only two changes, unemployment insurance and social assistance. And the big change from 1994 to 1996 for that bottom decile was social assistance. They are paying less taxes too. The tax cut apparently reached them, and they are paying an average of $28 less a year than they were in 1994.

The top 10% also received less income from transfers. On average they lost $17 dollars a year from transfers. Their gain from the tax cuts was $3,384, on average, at the top.

In the middle of the spectrum, you see there have been marginal increases, and in some cases no increase in the middle of the distribution. Taking a typical middle-income decile, you see that average after-tax incomes budged just a little between 1994 and 1997, arriving at not even $44,000. But that is 8% lower than it was in 1989. These families were actually paying more income tax in 1997 than in 1994, probably because they were working more. But they received $802 less in income supports.

What is the upshot in this period of growth? Forty percent of the population at the bottom saw reductions in their disposable incomes, as did the top 10%. The modest gains in disposable income were restricted to the upper 40%, excluding, of course, the richest. Again, just to focus our minds on the value of further tax cuts, the bottom 10% of families raising children-and this is the most recent distribution data that I have-pay an average $59 a year in provincial and federal income taxes. So the amount of tax scope you have to do something significant for people at the bottom is quite small.

This brings us to the role of taxes. There are two sides of the tax cut discussion. First of all, the economic theory I laid out for you-economic growth leads to more people working, leads to better incomes, leads to less disparity, which means more prosperity for all-is mainstream economic theory. Where we go rightward politically is where we assume that tax cuts are the primary lever for "goosing" that rate of economic growth, that that's the best way of getting a higher rate of economic growth. Again, the evidence does not support it.

If you take a look at the changes in this country in the period 1994 to 1997-and I choose the period 1994 to 1997 because by 1994 every income class of every province basically shows either an improvement or at least a stagnation. Generally, it's a recovery period, a meaningful recovery period for families, and GDP, gross domestic product, is definitely growing in this period.

When you compare the provinces that were growing the most rapidly in this country, Ontario does belong to the group of provinces that grew the most rapidly in 1994 to 1997, but it is at the bottom of the pack. You have four provinces that grew fairly strongly, you have four provinces that grew very weakly and then you have Newfoundland, which was a basket case in the period.

The four provinces that grew strongly were, in order of importance, Saskatchewan, Alberta, Manitoba and Ontario. Now, of the top three performers, only one of those provinces had tax cuts. There is something going on in this economy which is connected, perhaps, to the resource industry, energy resources in particular. It's quite peculiar that the three provinces where oil is sitting underneath the ground are the ones that grew the most rapidly between 1994 and 1997. That, I would contend, is less the advantage that Mr Klein gave to his citizens than the advantage that God gave to the citizens by placing oil underneath the surface of the soil.

Again, there is no evidence that tax cuts are the primary booster of economic growth. I'm not saying that they don't play a role. Don't get me wrong. I'm not saying that tax cuts have no positive influence on economic growth, but to say that tax cuts are the only way you get economic growth and in fact you get the highest rates of economic growth if you introduce tax cuts simply does not hold water in terms of the evidence. It bears mentioning also that sometimes less is more; sometimes less is just simply less.

This is, of course, avoiding the other part of it which I introduced at the very beginning: paying for tax cuts. Of course, they cost something. Tax cuts cost something to the system. So there's a trade-off. The trade-off we have agreed to make by electing governments that have told us they are going to introduce tax cuts is deep cuts to income supports and other forms of government expenditures. These cuts disproportionately affect the incomes of the bottom half of the population, and they affect the quality of life of all of us.

I guess the question I would pose to the finance minister, were he here, is this: He said in his brief to this committee yesterday that the tax cuts are the best public policy that can be pursued. Based on the evidence, I would have to question that they are indeed the best public policy that governments can pursue for us all. The heart of what I'm suggesting is that governments are directed and obligated to look for the best thing that can be done for all of us, not just for a select few.

The main message of this submission is that we live in a very unusual time, because even though we are living in a period of plenty, we have poverty amidst plenty. Even though we are living in a period of unparalleled prosperity, we also have unparalleled economic insecurity.

The previous presenter was talking about the Federal Reserve's Alan Greenspan's commentaries on raising interest rates. It's interesting that just a few months ago, Mr Greenspan was saying there were no inflationary pressures in the system and, of course, his goal, just like the Bank of Canada's goal, is to maintain a lid on inflation. There are no inflationary pressures in the system. Why? Because there is great wage insecurity out there and there's nothing pushing up the wage system.

The American economy has seen now, I think, 101-or some crazy figure-months of economic growth, and the average wage increase in Silicon Valley was reported in the Financial Post today, of all workers in Silicon Valley-the thing that we keep pointing to as being the best-the average wage increase in Silicon Valley, in the United States, was 5%. That goes from the bottom to the top. That's 5%. There is no wage pressure, because there's economic insecurity everywhere. I want to get that across to you as clearly as I can.

The 1990s may have ushered in more prosperity; they have also ushered in more insecurity. Prosperity is not the only objective for governments; it has to be also more security. If you're awash in money, surely we can create more security. Surely the best governments can do can be something more than simply getting out of our way by providing us tax cuts and actually increase the security of things that people need regardless of what their income is, whether that's basics like housing, health care, education or roads, for heaven's sake. We all need certain basics. I think we would not contest that there are basic things that we need to provide.

I'm hoping that in the spirit of the discussions that these types of committees provide we can actually have some discussion about the evidence, as well as options for actually improving the prosperity and the security of all residents of Ontario.

I thank you very much for your time.

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The Vice-Chair (Mr Doug Galt): Thank you for your presentation. It's much appreciated. We have about 30 minutes left, 10 minutes for each party, starting with the official opposition.

Mr Phillips: I appreciate your comments. I carry around this document, Ontario, Canada: The Future's Right Here, because it's sort of what the government tells their business friends at the Albany Club and it's useful to-

Mr Arnott: The investors too.

Mr Phillips: And investors, sure, exactly. That's exactly it. Here are the selling points for Ontario:

"Since 1991, Ontario's unit labour costs, measured in US dollars, have decreased 17.5% compared to a 15% increase in US costs. Ontario's hourly labour costs range from $4.71 to $13.65 lower than competing jurisdictions in the US. Major wage settlements have been 1% for the last five years. Wage growth in the next few years will be constrained by unemployment levels and continued public sector restructuring."

It goes on to other things. Your numbers, I think, kind of confirm that, that one of the big selling features of Ontario has been the significant wage constraint among hourly waged people. If you'd had a 4% increase in your salary, that would have been equal to what the tax cut is, 1% a year. It is somewhat of a comment on your document, which, as I say, is stimulating, to try and determine why average incomes haven't gone up substantially in spite of "the tax cut," particularly vis-à-vis our major competitors. It would appear to be that the Ontario wage rates have been substantially constrained versus other jurisdictions. That's just going on the basis of what this document says.

Has your organization looked at that? Do you have any comment on what has happened to wages in Ontario vis-à-vis our competing jurisdictions?

Ms Yalnizyan: In last year's Growing Gap report that I published, I kind of decomposed the story of inequality into what's happening to individuals, because that's how the labour market works, wage rates, what's the value of your work-right? That's an individual phenomenon-to what's happening to families, because we have all sorts of survival tactics. When our wages are falling down, we do all sorts of creative things because most of us live in families. There is a discussion of wage rates in this thing, but it's a little bit dated, given what you're looking at.

I did not look at wage rates for this particular submission; nor did I look at it for the Great Divide document that I just released last week, which is Canadian data. So I can't address specifically your comment about what has happened to wages.

What I can clearly say is that the period between 1989 and 1997 has done some kind of economic resorting of opportunities in the labour market, where there are fewer of them in the middle and the top of the spectrum and more of them at the bottom, to which I attribute primarily the fact that we have been engaging in a massive project of restructuring our economy, getting governments out of the way, privatizing services, downsizing services, down-sizing the public and private sectors, which has led to the increase in casualized employment, contract employment, temporary employment, part-time employment until very recently, but even the full-time has been on the casual side of the ledger, and downward pressure on wages. It's completely consistent with what's happened to this slide to the bottom for family income.

Mr Phillips: By the way, I find this a very helpful document because, as I say, it kind of-

Ms Yalnizyan: Actually yes, I know the one you're talking about. One of the things I was thinking of bringing along with me today, which I did not bring along with me, was an article from the fall of 1995, just after the election, where the Premier went to the United Kingdom to rustle up some business, to attract investors. And of all of the selling points that were mentioned, not one of them included the proposed tax cuts for which he was elected apparently. What he was selling was the quality of the labour force; the proximity to the American market, which was the fastest-growing market at the time, in 1995; location, location, location, as they say among realtors; and the fact that this was a very secure and friendly environment in which to relocate top executives. There was not one mention of the tax cuts as the selling point to investors. It's interesting how that flavour has changed.

Mr Phillips: It was interesting to me that we got this document one day and, on my desk virtually the same day-this is a letter from Minister Palladini of November 26, 1999. He sent us a magazine, Ontario: Canada's Economic Powerhouse, and said we can all be proud when an independent publication confirms that Ontario really is the best place to live, work, invest and raise a family.

My point is that the document that he sent us quotes the two major reasons why companies should invest in Ontario. Well, it says "two of the chief reasons," and I think they suggest these are the two most important reasons. One is "the province's abundant supply of skilled workers and highly competitive overall operating costs, including labor costs.

"Education attainment here is among the best in North America ....

"First-class education in Ontario is highly affordable and accessible."

That was the number one point.

Number two: "And the second factor is the Canadian benefits system, which is a publicly funded system. Employers pay less for such things as health care than they do in the United States .... A typical company operating in Ontario might find its employee benefits bill slashed to one-sixth of what it'd pay south of the border."

The reason I raise this question is because there is no doubt that in the land tax cuts have a lot of political cachet, as they say. My concern is that if indeed those are the two highly competitive reasons, as we move to lower taxes to compete with the US there is a risk, in my opinion, that we can no longer afford the two fundamental things that have got us here: our unique education system, where we have the highest post-secondary attainment in North America, and the way we fund health care. We run the risk of chasing a solution that leads us to a significant problem.

I wonder if you'd care to comment on whether that's the experience of your organization, that those are the key reasons, and what advice you have for the committee on that.

Ms Yalnizyan: I guess three points. First of all, if we've learned anything by looking at the evidence from 1989-97, it is that we were promised greater economic prosperity if we did all of these things, which included moving ahead on these agendas that lead to things like more tax cuts to attract investors, and what was the outcome of that promise? Actually declining economic prosperity for virtually every income group, from poorest to richest, over the course of the period in Ontario, the economic powerhouse of the nation. That's point number one.

Point number two: Now we are being offered tax cuts-you're right that they have great cachet and are parlayed into having great cachet because they touch the Achilles' heel of everything this submission is bringing to your attention: economic insecurity and, frankly, a great deal of political cynicism. Because when you keep endorsing party after party that tells you, "We're going to give you more prosperity. If you just tighten your belt, if you just follow the recipe for more economic growth, you'll be better off," and continually you are worse off, and, "Now the best thing we can do for you is give you tax cuts, because there ain't no market solution to increasing prosperity," then there is a certain malaise in the land, that if the best one can do economically is to take tax cuts, "Well, give it to me."

The fact is that poll after poll shows that if you ask a Canadian or an Ontarian, "Do you want a tax cut?" anyone is going to very enthusiastically endorse the tax cut. It's like saying, "Do you want more money in your bank account?"

If you ask an Ontarian or a Canadian, "Do you wish your government to pursue tax cuts as the primary priority for you, or a range of other things?" and it can be a range of a number of things-since 1997, poll after poll has listed all sorts of different things, including tax cuts-tax cuts appear consistently at the bottom of the list, as recently as December 22, 1999. I frankly found it interesting that tax cuts are still at the bottom of the list. People were more concerned about health care on December 22, 1999, than they were about tax cuts. The second-greatest concern at the height of the economic recovery, when we are in boom times, when we have arrived, is unemployment. That tells you something about the economic insecurity that we're talking about in the submission.

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Clearly Canadians as well as Ontarians are looking for something more that their governments can offer them than simply more cash in their pockets, because you can get more cash in your pockets but that family raising children and ending up paying for every child they're raising under the age of 18 is going to have to pay more in tuition to get that crack at the labour market that everybody says you need. For somebody studying to be a professional you're spending now-

The Vice-Chair: I'm going to have to step in here. We're well over the 10 minutes for the Liberals' questioning. My apologies. We'll move on to the third party for their questioning or they may run out of time.

Mr Christopherson: Armine, thank you very much for your presentation. I think it's been interesting that since the first report was published through to the recent one you published last week, I haven't been aware-and if someone knows of them, please show me-where anyone has refuted the statistical analysis. They may disagree with some of the interpretations, which is fair, but no one other than maybe the finance minister-when he was here yesterday and I said that incomes are falling right across the board, he said, "No, that's not the case." On every argument that I offered up to him he just plain disagreed with the premise, and yet the facts are here.

I'm sure we share the same frustration in constantly reading in the mainstream media over and over the same sort of pushing of the right-wing viewpoint. To be fair, it probably underscores the lack of ability on the part of the opposition parties to provide a credible alternative that people would feel is credible and at the end of the day does indeed make for a better life. But reports like yours make a huge difference and I certainly hope you and your colleagues don't become so discouraged over the lack of attention at this point and drop off, because we need you in there providing these kinds of things. Lay people like myself and others can't do it; we need experts like you. It does make a huge difference, so thank you for your efforts.

I want to just ask a simple question straight up. Given all that you've criticized about the result of the right-wing agenda that's been in power here in Ontario, what sort of things would you do differently? What recommendations would you make very clearly and specifically to this committee in terms of how you think, if you had the opportunity to design it, a new budget ought to look to reverse some of these things and undo some of the damage that's been done?

Ms Yalnizyan: I think governments at all levels, federal and provincial, need to take a look at this very historic moment that we're sitting on. According to your forecasts you're about one year away from a surplus situation, or at least not having a deficit situation. We've got a surplus situation at the federal level and in many of the provinces. We're sitting at a historic moment that we've not seen before for a very long time, a period of rising economic prosperity with no recession in sight. I think we've got an obligation to do something other than to just get out of people's way when there is so much more economic insecurity.

From my perspective, which again is rooted in my Christian faith, which stresses not accumulation but livelihood-that is all of the teachings. Both the gospel and the scripture are about having to attend to livelihood. Accumulation is not the issue. If we cannot provide livelihood for people and make sure that people can survive, we've got a problem in the midst of all this prosperity.

What are the basics that we all need? We all need, in a country as cold as this, housing. It has to be warm and it has to be dry. If in a period like this we cannot provide adequate housing for everybody, we've got a problem on our hands. This is not of course an issue just for the provincial level of government; I'm talking about all levels of government. I'm not talking about political parties; I'm just saying that's your obligation as leaders of people in a period of such economically prosperous times. We've got an obligation to do something to make sure everybody's got decent housing in this country.

Second, health care: It's incomprehensible to me that we are at this point in our country where health care appears to be in jeopardy, when we're sitting on a surplus, when we've got this boom time and we've got families that are stressed in both directions in terms of providing elder care as well as care to young kids.

I think there's a lot of mileage we can do in improving and restoring our health care system so that it is not a question of whether it is going to be there or not. It is there. It is a reliable public support for anybody of any age who gets sick, regardless of your income. That's surely one of the treasures of an industrialized, modern society, that that's the type of public service you can rely on without question.

Finally, education. We're being told-this has been going on now for over 10 years-that without post-secondary education you're toast if you're trying to find a job, and yet we're making it more difficult, not less difficult, for people who have the willingness to try and get an education to actually finish it. In fact, right now outside you've got people across this country talking about either tuition freezes or tuition reductions. This is one of the huge issues.

I didn't have the opportunity to take a look at this data by generation, but one of the things we did in The Growing Gap report last year was take a look at this kind of fault line that's emerging between those over the age of 35 and those under the age of 35. Listen, folks: People who are raising young kids are having a harder and harder time leaving home, getting married, having kids, let alone raising them, and it's partly because of the economic opportunities out there. If you're going to also double-whammy them by not providing them child care when they have to work at crummy jobs because those are the only jobs out there-there's no system of public supports there-and you're not going to let them get an education because it's out of sight in terms of their income abilities, what is left to take away from this next generation? Why do you think you're going to get political buy-in that we are engaged in a common project?

That is a piece of work that could be done, but my guess from the data we had last year, as well all the hallmarks you have around you, is that young families, families with heads under the age of 35, are really the net losers out of this whole game. That's not a legacy you want to pass on.

Mr Christopherson: One of the things the government points to over and over is the number of net new jobs that have been created. I know on page 5 you make the point, "More jobs don't necessarily mean higher incomes." Looking at just the headline of how many net jobs have been created, apparently when you scratch the surface it's not the whole story. Would you underscore that again for us? The average person looks at these things and says, "Oh, well, they must be doing the right thing, the correct thing," yet your analysis tells a whole different story.

Ms Yalnizyan: If you take a look at table 8, you'll see that the long-term trend over the 1980s and the 1990s is replacing full-time work by part-time work. The rate of part-time employment continues to grow, and it has continued to do that in the 1990s, with the exception of 1998. But let us hope that when you actually reach the apex of economic recovery, you're actually creating some full-time jobs. One would hope that's the fruit of all of this.

You know, what goes up must come down, and that fundamental economic restructuring of opportunity is still continuing apace through the 1990s. Another layer that got added on top of that in the 1990s was growing economic insecurity because of the casualization of work. The biggest labour market trend of the 1990s is replacing employment with self-employment. A number of different things are adding to more and more economic insecurity.

Just to repeat what I said earlier, there may be more full-time jobs in the economy today, but more and more people, especially those under the age of 35, do not know if they will have a job in a month, in six months or in two years. You cannot raise children with that level of economic insecurity unless you're providing security in other forms, that you know you've got health care, you know you've got education, you know you've got decent housing, you know you've got child care, that the basics are covered off. Let's make a decision here about how we're going to govern.

Mr Christopherson: One of the earlier presenters, the one just before you, in fact, was making the comment that if you looked at the Fair Share health care levy, things evened out for anybody making more than $80,000. If we look at a freedom-of-information request that our caucus received from the Ministry of Finance-these are government documents-it shows that even after the Fair Share health care levy was factored in, people earning between $78,500 and $83,700 still took home $2,350 more; and between $83,700 and $90,750 it was $2,510; and for those making over $247,500 they got $15,075.

You know the rhetoric, that what happens as a result of tax cuts is blown away when we look at the real stats and the story they tell. A lot of people will listen to the argument, "We've got to remain competitive." We know, for instance, that our minimum wage now is well below that of the Americans, and yet there they are still steaming along with the greatest boom ever in their history. In fact the President of the United States in his State of the Union address the other day implored Congress to raise it yet again.

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I'd just like you to emphasize again what is happening in the families that have the lowest income right now and the hits they're taking, the loss of transfers. Could you just expand on that and give us a sense of what their world looks like right now, both in terms of the money they receive, the wages they get or don't get, the insecurities, the lack of transfers, the supports in the community, what all that means to a family now as opposed to, say, where they were when you used your reference point 10 years back?

The Vice-Chair: Thank you, Mr Christopherson. I'm sorry, time's up. We'll go to the government side, and Mr O'Toole is first.

Mr O'Toole: Thank you very much for your very compassionate presentation and information this afternoon. I would also declare myself as a Christian, and from that fundamental I think we have shared values and priorities in life-not essentially you and I-so I come at this perhaps with a different set of tools to reach a solution.

I like the premise that you started with, looking at it purely as a model of economics. It's a fine thing to do, looking at our economy and its own aggregates over the period 1989 to 1997. You would know that in that period the lag effects and the implications of those effects in the statistics you quote would pretty much curtail that to the two previous governments. In my understanding, limited as it may be-and my background is in economics; not quite to the level of yours, but that's where my undergraduate degree is-I suspect there's a lag effect, would you not agree? You can respond in that way.

A change in policies occurred which would really start showing up in the economy somewhere in the late 1997 reported income period and onward. I look at some of the implications during that period: growth in debt load, which is servicing the debt; debt interest charges. Every economist would say we were crowding out program spending initiatives. In fact, during the time of Mr Christopherson and his government, debt interest was higher than what they were spending on public education. In fact, it was crowding out their actual spending in health care. I think you could probably substantiate those numbers. So our whole standard of living was at great risk without a re-sorting out of the priorities for the province; and a complete lack of leadership federally in any consistent policy in health care and the other distribution methods through fiscal and monetary policy that they have at their disposal.

Even today it's the issue, in the current budget we're all anticipating, the built-in inequities in their social justice policy. Most important, as was mentioned here by our finance minister, is the whole issue of bracket creep. Everyone in the world has talked about it, how it really penalizes the disposable income-that's the income you've talked about-for the very group you're talking about. They should inflation-protect that particular component of income. There are fewer and fewer people in Ontario paying provincial income tax because of the way we set the cap on where we max out those who are actually paying tax. Fewer people in Ontario are taxed provincially than they are federally.

I'm not telling you things you don't know, but I think even in the minister's statement there were other comments of how regressive the federal government is in its policies now, specifically on those working people, however you might categorize their income. Ontario workers and employers will pay $560 more in federal payroll taxes in the year 2000 than they paid in the previous year. That's again through their policy with the redistribution of EI and CPP. These are payroll taxes, primarily, as well as the bracket creep I mentioned. This nets out into actually a tax on jobs, a tax on the economy as we see it.

If you look at the broader scale on tax policy, which may sound right wing-"A tax cut for the rich," is what Mr Christopherson would say-in fact, that isn't really the truth. The rich actually pay a higher percentage of tax, and that was said by the bank person, Dr McCallum, before you. That's the background where we may have some disagreement, you and I, even though we're starting from the same boat: "I am my brother's keeper" and "The poor will always be with you." We're from the same book, you might say, so to speak, without being trivial.

Now you did talk about another point here on page 5 of your presentation. My comments would be specific here. You talked about jobs and defining jobs, I'm not sure from what economic premise. I would ask you to define the future of work itself. That's a purely academic discussion today, defining the workweek, defining whether work is a place or a way of life. That's a very important debate going on today if you are reading some of the journal material on the theory of work.

Ms Yalnizyan: Can I address any of these comments?

Mr O'Toole: No, no, I'm heading somewhere on this. There is actually a shortage of workers in Canada, in Ontario. You could say that our governments of the past decade, federally and provincially, have been all wrong in their training initiatives. They're training the wrong people with the wrong skills. There's a severe shortage of people with technology skills today. I think in Ottawa there's some 25,000 jobs that can't be filled, and the companies are moving to the markets where the people are, Silicon Valley, wherever they are moving to. So I criticize the previous governments again in their policies of establishing the fundamentals of wealth creation; that is, training, knowledge.

Knowledge is power and power is money. You know, those are basic things. Training people to know about philosophy and sociology is very important academic stuff-absolutely critical-and a critical thinker should know that stuff. But you actually have to be able to spell, you actually have to know technical things to add value, and then once you have the academic freedom to think laterally and vertically, that's great. I think people should have a PhD in philosophy, no problem with that, but you really have to operate some kind of system here. You have to be able to spell, you have to have some clinch on numeracy and statistics, or you are actually being de-skilled.

Having worked in personnel for General Motors for 10 years, and looked at the shift from knowledge-based employment to casual employment, I would challenge you that there is a job shift now and it's some risk for employers. The use of contract employment has been going on for the last 10 years. Why wouldn't you? You don't man up for the peak of job expectations, you man up for the level and you handle peak through contract or subcontracting. That's what everyone should do. The reason is because your payroll is such a significant part of your overall operating budget, especially in the public sector. So I think that as we go forward and look at our strategy and translate it into the debate that's going on today-

The issue of tuition: I have five children. Why would they pay the same tuition as somebody in engineering? Well, somebody in engineering is going to actually have some job-related skills when they graduate. In fact, they're going be recruited. That's what I did for 10 years. And they are paying the same as my daughter who's taking history and English, which is great, by the way, but there are no jobs for her. And there's 500 in her class and 30 in my son's engineering class. Who's getting the best product here? I think it should be related to the outcomes, to the market, and that's what we've done. We've allowed the governing bodies of the universities to decide how to attach the tuition component of the real cost. Tuition doesn't cover half of the cost anyway.

So I think that shift in policy is redressing so that the dentist who's going to make $200,000 a year or more is actually paying tuition somewhat commensurate with their ability to repay, versus my daughter or daughters or son who are taking kind of the history, sociology route which ends up basically where I'm not sure they would get a job, technically. It's good to have the knowledge, though; knowledge is important.

The after-tax gap can really be attached to some of the taxing policies we've talked about before. I have a question here-

Interjection.

Mr O'Toole: Yes, I do. I found your presentation interesting, so I listened and I was critiquing some of the fundamental points. I found a missing part here, though. In the closing part you do have an ambivalence as to whether tax cuts really work. You say that in your conclusion.

Ms Yalnizyan: Indeed, I'm not saying I'm ambivalent. I'm just saying the evidence doesn't necessarily support that tax cuts are the key lever.

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Mr O'Toole: I think you should stay tuned, because there are more people working in Ontario than ever before. We are competitive. We do have some differences between our tax policies and the brain drain issue. If we make it more advantageous for the well-educated people to go somewhere else where they're going to pay less tax, obviously we won't have the infrastructure to have the economy to create the jobs for the people who just want jobs without careers.

If you don't feel the tax cut policy's working, perhaps you can explain this to the others who were here this morning, Dr McCallum and others, who recognized the importance of our own GDP in Ontario, and the important contribution-probably 80% is attributed to the actual multiplier effect of giving you a dollar. If I give you $100 a month, you're liable to buy a car; you're liable to spend $28,000. If I give it to a government, they'll create some program that'll never pay for itself, so there is really no multiplier effect to the same extent of giving you a dollar. My response is, can you come up with a significant recommendation-

The Vice-Chair: I'm sorry, Mr O'Toole, but your 10 minutes is up.

Mr O'Toole: No, from a recommendation I just want one observation-

The Vice-Chair: I'm sorry. Your 10 minutes are up. It was an excellent speech and a short question. We'll have to move on. Thank you, Ms Yalnizyan, for coming before us. We appreciate your presentation.

Ms Yalnizyan: Thank you very much for the opportunity. I look forward to speaking to you, Mr O'Toole, at some other point.

WARREN JESTIN
ARON GAMPEL

The Vice-Chair: Our next presenter is Warren Jestin, senior vice-president of the Bank of Nova Scotia. Would the next witness now come forward.

There is an hour set aside for presentation, questions and answers. The time left over after your presentation will be divided between the three parties equally.

For the record could you just state both your names so they are recorded, please.

Mr Warren Jestin: I am Warren Jestin, senior vice-president of the Bank of Nova Scotia.

Mr Aron Gampel: Aron Gampel, vice-president, Bank of Nova Scotia.

Mr Jestin: Thank you very much for giving us the opportunity to give you our views on the outlook for Ontario. I've brought with me today two documents. One is our Global Economic Outlook, that tries to put the economic potential of Ontario over the next couple of years into the perspective of what's happening both in the United States and globally. The other one is more specifically related to the issue at hand, entitled Ontario-Extending Solid Growth into the New Millennium. What I'd like to do is go through that paper very briefly and then answer any questions that you would have.

It's our view that not only is the Ontario economy back on the fast track but it's likely to remain there. After growing by roughly 5.5% last year, we believe that provincial output will expand by about 4% this year and 3.25% in 2001. Over the next half-decade we think there's a very good chance that Ontario will be Alberta's main contender for the title of the nation's regional performance leader.

In looking at the statistics, we see the provincial growth has broadened and deepened into virtually all regions and sectors. Our unemployment rate has fallen close to a 10-year low of 5.6%. Over the past two years the average duration of unemployment has fallen by 25% and most of the 370,000 jobs created over that period of time have been full-time positions.

With after-tax household incomes finally outpacing inflation, solid growth and profits and consumer and business confidence are on a strong upswing. This confidence is reflected in the 8% growth in the province's retail sales last year, one of the best performances in the country. Big-ticket purchases have been particularly strong, with motor vehicle and home sales setting record highs. Housing starts have rebounded to their highest level since 1989. Private sector capital spending has been on a double-digit growth trajectory for the past four years.

Turning to the future, it's my belief that the forward momentum that Ontario is showing will be sustained through the year 2001. The reasons are straightforward and there are numerous ones. The first one is that over 90% of the province's exports are destined for the US, and that economic powerhouse has considerable momentum, in our view, over the next two years. We expect US output to increase by about 3.5% this year, which is close to its 4% growth performance over the last three years, and record another gain of about 3% next year, so a very good backdrop.

Even with the expected rise in the Canadian dollar to 72 cents this year and to around 72.5 cents next year, we believe that domestic industry will remain very competitive in the American market. I'll return to that issue in a few seconds.

The second philosophy we have is that the revitalization of offshore activity, with Asia coming back very quickly, particularly Korea, Europe beginning to strengthen, and Latin America slowly turning the corner, is very good news for commodity producers. Stronger and more synchronized global growth will also boost tourism, with Ontario and other parts of Canada remaining very competitive as destinations.

The third factor, related to the global environment as well, is the fact that our other provinces are doing fairly well. Ontario's trade with these province should also improve, because all regions are expected to report solid growth over the next couple of years. Atlantic Canada is benefiting from expenditures in offshore energy development and improving commodity prices. Quebec is doing much better than most analysts had expected even a year ago, and activity is broadening with the help of key transportation, communication and pharmaceutical industries. Prospects have also brightened in western Canada, particularly in Alberta, but in visiting BC you can see that that economy also has turned with the improvement in Asia and the bounce-back in commodities.

Even with the potential for a setback in North American equity markets, which is a considerable risk, and the likelihood that interest rates will rise by roughly three quarters of a percentage point by the end of the summer, consumer confidence in spending, in our view, will be reinforced by improving labour market conditions and an upswing in purchasing power. After the lengthy recession and restructuring through the first half of the 1990s, households still have considerable pent-up demand.

For example, provincial motor vehicle sales should continue to climb, in part because the average age of vehicles in Ontario has risen to over nine years, well above US levels. In the late 1980s, the age of vehicles was both lower and more in line with levels south of the border. Only 43% of Ontario households now own a vehicle under four years of age, compared with nearly 60% of American households, so US buying demand on the car side may simply begin to slow down-you can only fit so many cars in a garage, whereas there is considerable pent-up demand here, which should put our sales environment in a much better setting over the next two years.

I could say similar things about the housing industry. Home sales, housing construction and renovation activity have lagged US trends and are certainly in a catch-up mode right now. We believe, by the way, that Ontario will lead Canada in terms of the rebound and the further acceleration in the housing industry.

Business investment will also be driven by some favourable factors: improved cash flow, rapid technological change and the need to adopt best practices in a relentlessly competitive marketplace.

The focus on Y2K-related initiatives over the past two years has created a backlog of projects that are now being brought forward and that will help to sustain capital spending momentum. There was considerable worry that with Y2K behind us business investment would fall off, and in fact we expect just the opposite. Scotiabank is a good example. We've spent about $170 million globally over the last few years on Y2K issues, and that has created a bottleneck of projects that we want to bring forward. Those are now coming to the fore.

Tight vacancy rates and the need for space that accommodates more advanced technology and communications platforms should also keep commercial and industrial construction at a high level, particularly in the technology-intensive regions of the province. You could talk about the Cambridge-Kitchener-Waterloo area, Toronto, Ottawa. There are various nodes of high-tech industry in this province, and we expect all of them to be doing quite well.

The improvement in federal and provincial finances is also allowing governments to play a more active role. Lower taxes and increased spending in our physical infrastructure and social infrastructure will help sustain the economy's forward momentum.

Turning more to an industry look, we believe there are key sectors that are geared for very high growth over the next few years. Ontario is emerging as one of North America's high-tech leaders. The focus in the press, of course, is on Nortel, JDS-Uniphase, ATI, Celestica and a few other names, but the reality is that the industry is made up of a large number of small and innovative firms that have consistently contributed to growth. We're somewhat restricted by data and the way it's collected in terms of division, so we don't get a full handle on the high-tech sector yet, but in taking the electrical and electronics sector, which is a key segment of the high-tech sector, we find that growth has been almost 10% annually over the past five years.

Unprecedented technological advances, international communications deregulation, expanding Internet and e-commerce applications, and the convergence of telephone, cable TV and PC-based services will keep this sector in very high growth mode, in our view, well through this decade. Global spending on optical components and networks is virtually doubling every year. Ontario's world-class producers of optical networks and fibre optic equipment are at the leading edge of expanding Internet and high-speed data transmission.

Ontario's telecommunications equipment industry will also benefit from the rapid expansion of global cellular-PCS services. According to IDC, international subscribers will climb by close to 30% annually through 2003. The largest markets are in the Asia-Pacific region, where wireless systems are favoured over wireline and teledensity is still low. I should point out there too that this is a region that is coming back very rapidly. The days of the Asian flu are over and the rebound is beginning to gather momentum.

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The province is a significant provider of electronics manufacturing services which provide outsourced integrated components and systems for computers and electronic equipment. This market is projected to advance by at least 20% annually over the next four years. Similarly, the future appears to be very bright for Ontario's world-class producers of computer graphics equipment and software.

Turning to the auto industry, while the US motor vehicle demand will probably slip a little bit over the next two years after nearly a decade of very strong gains, we remain bullish about the prospect for Ontario's highly competitive auto industry. Provincial assemblies set another record in 1999, accounting for 16% of the combined NAFTA production. A decade ago that was only 13%, so we've gained significant market share. The motor vehicle and parts industry accounted for an outsized 50% of Ontario exports; that's more than the combined shipments of machinery and equipment, chemicals, forest products and non-ferrous metals.

Expansions in the industry at Cambridge and Alliston will lift the province's assembly capacity by 8% in 2000. In comparison, the gain in the US will be roughly 1%, so we are continuing to gain production share. The expansion of domestic capacity is even outpacing the rapid build-up occurring in the southern states, the preferred American destination for foreign automakers. Ontario is poised to overtake Michigan-we've seen that in the paper quite a few times recently-for supremacy on the production side for motor vehicles. Moreover, the province's facilities produce many of the best-selling light truck and mini-van models, the segment that continues to gain market share.

Ontario's gains reflect a clear competitive advantage in the auto sector. Scotia Economics estimates that the province has a 4% productivity advantage over the United States, a sharp reversal from 1989 when US assembly plants enjoyed a 3% advantage. Our industry also enjoys a 33% labour cost advantage relative to American assembly plants, and this edge will widen after recent contracts. The reality is that the exchange rate will have to rise above 85 cents to eliminate our advantage in the auto-assembly area.

The auto parts sector, which accounts for two thirds of overall auto industry employment, has also been gaining market share. Shipments from Ontario suppliers have been advancing by 13% per year since 1991, considerably faster than the 9% gain posted by US suppliers. Each Canadian and US vehicle assembled now contains more than $2,000 worth of Ontario-made parts, nearly double the late-1980s level.

Turning to the fiscal opportunities and challenges that lie ahead, obviously Ontario's economic revival has underpinned a dramatic turnaround in government finances. The province will have finally achieved a balanced budget in 2000-01 after five years of major personal tax cuts and gradual deficit reduction. It's noteworthy that this will enable the provinces in aggregate to report a budget surplus-the first ever-capping a dramatic reduction from a peak shortfall of $25 billion eight years ago.

Having achieved its first set of objectives, Ontario is poised for the next stage of its longer-term fiscal and economic strategy. The outlook for further strong revenue gains provides Ontario the luxury of planning the allocation of its fiscal dividend among tax cuts, increased spending and debt reduction. I'd like to present our views on the weighting of those.

The arguments are pervasive for continued tax reductions, particularly in today's fiercely competitive global arena. The trend to lower taxes is widespread among countries, and with a fiscal surplus rapidly exceeding $150 billion, the United States will soon raise the performance bar in this key area. It's an important point, because the US has enormous potential to cut taxes with the type of surpluses that it's building up.

The importance of having a competitive environment is well recognized in all the provinces, who have led Ottawa in both personal and corporate tax cuts. Small business, for example, has been a prime area of tax cutting among the provinces, and we certainly have been moving very aggressively in those areas.

Sustaining competitiveness also requires constant upgrading of Ontario's physical and educational infrastructure. The province must work more closely with both junior and senior levels of government to coordinate the spending of scarce tax dollars in these strategically important areas. Greater use of private-public sector partnerships needs to be part of the solution, particularly with enormous pressures on the government to ramp up spending on the health care system.

While tax cuts and infrastructure spending are essential elements in the province's long-term fiscal strategy, in my view top priority must immediately be given to paying down the province's $110-billion accumulated debt. This is the only way that the $9 billion that now goes to debt service each year can be freed up for other policy priorities. With Ontario back on the fast track, it is unacceptable that 17 cents of every revenue dollar flowing to Queen's Park is directed to debt service, fully four cents above the average of the other provinces.

A front-end focus on debt reduction yields substantial cumulative benefits and greatly enhances long-term fiscal flexibility. Alberta has certainly found this. For example, a five-year plan allocating about $2 billion each year to retiring provincial debt could trim the annual interest cost by close to $600 million by the fifth year. Adding in savings from high-coupon financing, annual debt service in five years' time would be close to $1 billion lower.

Now to the risks of the outlook, and we brought along our global outlook to give a fuller view as to where we see things going in terms of specific numbers. A focus on debt reduction during periods of prosperity broadens fiscal options during periods of economic setback. While the future appears brighter than it has in over a decade, there are still considerable risks to the economic and financial outlook. By the way, almost all economists have a very optimistic view about where we are going, but as you probably know by past experience, believing totally in economic forecasts can be very hazardous to your wealth.

We expect North American interest rates to rise by only three quarters of a percentage point this year. By the way, Chairman Greenspan raised interest rates by a quarter about an hour and a half ago. Then we believe they will begin to move lower as cyclical inflation pressures subside. However, consistently strong US growth and rising inflation could push interest rates higher and keep them there longer, a clear negative for Canada, for Ontario and for global growth.

Alternatively, rising interest rates could be the catalyst for a sudden correction in equity markets, with the potential for heavy collateral damage to our economic prospects. The international fallout during the Mexican peso crisis and the more recent bout of Asian flu, both of which, I might underline, were not anticipated fully in the financial markets, dramatically illustrates the power of sudden changes in market confidence on economic conditions, particularly in debt-heavy jurisdictions.

In summary, given the very good economic progress we are likely to make in the next couple of years-the fiscal options have not been as wide for quite some time as they now are. But in our view, if we are weighting those options, the first and heaviest weight should be to debt reduction, the second should be to tax cuts and the third would be to spending, with priority given to the economy's fiscal and educational infrastructure. Thank you.

The Chair: Thank you very much for your presentation. We have approximately 13 minutes for each caucus. I'll start with Mr Christopherson.

Mr Christopherson: In your presentation, one of your identified risks is rising interest rates. I appreciate your telling us what happened today, because we hadn't heard yet. What are your thoughts on what happened today and what that means for us?

Mr Jestin: The Federal Reserve raised interest rates a quarter of a percentage point today, which was widely expected by the market. The market initially rallied on the results and, by the time we left the office, had virtually sold off all the rally. So it was a very short-term relief for the marketplace, or the bond market at least. We would expect that next month the Federal Reserve will increase interest rates another quarter of a percentage point and, sometime between May and August, a third quarter-percentage point move will occur. We believe the Bank of Canada will follow suit, virtually one for one, so by August we would see things such as the prime business lending rate on both sides of the border up by one-half to three-quarters of a percentage point.

In this type of environment, the bond market is also likely to trend higher, largely because, in our view, cyclical inflation pressures will be moving up probably over the next six to eight months. We believe, however, that oil is not going to continue to go higher. It's probably going to settle down below $25 a barrel. The acceleration in commodity prices will probably dissipate, and overall, some of the long-term disinflationary trends that we have seen for quite some time will begin to re-emerge. As they do, we believe inflation will start to move lower by the end of the year and into next year, which will allow interest rates to come back down.

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That is one of the reasons we have a fairly optimistic forecast, because we believe that the interest rate and exchange rate environment will remain quite favourable to Canada. The rest of the world expanding, the US doing reasonably well, interest rates at the outside three quarters of a percentage point and then coming down would keep our growth momentum quite alive.

I should mention, as I stressed at the beginning of my presentation, that Ontario stands to benefit very handsomely from that, being either one or two in economic performance, in our view, among the provinces over the next five years.

Mr Christopherson: Is it fair to say, in your opinion, conversely to your last point, that if the American economy goes into a tailspin we're going to feel it first and arguably harder than anywhere else because of our trading relationship and the exports driving our economy?

Mr Jestin: Ontario is most dependent on the US of the any of the provinces, and particularly, if we had a substantial slowdown in consumer spending it would have an immediate negative impact on Ontario because of the weighting of the auto sector in our exports. It's important to point out, though, that the consumer is not spending in the US simply because of these huge gains that we have seen in NASDAQ and the various high-tech stocks. In fact, the US has created 25 million jobs over the last decade. The unemployment rate there is at a 30-year low. We have income outstripping inflation by a very substantial margin. Consumer confidence is very high, largely on the basis of the job market. Housing prices are actually going up in the US, which makes the two thirds of American families who own homes pretty happy.

So even with a setback in the equity markets of 20%, we may well see, as we saw in the fall of 1998, the US consumer staying in the stores. What I think will happen, however, is the US consumer begins to slow the rate of growth in consumption that it currently has down to its rate of growth in income, because right now consumer spending is growing at a much faster rate than income. The adjustment will logically be to bring that down to income growth, which, in our view, will still remain pretty healthy.

Mr Christopherson: On page 3 of your presentation you make reference to the 33% labour cost advantage that the Canadian autoworkers have over American autoworkers. I would think that part of that is of course the fact that we have universal health care and down in the States they have to purchase comparable coverage for their workers and it drives that labour cost way up.

With that in mind, if I heard you correctly, you mentioned that your number one priority would be debt reduction. I guess I would be interested in your thoughts, given what I've further identified from your comments about the labour advantage and where much of that comes from for us in terms of our health care system and given the fact that depending on how big a crisis you want to believe is there, there seems to be a general feeling across the province that our health care system is in some form of crisis. Whether that's in transition or actually the beginning of a slippery slope remains to be seen. I was curious, therefore, that your first choice would be debt reduction rather than things like health, which supports our labour cost advantage for our autoworker segment of the population, as well as education for that matter, which provides for skilled workers, which again gives us an advantage in terms of competition around the world and the American system, and we seem to have the edge on both. I was curious why those weren't a priority to you but debt reduction was.

Mr Jestin: Among all the competing priorities, I think debt reduction has the ability to free up the cash needed to actually repair the type of damage that has occurred, for example, in the health care area and in education. I'm on the board of the University of Guelph and I certainly see it all the time in terms of the problems that exist there.

If we could free up a portion of the $9 billion that we are spending now on debt service into these other areas, we could legitimately afford the type of health care that the residents of this province require. We could afford the improvements in education. However, the immediate pressure suggests that we are going to have some upswing in spending. We have to make sure that in weighting the competing areas we don't let infrastructure slide, because there is no huge political upside immediately from repairing sewers, roadways and telecommunications. Those issues are long-term competitive issues which I think are very important.

Debt reduction is the only alternative that will actually free up long-term cash. We do, as a province, pay more than the average in terms of debt service even though we are, arguably, the most prosperous province in the country. That is unacceptable.

Mr Christopherson: Do you support the idea that the tax cuts came before a balanced budget, for instance?

Mr Jestin: I believe that we should have moved much more aggressively on the deficit to get the budget in balance. I'm not suggesting that we should have or could have followed the Alberta model one for one. But certainly the dividend that has been paid there is enormous.

Mr Christopherson: Because even those who may support some form of tax cuts as an expenditure priority at a given time have said that it should have come after they balanced the budget rather than beforehand.

Mr Jestin: By the way, it's not so much an either-or. You have to prioritize. I would have put much heavier emphasis on debt reduction. The fiscal dividend is really reducing the debt service cost in my view. It's not the surplus that would be generated; it's actually freeing up cash that we otherwise are required to pay for previous overspending.

Mr Christopherson: Then there would be a political debate as we had at the federal level, whether that should be an income tax or further expenditures into social policies infrastructure, but at least we can have that debate. I think a lot of us, for instance, the Liberals and the NDP, disagree on a lot of things, but the whole notion that doing the tax cut when they did was wrongheaded is one that most of us agree with.

We just had a further report from the Centre for Social Justice where, again, they emphasize the fact that during this biggest boom in the North American economy, we're seeing an increase in the income inequality between the very wealthy and the very poor. In terms of your vision of how the Ontario economy ought to work to benefit the most people, how do you feel about that? If you have some concerns about that growing inequity, what would you do about it?

Mr Jestin: I haven't seen the study, so I wouldn't be able to comment specifically on it. The technology change that we are experiencing is creating both winners and losers and at a very rapid rate. Some companies are doing very well; others are not. Similarly, incomes in some areas are going up rapidly and others are falling behind. Largely, within Canada, North America and, more generally, globally, that's a pattern that will likely prevail for some time.

We are in the midst of a vortex of change globally. Governments obviously are attempting to address some of the most egregious problems as best they can. But I don't think that is a reason to focus government solely on that area. Improving competitiveness raises the standard of living for the province as a whole and, as a result, gives a bigger pie that can be distributed through society.

Mr Christopherson: I assume you would agree that government has a role, in fact a responsibility, to play in terms of what happens with that growth and with the money that we're awash in to ensure that we're not increasing inequity. You used the phrase that they're addressing the most egregious. We would argue, as does the study that-and I realize you haven't seen it yet and I understand what that means for your response-based on StatsCan figures indeed the tax cut has exacerbated that inequity.

We're faced with a situation in Ontario where the whole notion that this needs to be addressed is not even on the agenda whatsoever. In fact, all of the policies of this government have again, to repeat myself, exacerbated that very situation. If you take it out to its final conclusion, what it means is that we're going to continue to have more and more people who will slide from middle class into poverty and those who are in poverty are in a deeper level of poverty. They're worse off than the poor have been in previous generations.

I just can't imagine that at the end of the day that's good for investment, that that's good for our competitiveness, when we see a society that's so polarized, particularly when much of our reputation is built around being fair-minded and caring about each other. The UN has chosen us five or six times now as the best place in the world to live, not because we have the best tax cuts but because we have the best education system, the best health care system, a great social net, safe streets, all of those sorts of things. Surely it must concern you if it continued unabated and we saw this continuing polarization of our society.

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Mr Jestin: The social agenda has to be founded on a very strong economic foundation. Going back to my comment on the prioritization of government, I would say debt reduction is the way we free up cash for other issues. Tax cuts are certainly absolutely essential to maintain competitiveness or to regain competitiveness, and we are following a very aggressive US model, in my view, over the next little while, so tax cuts would be number two.

Number three would be dealing with the most egregious of the problems that exist now because of the cutbacks that we have had in various areas, but among the spending programs I would suggest that infrastructure that improves competitiveness ultimately generates the jobs which generate the income which supports the social agenda.

Mr Christopherson: The problem of course that we have in Ontario is, and an earlier presenter-I think another bank economist-actually made the point, that much of the fiscal flexibility you might have in a surplus situation has been limited by the early tax cut, and we don't have as much room as we had before.

I've been pointing out the low savings rate that we have and the amount that people are looking to in their RRSPs and their mutual funds for their retirement. If all of that bubble bursts, we're in some serious trouble, and it's going to be the vast majority of Ontarians who are going to feel that hit. At that point, I would say to you, with great respect, people are not going to be worried about what the debt reduction policy of the government is and they aren't going to be worried about whether there are new tax cuts. At that point they are going to want to know, "How am I going to find a job to provide enough income both to raise my family and to be able to survive when I retire?"

Mr Jestin: We have a laboratory experiment going on in Canada right now between British Columbia and Alberta, British Columbia having reasonably high taxes and Alberta having the lowest ones in the country. BC used to be the strongest-growing province in the country in terms of population; Alberta was fairly weak. Because of a number of circumstances, one of which of course was a dramatic reduction in taxes, Alberta has now moved well ahead of BC, so I do believe taxes matter. I do believe taxes create growth, which creates revenue, which gives the government more options, but at the same time, harping on my key point, debt reduction is the one that yields the extra revenues that can support the entire spectrum of government spending.

Mr Christopherson: I think you would recognize that BC has the Asian market, Alberta has oil, and we're tied to the United States market, so three very different basic economic foundations in terms of growth.

The Chair: I now have to go to the other side; your time has expired. Mr Gilchrist.

Mr Steve Gilchrist (Scarborough East): Thank you very much for your presentation. I think when we see the difference between the previous presentation and yours, it shows the merits of having these hearings, because there's certainly a wide divergence of opinion out there on whether the glass is half full or half empty.

Your comments about productivity: I would appreciate if you could expand on the importance of that. To the previous presenter, Mr Phillips read from one of our publications and made what I think I could confidently call disparaging comments about the suggestion that we have a competitive advantage over the United States, and I guess he created the impression that somehow that was a bad thing or arose from improper fiscal or monetary policies-

Mr Phillips: I never said anything of the kind.

Mr Gilchrist: -whereas I think you clearly lay out in your presentation that it has a lot to do with productivity and the fact that our companies have had to, of necessity in some cases because we started off with a smaller market to serve, be more efficient, and therefore with the creation of free trade opportunities we're able to exploit those efficiencies in a much larger market, not just in the States but for many companies very successfully around the world.

You mentioned as well that productivity, particularly in the automotive industry, will play a very important role in Ontario's continued growth. I wonder if you could perhaps put some minds at ease even more by elaborating on the importance of productivity even if the American economy was to suffer a downturn. Let's deal with our automotive factories to start, as a concrete example. If we are more productive in the manufacturing of a particular automobile, would it not stand to reason that it will be the American factories that start reducing their production before an Ontario factory would?

Mr Jestin: It would all depend on complex things such as models, popularity and things like that, of course. The auto sector is one segment that there is a lot of data around on. We have a productivity advantage with newer investment, but we also have a substantial labour cost advantage, partly because of the exchange rate and partly because our inflation rate has been below the US since 1991, which is the longest time on record. So there are a variety of things that have really cemented in the success of that particular industry.

If I were looking into the future-and my colleague Aron Gampel has done quite a bit of work on this-the areas that I think are the ultimate top performers will be in the high-tech sector. Here, I suspect, we can match the US in many ways one for one. Our equity markets do not give the same multiples and the same potential for expansion as in the US-we don't have a whole lot of companies where price-earnings multiples are 200 to 1 on this side of the border-but overall we believe that in the knowledge-based sector it's the uniqueness of ideas and the success of ideas that are going to push us forward, and I think we're doing very well there. It's much more than labour costs that are at issue; ideas have enormous value if we get them correct.

Mr Gilchrist: Given that, would you be prepared to make any suggestions about specifically how we would change the tax system right now? You mentioned that you believe tax cuts create wealth and that they create increased revenues for the government, but they can accomplish other ends as well. If you were to believe that the high-tech sector offers the best opportunity for long-term growth in our economy and retention of the sort of high-paying jobs that I think we're all being told will be the hallmark of successful companies in the 21st century, should we be targeting tax reductions? Should we be offering tax incentives to companies that make R&D investments, for example? Have you individually or as a bank given some thought to how we would target further tax reductions?

Mr Jestin: I'll give you an answer, obviously, as an economist on that particular issue. Back in the early 1990s there was some work done in Ontario about industrial strategy, essentially picking winners and losers. If you go back to that work, the auto industry was decidedly put in the also-ran category. If we had looked at that particular vision of the world and if the auto sector hadn't been around in Ontario through the dark days of the 1990s, we wouldn't have been in a recession; we would have been in a depression.

My concern is that while I believe there are certain areas of very high growth potential, putting policies rigidly in place that pick winners and losers can ultimately lead to huge mistakes. So I would rather see policies that are targeted more broadly to improving competitiveness. Again, however, rather than reducing taxes as my number one priority, it would be debt reduction that would give the potential for both tax cuts and spending increases.

Mr Gilchrist: Fair enough. That's a very reasonable position and one which I think we would echo.

There is something I would love to have you put on the record, though. We hear often from the other side and from other critics that somehow the tax cuts to date have unduly increased the debt of the province. When we first arrived here in June 1995, the province was losing $11.3 billion a year. This is going to sound like an awfully simple question, but it needs to be stated, and coming from you I guess it will carry more weight than when we put it on the record. Would it not follow that the only way the province would have stopped any further increase in the debt would have been to immediately eliminate $11.3 billion worth of spending? To balance our budget from day one, which would be the only way we would not have a higher debt today than on June 3, 1995, we would have had to eliminate exactly the same amount of spending as was the amount of the deficit.

Mr Kwinter: Or increase revenue.

Mr Jestin: I think the issue boils down to whether a longer process of debt reduction or a short-term process of tax increases boosts prosperity the most. We have no agreement on that among the economic fraternity. I believe that tax cuts have mattered and have created job growth, although if I were to look at the estimates that have been put together sequentially by various federal and provincial governments on the job-creating potential coming out of various government measures, I think we would have the unborn fully employed for the next few decades if we totalled them all up.

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Essentially, I think lower taxes have helped. At the same time, we are, next to the US economy, the strongest economy in the world that has had an unprecedented economic expansion. In weighting the alternatives, while tax cuts were very important, I think initially putting more emphasis on developing a surplus would have paid larger dividends.

Mr Kwinter: That's not quite the answer you wanted, but pretty good.

Mr Arnott: Thank you very much. I want to commend you on your presentation today, particularly on your suggestion at the end, your recommendation that debt reduction, debt retirement, has to be a very high priority of the provincial government now that we're entering into this phase where the deficit is almost paid down.

I think what you've said bears repeating. You've said this: "A front-end focus on debt reduction yields substantial cumulative benefits and greatly enhances long-term fiscal flexibility." Then you go on to say, "A focus on debt reduction during periods of prosperity also broadens fiscal options during periods of economic setback." This is common sense of the type that I hear day to day, week to week, in my constituency from people, and I also believe very strongly that this needs to be a high priority of the government.

The government is committed to retiring at least $2 billion worth of debt over this term of office. Do you think that's enough or should we be striving for something higher? Should we not be looking at this as sort of a long-term problem, with committing ourselves as a government to a long-term debt retirement plan with, say, interim targets every five years of how we're going to pay down this debt over the next 25 years? Would you agree that that would be a reasonable approach for the government to take?

Mr Jestin: I think a consistent debt reduction strategy, obviously with adjustments over an economic cycle, is very important. If I can give you a federal example, I think it's very important as well. If Washington continues on its current policies without big tax reductions or spending increases, it will pay off its market debt in 18 years. At the current modest debt reductions at the federal level, it will take us between 100 and 150 years. So there are degrees in here. I don't think we have to opt totally to the Alberta model of very rapid debt reduction, nor to the US potential, because there are a variety of other circumstances and priorities that have to be taken into account. But to the same matter, $2 billion over the length of the mandate, which is what the finance minister indicated, in my view is too modest. We should, in a period of very strong and sustained expansion, be trying to raise the bar and shooting more aggressively.

The idea that we could save $1 billion annually within five years by paying $2 billion down a year-that is a very large payback. By the way, that is around in perpetuity. That money is available each and every year because it is essentially wiping out a dead-weight loss that we now are burdened with in terms of debt service.

Mr Galt: I'm curious. You mentioned, number one, paying down the debt so we don't have to service that debt with some $9 billion a year. Half of that occurred in the first half of the last decade, in a period when we drove 50,000 jobs out of this country while the rest of Canada was creating some 350,000 net new jobs. We wrestled the economy right to the floor of all the other Canadian provinces. In your opinion, was it necessary to spend and increase the debt by some $50 billion in the first half of the last decade?

Mr Jestin: Unfortunately, we can't relive history. Fighting the recession rather than the deficit in the rearview mirror looks like a very unfortunate error. The problem with suggesting that we wouldn't have had a run-up in debt, of course, is that Ontario was going to be hit very viciously by that recession because of a number of economic circumstances that were occurring within the global and the North American context. But we are burdened with that debt now and we do pay more debt service than the provincial average. We do not enjoy the fiscal flexibility that a province such as Alberta has. We do not have the fiscal flexibility that the US has. They are principal competitors of ours. We have to get our finan-ces more in line with our principal competitors or we'll have a competitive disadvantage. That's basically the message. So a little bit of pain now in deferring spending will yield substantial long-term benefits, in our view.

The Chair: Go ahead. You have a minute left.

Mr Galt: I'll pass.

The Chair: Thank you very much. I'll go back to the official opposition.

Mr Phillips: Mr Gilchrist has once again deliberately distorted what I said.

To the presenter: The government has already said what they're going to do with the fiscal dividend. They've announced $5.3 billion in tax cuts-$4 billion on personal income tax; roughly $1 billion on property tax, although that will show up as an expenditure; $300 million on corporate tax-$2.5 billion a year on health and $500 million a year on debt reduction.

I have two questions on that. You've done some calculations on revenue growth. As the economy grows, tax revenue grows. In answer to one of the previous comments about how you get rid of a deficit, my recollection is that tax revenue grows at roughly the rate of nominal GDP growth. But my question is, have we already to a fair extent committed for the future fiscal dividend with those three commitments? Have you got some revenue estimates that you could provide us? The government will not give us a single estimate on revenue beyond the last fiscal year. Has the bank done some estimates on what we should be looking at in terms of revenue growth?

Mr Jestin: We certainly have done some work in that area, and I could provide that to you if you like. The point of whether we have fully spent or allocated the fiscal dividend largely hinges on the upcoming prosperity in the economy. We're very bullish on the economy. If we are overly bullish on this-and economists are notoriously bad at picking turning points-then we will find that either higher interest rates or a sudden reduction in growth will immediately cause the deficit to re-emerge and begin to accelerate because of commitments. That's one of the reasons why we're concerned and one of the reasons why we think debt reduction should have top priority. We can see situations, although we would not give them high probability, where interest rates would be higher longer, which raises debt service in two ways: (1) slowing down the economy to the actual cost of debt, or (2) a setback in equity markets triggered by the US consumer could really slow down exports and as a result feed back into growth and revenues.

If we continue to sail along, we will have some fiscal flexibility in upcoming budgets, but if somehow this unprecedented expansion in the US, or in Canada as its emerging and in Ontario, begins to unwind, we will quickly find ourselves back into the fiscal goo again. In my view, the only prudent thing to do in that situation is to focus more seriously on debt reduction.

Mr Kwinter: Mr Jestin, I want to just make a comment. I totally agree with the priority being debt reduction. That's an economist's point of view, and it's typical Keynesian economics that in good times you pay it down so that in bad times you have a buffer so that you can look after some of your needs. That's great as an economist, but the budget is a political document, not an economic document.

My concern-and I'd like to get your response as to what you would suggest-is that we had a presenter just before you who was saying: "My God, times are booming. How come we've got homeless, we've got problems with our health care, problems with our education? This is the time we should be beefing these things up." The economist's point of view is: "No, that's not the time to do it. When times are good that's when you should be paying down the debt." How do you reconcile that?

During the first mandate, at the beginning of the election campaign, Mike Harris publicly stated: "We do not have a revenue problem, we have a spending problem. We've got more money than we know what to do with. Our problem is we've got to get our spending under control." The problem with that of course-and Mr Gilchrist mentioned it-is that they all seem to think if spending is the problem you can also raise the revenue.

My point is this: How do you politically start taking $2 billion a year, as you say, which would be great, and pay it to debt reduction when there are all of these pressures? We now have a situation where this government is committed to spend more money in their budget than any other government in history in Ontario, and those pressures are going to continue. If the squeaky wheel comes along and they can't take the heat, throw some money at it, and before you know it, you're compounding the problem. Do you have any comments on that?

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Mr Jestin: In the type of revenue trajectory that you would probably see, given the growth estimates that we have here, there will be a substantial increase in revenues. The issue then becomes, what is the distribution of that revenue stream? What we're suggesting among the competing alternatives is a slower pace of spending. Perhaps a slower degree of tax cuts would leave more on the table for debt reduction. It's not an either-or situation. We obviously have big competing priorities, and one of them, I should underline, is physical infrastructure. My point under the physical infrastructure statement I made was that we need a lot more co-operation among the municipalities and the federal government with the province in these joint ventures because no level of government can uniquely fund these particular projects. But we have to slow down perhaps the degree of tax aggressiveness, maybe slow down the trend in increased spending so that we leave more on the table for debt reduction. That's basically our proposal.

Mr Phillips: I'm quite interested in your estimates on revenue and I appreciate you providing them to the committee.

One of the challenges is that in 1999-2000 the sale of the 407 had a one-time infusion of $1.6 billion. The federal government increase in support of health care was most heavily oriented to this fiscal year. So we've got those things bringing the revenue growth down for future years.

We've got two things offsetting it. One is the gambling revenue. The government has got a windfall-not a windfall, but they're going to rake in a bundle of money. I think just from the slot machines they're going to get $500 million or $600 million. What should we expect, first, if you don't assume any tax changes? What sort of formula should we be using for growth in tax revenue?

Mr Jestin: We would suggest a one-for-one relationship between nominal GDP and growth. It varies substantially from year to year over the cycle. Using that as a rule of thumb would probably be as good as any, given the variance that occurs on an annual basis.

The degree of revenue growth hinges very much, as I said, however, on continuing US expansion, which feeds directly back into Ontario. My concern is that we become a little more prudent as we go forward, leaving a little bit more in contingency or whatever you want to call it, which would ultimately be used on the debt service side.

Mr Phillips: Your recommendation on private sector partnerships on infrastructure is interesting. My own view is that the users of the 407 got completely ripped off by that sale. Those tolls are going to go up at inflation plus 2% every single year for 15 years. They were hung out to dry. Based on what we've heard about infrastructure, there are two big things where the private sector would be involved. One is build-lease, where they'll build a school-and that's what most school boards are doing now-or where you would sell off a stream of revenue, which essentially is a toll road or somebody will build a sewage plant in return for being able to put a surcharge on your monthly bill.

Both of those things are just a different way of either taxation or borrowing money. Are there certain things in the infrastructure that you can think of where the public will not end up with either a user fee or paying the debt through a lease cost?

Mr Jestin: In terms of expansion?

Mr Phillips: You're saying that we should be looking to refurbishing the infrastructure, we should be looking at more private-public sector partnerships, which I intuitively like, but can you give us some examples of what you have in mind here that will either add a new tax in the form of a fee or result in simply paying debt in a different way?

Mr Jestin: One of the things that may well be worth considering and which may well come down in the federal budget is setting up single-purpose-not a corporation but a crown entity or corporation that essentially is funded by federal money, provincial money and municipal money, with the potential to bring in private sector partnerships.

The millennium fund is a potential example of that, I guess, but I'm thinking much more of using that for a corporation that is at arm's length, or more at arm's length, from the government. If it may be directed towards sewers or highways or technological infrastructure, it allows all governments to participate in terms of the funding but having a separate group that essentially ad-ministers and prioritizes things and seeks ways of bringing the private sector in. It's basically setting up the availability of capital to fund these initiatives that I think is very important.

If we look at government spending on infrastructure, the private-public partnership proposals that are on the table can bring in a substantial amount of money. You may remember back in the early 1990s Ontario was spending roughly $4 billion annually on infrastructural costs. That will only come to fruition if we have SuperBuild, plus the entire private sector participation, bringing it up to $20 billion over five years. I worry that we don't have enough money directed to that, and perhaps setting up these corporations, putting them more at arm's length, would help.

Mr Phillips: To change the subject a little bit, on pension expenses in the province, the province pays out in cash payments to the pensions $1.1 billion, but on the books, on the financial statements, shows a profit of roughly $300 million. That is because the way they account for it is that because the pension funds have seen such an appreciation in their assets-the pension fund on an annual basis has increased more than the expenses, so you subtract the two. The teachers' pension, I think, is now 70% in equities. We're now showing on pension expense, as I say, a profit of $300 million on the books, but in cash payments we're paying out $1.1 billion.

This is the first time, I think, where a substantial downturn in the equity markets hits the financial statements dramatically. Have you had an opportunity to look at that and do you have any comments for us on that?

Mr Jestin: I couldn't comment on the Ontario government case. Having read some of your material over time and things like that, I know you're the expert on these particular matters-

Mr Phillips: I wouldn't say that.

Mr Jestin: -and I'd defer to your judgement on that. But one of the things you're pointing out is very well taken, and that is that pension funds have been flush with what's been happening in the markets. We've been in a sustained bull market for quite some time, and inevitably there would be major adjustments, not only in your personal finances and household finances, if there was a significant setback or a move to lower growth, but also in the outlook for pension funds, which would change the entire investment dynamic coming out of these funds.

Pension funds and large pools of capital essentially are becoming much more dominant in overall funding in Ontario and around the world, so it is a very significant issue.

The Chair: With that, we've run out of time. On behalf of the committee, thank you very much for your presentation.

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NESBITT BURNS

The Chair: Our next presenter is the senior economist and vice-president of Nesbitt Burns, if you could state your name for the record. On behalf of the committee, welcome. You have one hour for your presentation.

Mr Douglas Porter: Thank you, Chairman, and good afternoon. I'd like to thank the committee for the opportunity to present my views today.

Basically, I'd like to make a three-part presentation today. I've brought along a small handout, which I'll only refer to on the periphery; it includes our regional economic outlook. Some charts I'll be referring to, and a short article which is really meant to be an appendix, which I recently wrote.

I'd like to keep my economic overview relatively brief just because it's not terribly different from the one you just heard, but it might be helpful to go through some of the charts starting on page 4.

Basically, the big story here is the tremendous turnaround in global growth that we have seen in the past year. It's quite a turnaround from the situation of just a little over a year ago when almost every news magazine you could look at, whether it was Newsweek or Fortune, was warning of a recession or worse in 1999. Of course, 1999 turned out to be quite a good year.

With Asia and the rest of the emerging markets in full recovery, we're actually looking for above-average economic growth both this year and next year for the world economy, something a little bit better than 3.5% for both years. Again, Asia has simply left the crisis well behind it. Equity markets there are back to the levels they were before the crisis and growth is as well. We've also seen Europe begin to pick up after a bit of a lull at the start of 1999, and even Latin America is recovering after a recession last year.

Most importantly, the US has not skipped a beat. We saw above-average growth last year and we expect above-average growth this year. We're looking for US growth of about 4%, which would be the fourth straight year. We think, if anything, the risks are to the high side, that we might actually be underestimating growth.

One thing we've seen year-in and year-out during election years is that the economy actually tends to accelerate; that is, if you look over the past 40 years, US GDP growth has, on average, been about one percentage point higher than in non-election years. There are a number of reasons for that. Obviously, there is the direct spending on the election. There's indirect spending by congressmen who might want to be re-elected. There's the fact that election years take place during leap years, which means we all get to work one extra day. It also takes place during Olympic years. This time it takes place during a census year, and there'll be 500,000 census workers employed this year. The bottom line is, if anything, the risk is that we may actually be underestimating the strength of the US economy, at least in the year ahead.

Canada is a similar story. We're likely to follow along. We think growth will be about 3.5% or slightly better this year. That's the fourth straight year we've seen 3% growth or better. That's the first time we've actually done that since the late 1970s. Ontario, since it is most closely tied to the US, is expected to grow by 4%, after a 5% gain last year. The full details of the Ontario outlook are on the back page of the handout.

The long expansion is clearly spinning off tremendous job growth. We've seen over a million jobs created in Canada in the past three years alone. If you saw, Stats-Can actually revised up the number of jobs created last year and now the unemployment rate actually stands at 6.8%. Unemployment is tumbling almost in every province. We actually expect it to move below 6% by the end of the year. We're already there in Ontario. That 6% may actually sound quite dramatic, especially compared to the trend of the past 20 years, when the unemployment rate, as you can see from the one chart, has averaged 9.5%. But if you look back to the late 1960s, early 1970s, before the real crest of the baby boom entered the labour market and before the first oil crisis, an average unemployment rate was actually only 5%. We think those kinds of levels are achievable again.

This dramatic decline that we've already seen in the unemployment rate has given a tremendous boost to consumer confidence and business confidence. In fact, the Conference Board came out today with their fourth-quarter numbers on consumer and business confidence. Both accelerated quite sharply and they are at some of the highest levels we've seen in the past 10 years. That's being reflected in things like consumer spending. After a bit of a lull in 1998, consumer spending was quite strong. That's continuing into the year 2000, where car sales are still rising at about an 8% trend. If anything, just looking at the number of cars sold may actually underestimate the strength of vehicle sales because consumers are increasingly buying larger and more lavish vehicles. Retail sales as well have been quite solid, particularly in Ontario. We saw a record year for home sales last year. Starts have increased. Of course, they're well below the peak levels we saw in the late 1970s, but they're pretty close to underlying demographic trends at current levels.

That broad-based strength we're seeing in the economy is a big reason behind the upswing in interest rates. As was mentioned by the previous speaker, the Fed did raise rates by another 25 basis points, and we believe there are more to come. Actually, our rate forecast is very similar to the one previously presented. We do believe the Bank of Canada will follow tomorrow morning.

This upswing in the interest rates is likely to lead to some sort of slowdown in 2001. We're certainly not looking at a recession. We think that growth will be still a little bit above average in 2001 but perceptibly slower from 2000. We believe that the Fed will do what it takes to bring growth to what they're more comfortable with, and the common view is that the Fed is comfortable with growth on the order of about 3% to 3.5%.

That leads me to the second part of my presentation. For the second and third part, I'd like to go over two primary concerns I have on the fiscal front, which may seem somewhat contradictory but I'll explain later.

The first concern is that with the economy booming and the fact that we're more closely tied into the US than ever before, we are, of course, more vulnerable than ever before to the US economy and, similarly, to the US equity market. Manufacturing, unquestionably, is on an absolute roll. We've seen employment in the manufacturing sector rise by 6% in the past year. Remarkably, this is at a time when US factory payrolls are actually falling. Effectively, what we're seeing is a real diversion of production from the US to Canada, and we think, quite simply, a big reason for that is the highly competitive Canadian dollar.

This has been especially noticeable in the auto industry. We now produce almost one in every five vehicles produced in North America, and that includes Mexico. As was mentioned earlier, we produce as many vehicles as Michigan, with a similar population base, but here's the rub: Michigan is one of the most cyclical state economies in the US, and we believe that Ontario too will become even more prone to a boom-bust auto cycle.

Make no mistake, we are at the crest of an auto boom. If you look at the chart on US auto sales, you can see just how far above long-term trends auto sales are now. There is some reason to believe that there can be a bit of a level upshift in US sales. In other words, they are probably on a permanently higher basis than what we saw through the late 1980s and early 1990s, but it's very hard to believe that the kind of auto sales we saw last year, ie, close to 17 million, are sustainable going forward. The main message is that it would be a mistake to assume that revenues at current levels are sustainable forever and to build future spending plans around an assumption that these are normal economic times.

Also, the US boom is clearly tied to the equity market run that we've seen. Greenspan and the Fed have estimated that about one percentage point of growth in each of the past four years has been tied to the equity market boom. What the equity market giveth to the economy it can also easily taketh away.

In a similar vein, the economy is performing extremely well already. I think it's in little need of a major fiscal boost at this point. In fact, our ramp-up in spending could aggravate wage and price pressures that are already building. We are seeing the first signs of wage and price pressures beginning to emerge. The Bank of Canada, for the first time in a long time, is actually beginning to raise rates to cool down the economy, instead of just trying to support the Canadian dollar. Almost every rate increase we saw through the 1990s was in response to a very weak Canadian dollar, but that is obviously not the case with the rate hike in November and the one that's likely to come tomorrow.

Essentially, a substantial loosening in fiscal policy could actually stoke the boom that's already in place and would ultimately force the Bank of Canada to raise rates even further, in other words, move even beyond what the Fed will do over the course of the next year. Essentially, that would be a repeat of the late 1980s.

The second source of concern on the fiscal side-this is the third part of my presentation, and as I said, this may sound somewhat contradictory to the first concern, but it isn't-is the persistence of high marginal tax rates in Ontario.

If I can direct your attention to the table on the bottom of page 8, you can see that even after years of cuts, while the Ontario top marginal rate is the second lowest among the 10 provinces, it's really not out of line with most of the other provinces. It's not significantly below any of the Atlantic provinces or the Prairie provinces and it's also still well above US rates. I'd argue that the high top-end rate is arguably not the biggest problem for Ontario but rather the low-income level that they kick in at. This is certainly not a new issue to anyone here, but I think it is worth stressing again. A common criticism of the United Alternative's or the Reform-Conservative's 17% tax proposal is that it's not progressive, but you can make the case that Ontario's current set-up is also not terribly progressive either, with everyone in the middle class and up basically facing the top marginal rate.

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Second of all, we believe that the brain drain is impor-tant. It may not be reflected in the big emigration numbers but we are sympathetic to the view that top performers or stars do matter and that losing only a few of them will cost the economy plenty. Tax rates are certainly not the only factor in the brain drain, they may not even be the biggest factor in prompting top-flight talent to leave, but tax rates are one of the few factors that policymakers can control, unlike the weather. Canada is already operating with one hand tied behind its back on many fronts and it doesn't make sense for the government to tie the second hand behind its back with punitive tax rates.

In fact, the tax gap with the US is at risk of widening, especially if George Bush is elected. Admittedly that looks somewhat less likely today than it did yesterday, but he does plan to cut the top tax rate to 33% from 39.6%, with the states averaging another 5% to 6% on top of that. Even Gore and McCain are also planning tax cuts. Importantly, the top tax rate in the US does not kick in until about an income level of $400,000 Canadian. In Canada it kicks in at about $63,000. Just to put that in perspective, in 1966, the top rate was not reached until an income level of $100,000.

The bottom line, and this really goes to the small article I attached, is that further cuts in marginal rates are needed just to keep Ontario competitive with not just the US but most other countries.

To conclude, how to reconcile these two concerns on the fiscal front, ie, not engaging in an overly loose fiscal policy, and the need to reduce marginal tax rates? First of all there are basically four strategies to reconcile these. One is, keep a rein on the spending side of the equation. Two, cuts in marginal rates do have supply-side impact. It does take time to work but it does increase the incentive to take risk and to invest. In other words, while it will stoke the economy a little bit, it also does help to increase the supply side and is less inflationary than just a spending increase. Third, the government can focus on low-cost and high-return tax cuts, such as the surtaxes or capital gains. That only applies if Ontario sets out its own tax regime. And fourth, the government can set long-term goals on lowering tax rates and move towards them as fiscal circumstances allow. It at least gives income earners hope that their investment will be rewarded later and also should help stem the brain drain.

If there are any specific recommendations, it would be to raise the income threshold when surtaxes kick in and/or even reduce those surtaxes, and also raise the income threshold for when the highest rate kicks in. That concludes my prepared remarks.

The Chair: Thank you very much. We have approximately 15 minutes for each caucus. I'll start with the government side.

Mr Galt: Thank you very much for your presentation. It was most interesting. Just a couple of quick, short questions. The last presenter was talking about debt reduction, tax cuts and spending. If you were to put it into priority, what would your priorities be now that we're coming to look like a balanced budget-not quite as fortunate as the feds but it's our economy, our policies that probably got them there and they haven't made any tax cuts, but that's beside the point. What would your priorities be for the province as we head into a balanced budget?

Mr Porter: I'm operating under the assumption that we actually already are at a balanced budget and that the latest estimates are on the conservative side. The top priority, I believe, should be reducing the top marginal rates, or marginal rates across the board; second, debt reduction; and third, selected spending increases. Admittedly it's extremely tight between the top two, there are no two ways around that, but I think for the longer-term health of the economy and in terms of improving competitiveness, the top priority should be tax cuts, that is, bringing down the marginal rates.

It is a close call, no two ways about it. Part of that stems from the fact that-keep in mind that Ontario's debt, while it is large in historical terms, in the greater macroeconomic environment, a little bit more than $100 billion really does not stack up that importantly against the federal government's debt. If you could make the case for what's the greatest risk to the Canadian economy going forward, it's the federal debt; it's not the levels of provincial debt.

Mr Galt: Which on a per capita basis is roughly double what Ontario's is.

Mr Porter: Actually, I don't think it's necessarily a fair comparison, looking at things like debt to GDP and feds versus the provinces, because the federal government has many more tools at its disposal in terms of debt operations. In terms of what matters for Canadian interest rates and investor sentiment towards Canada, it really is the federal debt that will weigh the heaviest and have the most say in the credit rating of the country as a whole and where the currency is going. So in terms of the macroeconomy, I think the province's debt just doesn't weigh as heavily as the federal debt does.

Mr O'Toole: I just want you to dwell a bit on bracket creep, the brain drain, the difference between the US rate and harmonizing. It was mentioned a couple of times here. You mentioned, thinking long term, that it became an issue and sort of went away. I don't know why it went away because I think long term, for our infrastructure and capital-I'd like your response as to how important critically in the longer strategic thinking process is that issue of knowledge drain, whether it's doctors or researchers.

Mr Porter: I think part of the reason the issue may have gone away, although I'm not convinced it has gone away, but maybe the reason it fell off the front pages at least is that it's not a simple issue. We were basically bombarded with all sides of the debate and even the statistics seemed to conflict. We had studies from C.D. Howe and from Statistics Canada that couldn't even agree on whether the brain drain was important. I would assert that even Statistics Canada's numbers showed there was a significant brain drain, at least in the health care field.

I really don't want to get into the whole debate again, but suffice it to say that we believe that even if we lose a few stars, a few top-flight knowledge workers, that's too many and that can impart a large cost to the economy. We should be doing everything we can to create a healthy environment for investment and one that encourages skilled workers to stay here. Again I would stress that one of the few things the government can have an impact on is taxes.

Mr O'Toole: I think it's an important issue.

Mr Porter: I fully agree. While the public and the media may have lost some interest, I think it's critical for the long term.

Mr O'Toole: On the research side too. I know personally that's where the money is. That is where the researchers and high-techers go. I know that personally.

Mr Arnott: I'm sorry I missed the first part of your presentation, I had to leave the room for a minute, but I appreciate your coming here and advising us the way you have.

You left with us a paper you've written. I don't think you made too much reference to it while you were making your presentation, but something that is really interes-ting to me is detailing the tax cuts that are taking place in Britain right now under a Labour government and tax cuts that are taking place in Germany today under a social-democratic government which is generally considered to be the left of the spectrum in Germany. It would seem that the traditionally left-wing parties in Europe have caught on to this. It's interesting in Britain to see them cutting capital gains taxes, of all taxes. Obviously they see that as a positive thing.

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Mr Porter: It seems to me that things like corporate tax rates and capital gains taxes are almost a no-go area for governments, and certainly for the federal government. Basically what our paper was trying to stress is that there are a number of historically left-of-centre governments that are fully embracing tax cuts at the corporate level, or capital gains taxes. They recognize that there is this intense competition for business investment throughout the world and that capital is extremely mobile and will go to the most favourable jurisdiction. That's a simple fact that I believe has been borne out quite clearly in the past 10 years, and we should try to get over this "taboo" that we can't bring down corporate or capital gains taxes.

Mr Arnott: The one thing that concerns me, I guess, looking at the position we're in today in Ontario-you probably heard the presentation that was made yesterday by the Ministry of Finance officials talking about the trends. They're all positive and some of them overwhelmingly positive, which is good news, yet we can't allow ourselves to become complacent, as you say, in terms of international investment and globalization, where we have to continue to work to be competitive if we're going to get new international investment, which we need to create new jobs. We have to continue to be vigilant all the time. That's where I see our biggest challenge today as a provincial government where we have to, in terms of this committee, take forward advice to the minister as to what should be in the budget. Would you agree?

Mr Porter: Absolutely. Basically, again I would stress that by bringing down marginal rates you sow the seeds for growth down the road. While there may be a small fiscal cost short-term, ultimately it will strengthen the economy and increase investment. That just leads to a much stronger economy over the medium term. That will also help us limit the damage from the boom-bust cycle.

I would go to the first half of my concern, though, and stress that we shouldn't get lulled into a sense of complacency that these are "normal" times. Clearly, revenues are absolutely exploding, but I don't believe this is a sustainable trend. It's not necessarily wrong to have a long-term goal to-we don't have to do it overnight or anything, but it would be nice to sort of set a North Star to aim for. Large-scale the tax cuts are perhaps not the best medicine for the Ontario economy right now, given that the economy is already in the midst of a very strong upturn, but since there are supply-side benefits from marginal tax rate reductions, again, I think that can help sow the seeds for longer-term, more sustainable growth.

The Chair: Any more questions? If not, I'll go to the official opposition.

Mr Kwinter: Mr Porter, thank you very much for your presentation. I want to talk about two separate issues. First, you've spent a great deal of time talking about the automotive industry, and rightly so; it's a major engine of the Ontario economy. I have been following this for some time and I find that there's a bit of a dichotomy in that you say it's boom time in the auto world and Canada is doing great, but there hasn't been a new greenfield investment in Ontario in the automotive sector since the early 1980s. There have been add-on investments to things that are here, but nothing that is greenfield, started from scratch.

Earlier this week, General Motors announced that they are putting the first major plant that they've built in the United States into Michigan to build the Cadillac. You have Mercedes, BMW, lots of Japanese companies all going to the southern United States. Notwithstanding that, we are supposed to be so competitive. Do you have any explanation as to why, if that is the case, these greenfield investments, which are new plants in new locations, are not coming to Ontario because we are the centre of the automotive industry?

Mr Porter: I actually don't find it that worrisome that there isn't a lot of new construction, because one trend we've seen in business investment for the last 10 or even 20 years is basically a more intensive use of existing facilities; in other words, perhaps triple-shifting or increasing the number of machines within a given plant. We've actually seen very lacklustre non-residential construction. Even in the US, the main thrust of business investment has been in machinery and equipment and using existing facilities more intensively. That's essentially what we've seen in Ontario as well over the last 10 or 15 years. I actually don't find it that problematic. Essentially the automaker sees the auto market as quite mature, and the last thing they want to do is build all kinds of new facilities that will eventually be shut down in the next bust. They want to use the existing facilities as intensively as they can during a boom and then scale it back during the next downturn. So I don't necessarily regard that as overly worrisome. I think all you have to look at is the amount of production that is now going on in Ontario. That sector at least has benefited mightily over the last 10 years.

Going back to an original point, though, I think it's important to stress that while the auto sector has done very well and Ontario has done very well in the last couple of years, don't get me wrong: The 1990s were a brutal decade for the Canadian economy. There's no two ways about it. Our growth rate was only a little bit better than 2% throughout the 1990s-that's for Canada as a whole, and Ontario wasn't far away from that-versus almost 3% in the US. It's not as if the Ontario economy has just gone through a long-term, 10-year boom or anything. On balance, it was quite a rough decade for the economy as a whole.

Mr Kwinter: The other point I want to make is, you refer to various economies that are following suit and making changes to their tax structure. Over the last few years, the poster country that tax cutters were using was New Zealand. I even heard my colleagues on the other side using New Zealand as a model of what could happen with the right government approach to taxation.

I had occasion to see a report just recently where New Zealand is now considered to be or was a basket case, and a new government has come in to totally change all of those particular initiatives.

Do you have any comment on that? Have you been following what's happening in New Zealand?

Mr Porter: On the periphery. I have to admit that New Zealand is not such a large economy that I think it deserves as much attention as it's gotten in the last 20 years. The one thing I would say is that New Zealand is still, to this day, a highly commodity-based economy. They are still very much driven by the farm products they have, and they were extremely hard hit by the Asian crisis and the ongoing weakness in food prices and farm products. I think that actually explains quite a bit of the pain they suffered in the last couple of years. Admittedly, Australia, with many of the same attributes, has absolutely sailed through the last couple of years, but I think that goes back to the fact that Australia is in the process of widespread restructuring and taking many of the right steps.

Turning back to New Zealand, the only thing I would say is that I think that while they have suffered a little bit in the last couple of years, they are still in much better shape than they were back in 1984 before all the restructuring came into play and they are much better off than they would have been had they not restructured. I don't think you can judge an economy by one or two years. You have to look at it over a broad scope, almost over 10-year periods. I think on that basis New Zealand is still doing quite a bit better than it was in the early 1980s.

Mr Phillips: One of your charts here shows Canada's corporate tax rate substantially higher than any other jurisdiction. At the same time, I've got the Ontario document here that says Ontario's combined corporate income tax rate-this is for manufacturers-of 35.6% is four percentage points lower than the US average, indicating at least for the manufacturing sector that Ontario, when you take the federal and the provincial tax rates, is substantially lower than the US on corporate taxes.

Are we looking at apples and oranges here? It would be very helpful to our committee, and certainly to me, if you can supply us with sort of the comparable tax rates in neighbouring jurisdictions.

Mr Porter: Admittedly, this table basically looks at the top corporate tax rates, so effectively this would be for a service sector corporation. This goes back to the Mintz committee report that basically looked at the extreme differences within corporate taxes even within Canada and questioned whether that was still an appropriate policy to have, basically to favour the manufacturing sector which, as I pointed out, is doing extremely well in any event largely because of the highly competitive exchange rate and, probably to a lesser extent, the relatively favourable corporate tax rate.

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I think you could make a strong case that where the growth will be over the next 10 years will not be in manufacturing per se. It will basically be in the high-tech industry, which is not typically manufacturers. This is really where we should concentrate on helping to level the playing field and bring down corporate tax rates to at least close to the same levels as they are in the US.

We can certainly get different answers depending on what state we look at, what industry we look at. We can probably find some cases where Canada has actually got a more favourable corporate tax regime than the US. That does apply in the case for manufacturers against neighbouring states. Where the growth is going to be, and certainly the stock market is pointing to that, is in the service sector. We should try to balance the playing field a little bit between service and manufacturers.

Mr Phillips: A fundamental difference between us and the US is the way we fund our health care system or the way we pay for it. You can see in the provincial budget it's well over $20 billion. In income tax we raise around $16 billion. It is substantially different than the US. At the same time, we hear from lots of people that we've got to find a way to get our tax rates down very similar to the US. The issue then is, if we have identical rates to the US and the average productivity in the US is higher than us, I think we put our health care system at risk.

It is a bit of, as they say, a conundrum. As we move to presentations like this where we compare our tax rates to our neighbouring jurisdictions, how do we factor in the completely different way that we've chosen to pay for health care in Canada?

Mr Porter: There are two points to make there. First of all, I'm not necessarily advocating absolutely mirroring the US tax regime, especially since it looks as if the US will be bringing down their rates even more. It's more that the wedge between US and Canadian rates has absolutely exploded in the last 20 years. We should at least begin to bring that wedge down, not let it widen further, which it is at risk of doing. The faster we could bring it down, the better, I believe, for a long-term healthy economy, for competitiveness and productivity. We should at least begin to address that wedge.

Second of all, I do believe that the fiscal costs of reducing marginal rates, or at least increasing the threshold to which the top marginal rate kicks in, does not carry that big of a fiscal burden. It's not going to put the balanced budget, or even a small surplus, at risk in the years ahead. I am a firm believer that it can improve the supply side of the equation. In other words, it actually increases investment and increases the incentive to work. It helps keep our best workers here. It really doesn't carry that big of a fiscal cost. I'm not convinced that bringing down some of the top marginal rates would put the health care system at risk.

Finally, the third point to make is, while health care is a huge share of spending, it still is only roughly a third of the dollar. There's still another $40 billion in spending that we can work on, or at least keep tough restraint on it.

Mr Phillips: The government has estimated job growth at an average of 165,000 jobs a year for each of the next five years, which is considerably higher than your estimates would put it here. The government believes that's going to lead to unemployment potentially in the 2% to 3% range in Ontario. Do you have any comment on-I shouldn't say "how realistic"-the impact of them achieving 165,000 jobs a year in each of the next five years?

Mr Porter: I don't have the percentages in front of me. You wouldn't happen to be able to tell me what kind of percentage growth rate that is per year, would you, 165,000?

Mr Phillips: On about 5.5 million.

Mr Porter: It's about 2%, then, a little bit better than 2%.

Mr Phillips: Yes, 2.5% to 3%.

Mr Porter: That does strike me as being a little bit aggressive for a five-year outlook. I think something on the order of about 1.5% as a trend would be realistic. In other words, that would be on the order of about 100,000 a year, perhaps a little bit stronger, because I think it's going to be quite strong growth in the year 2000. But that does strike me as being a little bit aggressive. I could see the Ontario unemployment rate coming down quite a bit further. I think something in the fours would be reasonable within the next couple of years, but 2% is, needless to say, quite aggressive. Even the lowest unemployment rate state in the US is only around that level, and I don't think we're quite in that zone yet.

Mr Phillips: One comment, among others, that stuck with me was this analogy to Michigan. I think you said we're roughly the same population, we produce roughly the same auto parts, auto business, and so the auto seems to be roughly equivalent, and that they are the most cyclical economy in the US, which is at least a cautionary flag to us here. "A cautionary note" I think is the expression you gave to us. What do you think we should be doing to prepare ourselves for that kind of an environment?

Mr Porter: I don't want to harp on the late 1980s, but during that boom phase basically spending matched the growth in the economy and maybe even exceeded it, and I think it just stoked the boom. I don't want to revive painful memories of how the rest of the country was pointing their finger at Ontario as being the cause for the overly tight Bank of Canada policy, but I think that we are at risk of repeating that same experience if we don't keep as much restraint on spending as possible-simply put.

Mr Christopherson: I want to ask you about the fact that at least five times now the United Nations has chosen Canada as the best place in the world to live. They didn't predicate that on who has the best tax breaks for either corporations or rich individuals. They didn't base it on who can water down the environmental protection the fastest and to the greatest degree, who can water down their labour laws, who can water down health and safety legislation. All these things had nothing to do with why we were chosen. In fact, the things that chose us as the best place in the world to live were the very things that are suffering now under a regime, with respect, that seems to me to match pretty much what you're calling for. I have personally and my party has some real difficulty with our continuing this kind of agenda.

I realize that from a purely economic point of view, where nothing matters except the numbers-and in large part that's what you do-when the government flashes up one of their charts that says corporate profit is taking off, that's great news. For most people it's probably comforting because they think what it means is that there is going to be some element of security around them economically in terms of their jobs and that maybe, if they hope against hope, some of this benefit will trickle down to them. Yet we have a study from the Centre for Social Justice that points out that just the opposite is happening. People are feeling more insecure. There is less sense of security around jobs, around community. People are worried about the health care system and they're worried about the education system in terms of what it means for the future.

I'd like to hear how you think we ought to be balancing off these things, recognizing that based on the Stats-Can numbers, if we just continue where we're going, what we're going to create is exactly the kind of province and, given how large we are in the Canadian context, ultimately a country that no longer reflects the kind of reputation that the United Nations gives us by virtue of choosing us over and over again as the best place in the world to live.

At some point in the equation, quality of life should come into this, and yet by supporting the ongoing agenda of the current government, the opposite is going to happen. We're going to see a continuing erosion of those things that make this a great place to live, the best place to live, and we're going to see greater and greater disparity in terms of the inequity of the after-tax income between the very wealthy and the poor, recognizing that we're getting a larger pool of poor people because the middle class is being squeezed out, and they're not being squeezed up, they're being squeezed down.

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What are your thoughts on how we balance all of that, or if you don't think we should, what do you say to those sorts of things that public services provide for the vast majority as opposed to the very few in our province who have the luxury of being able to buy through private, disposable income whatever kind of health care, education, recreation, location of home etc that they choose? Just some of your thoughts on that.

Mr Porter: First of all, one thing to keep in mind about the UN survey is that if you look at the countries that rank near the top and the ones that rank near the bottom, it is very closely related to income levels. Many of the services that you talk about, things such as high literacy or health and well-being and a clean environment, are tied to income. In other words, a good environment and a good health system are closely related to a strong economy, so getting a strong economy should be priority number one in achieving many of the other benefits.

I would be the last to question the UN's methodology and be the last person to question whether Canada is the greatest place to live. I fully believe it is. But one thing I would point out is that it doesn't have that fine a line between income levels. In other words, a country such as Canada, where income levels are 20% or 30% below those in the US, was treated almost equally in terms of that measure in the UN survey. In other words, the US doesn't really get any benefit from the fact that it has a 30% or 40% higher disposable income than Canada does in that methodology, just for your interest.

In terms of your remarks on the Centre for Social Justice-unfortunately I haven't seen that report-you mentioned that people are feeling more insecure about their employment situation. That's actually very hard for me to understand, because we do have the lowest unemployment rate in almost 25 years. I think either that survey is based on somewhat dated information or that it can't really be correct, because it's hard to believe that things can get much more favourable on the employment side than what we've seen recently.

Finally, in terms of the middle class being squeezed down, I think that goes right back to one of my main recommendations and that is not to have a punitive tax rate kick in and apply to even what most of us would consider middle class.

Mr Christopherson: Fair enough, I appreciate your comments. I'm going to respond to a few of them.

First of all, we had one of the strongest economies in the world in the post-war era, after the Second World War. That's where the great investments were made that we're living off now, in terms of our road infrastructure, our health infrastructure, our education infrastructure, particularly post-secondary education, our new college system, all under Tories, I might add. It was those investments that allowed us to benefit from the boom in North America that existed at that time. So we had a strong economy. At one time, it wasn't that long ago, we had a strong economy. We had growth and we had emerging social benefits that did benefit everyone, not just those in poverty who needed help with somewhere to live and food, but overall, and helped create the very middle class that you and I are making reference to. I just find it troubling that we've decided that because of global competitiveness and free trade agreements none of that is any longer possible and we have to let go of all that.

When you say we need a strong economy in order to provide for the things that I've mentioned, the reality is that under a regime where tax cuts are the number one priority at the expense of these other parts of our society, the middle class is dropping. Virtually every income group has lost ground, and the lower you are down on the income scale, the greater the ground that you've lost under the Harris government which has put tax cuts as the number one issue. Our concern is that if this continues unabated and this gap, this polarization, this inequity continues to grow, we're going to lose an awful lot of what we are all about as well as watching virtually tens of thousands of our neighbours and fellow citizens slip out of middle class and get close to poverty.

I worry, especially when you and others do recognize that there's a number of risk factors out there, that the bubble could burst with this economy. If it does, and the American economy starts to slip, we're going to feel it big time. All of the economic gains that you've talked about, in my opinion, will vanish, they will just vapourize, and all that will be left is an economy basically waiting for the American economy to pick up steam, because that's what's pushing us right now. At the same time, all the things that made us great in the past have now been weakened to the point of almost being destroyed. I just don't understand how that is a worthy goal of a province and a country like ours.

Mr Porter: Which goal specifically?

Mr Christopherson: The goal that we would become one of the most competitive economic states within the world that we trade in, but at the same time we make sure that it's not just the very well-off that are benefiting from it, that we're reinvesting it in quality-of-life things like education and health care that ensure that everybody benefits. I point that out because right now the stats are showing us that under the Harris regime the opposite is happening. People are losing ground. People are slowly slipping down in the middle-class bracket and eventually out of the bracket. Unless something changes, I don't see why we wouldn't just continue to see this polarization until we hit the point where the bubble bursts. When the bubble bursts, where are we?

Mr Porter: I think that the Ontario economy would be vulnerable to a downturn in the US regardless of what fiscal policy was in place in Ontario. It's a simple fact of life that after the free trade agreement we inevitably hitched our wagon to the US very closely and that we are going to ride the wave with the US almost more so than we ever have in the past. That's nothing really new.

I think the question there is to what degree do we suffer when the US does ultimately falter. If we set the stage for a strong domestic economy and we have the fundamentals right here, then we can ride it out a lot better than if we don't have the right fundamentals. If we have a huge and growing tax wedge with the US, that is simply going to aggravate the downturn when it comes in Canada.

Mr Christopherson: You talk about riding the wave. Again I would point out that the stats are showing us that in riding the wave now people aren't getting ahead. They're riding the wave but it's in reverse. They're losing ground. Virtually every income group in terms of after-tax income from a family perspective-it's done as family units-is losing ground, every one of them. So somebody is riding the wave, I agree, and somebody is making tons of money. Corporate profits are up and the government has balanced the books. They've done it on the backs of municipalities and health care and education. There are some winners, but they're not people, they're not families. The people and the families that make up this economic entity called Ontario are losing ground.

Mr Porter: I would point out that disposal incomes took their biggest hit between 1990 and 1995 and they've been slowly but surely creeping back since then. That's average or median disposable incomes.

Mr Christopherson: That's not what the stats support.

Mr Porter: Admittedly, average disposable incomes or median disposable incomes per person adjusted for inflation are still lower today than they were in 1989, but the quickest way to redress that is to reduce taxes and increase disposable incomes.

Mr Christopherson: Here's where I have a problem. If you do that in the way that's been done so far and in the way that I think, if I'm interpreting your material correctly and your presentation, you would support and urge the federal government to adopt also, it means that these tax cuts are exacerbating the very situation I'm describing to you. They're pushing those who already have further away from those who don't. That disparity, that inequity, has not been the Canadian tradition.

Mr Porter: No, I don't think I'm advocating that. I think marginal tax rates should come down for everyone. It shouldn't just be for the very top-end earners. I think the whole broad spectrum of marginal rates should be brought down so everybody has more incentive to invest and to increase their skills in order to earn more. Again I would stress that one of the most important things that can be done is to raise the threshold at which some of those higher levels of taxes kick in, and the people who benefit are low-income earners or middle-class earners.

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Mr Christopherson: Again, though, I don't want to be argumentative, but the stats are showing us that it's straight up: The lower that you are down in terms of income the less you benefit. Now the government plays with percentages and talks about the bulk of the money goes here, there and the other thing. When we're talking family units and quality of life and standard of living, the reality is that when you do tax cuts in the fashion that this government has in Ontario, those who are already well off are a whole hell of a lot better off and those who were at the other end of the income spectrum are dropping down further. For the life of me I fail to understand how that's a good thing, given the tradition.

You mentioned that we have the right fundamentals. I guess the difference is that I can't limit myself when I think about the right fundamentals to just the economic fundamentals like interest rates, inflation rate, GDP, all of the things that are normally the fundamentals. For us in Ontario, the vast majority of citizens would see the right fundamentals as being a growing and improving health care system, not one that's deteriorating, and the same with education. In health care alone, the previous presenter talked about the fact that there was a 33% competitive advantage for our auto workers versus Americans, and a big chunk of that was our health care system. So not only is it a quality-of-life issue but it's a competitiveness issue. Yet we're paying a price in our health care system and education in order to impose the tax cut regime that we have and that I think I'm hearing you suggest be continued.

Mr Porter: You're hearing me correctly all right. Again it's important to stress that the only increases we've seen in disposable incomes, even for the median person, for the average person, have been in the last few years. Things were devastating in the early 1990s because of the deep recession and the restructuring that we saw in Canadian manufacturing and whatnot, and we are at long last starting to see those incomes come back.

Mr Christopherson: I'm sorry, but the reality is the stats are showing us that during the recession from 1990 to 1995, the gap, the inequity between the wealthiest and the poorest, was actually decreasing. The gap was going the other way. We were getting more equity, not more inequity. Now, with a different regime and a different priority, ie, tax cuts, in the greatest economic boom we've ever seen, we've now got a reversal where we have more inequity. That's the reality and that's what's frustrating for some of us in looking at what's happening. The difference between what a headline says and what's really going on and what the government says and what's really going on in our neighbourhoods and in our communities is completely different.

Mr Porter: In the early 1990s incomes were converging towards zero, so if that's the goal you want to achieve, so be it. All I can say is that, again, the middle-income earner has improved in the last few years, whereas they were hit very hard in the first five years.

Mr Christopherson: Let's agree to disagree, because I certainly do disagree and I think there are stats that bear it out. It's not just an ideological, philosophical exchange of ideas. The stats are now there to show us that's not the case. The middle class has lost ground and has lost more ground under a government that's imposed tax cuts and this whole right-wing regime than in the past.

The Chair: With that, Mr Christopherson, the time has expired.

Mr Christopherson: Thank you for the opportunity to have the exchange.

The Chair: Mr Porter, thank you very much on behalf of the committee for your presentation.

ONTARIO SECONDARY SCHOOL TEACHERS' FEDERATION

The Chair: The next presenter on the agenda is the Ontario Secondary School Teachers' Federation. For the record, gentlemen, could you please state your names.

Mr Earl Manners: Earl Manners, president of the Ontario Secondary School Teachers' Federation. On my left is Dale Leckie, a researcher on educational finance on our staff, and on my right is Mark Ciavaglia, our legislative liaison.

The Chair: On behalf of the committee, welcome. You have 30 minutes.

Mr Manners: Thank you very much. I believe you have a copy of our submission in front of you. I do not intend to read it. I will do my best to summarize it as quickly as possible so there are opportunities for questions.

I'd like to begin, however, by setting the context. I note today that the finance minister is reporting that we have a robust economy, that there are increased revenues, that he's projecting a balanced budget this spring and that we have economic prosperity now and for the foreseeable future in this province. Government representatives may be pleased to hear that I am prepared to accept that as a fact.

I am not going to debate at the same time the causes or the merits of how that was achieved either. You may be happy with that statement. But I would hope that you would show the same degree of recognition when I say at the same time that all of that is true, not everyone is sharing in the prosperity equally.

I think we're all familiar with the plight of the homeless. We all know-Statistics Canada has recently published a report on this-that working people have seen their real incomes decline, especially in Ontario. The old saying that the rich are getting richer and the poor are getting poorer, I think is more true today than it has been. These are real people, real families, and they are real children we see in our schools, and the effects of that we are seeing in our schools as well.

I also want to say that it's not just those people I identified who are not sharing in the prosperity, but it's also some of the public institutions that are there to serve all citizens of this province that have not shared in the prosperity as well. There's been a lot of talk recently about the health care system, but I would add social services and in particular, from my point of view, public education.

I want to talk about public education in particular, because the government has purported to be providing stable funding to our public education system, but it is the public boards that are bearing the brunt of that so-called stable funding. I think you have a chart in front of you that shows you that all but two public boards are getting less and less because of the government funding formula. What we're seeing is a ratcheting down of support for public schools to the very lowest common denominator.

Even if we go to the government's definition of stable funding, I want to point out that it includes restrictions as well, because in the government's definition of stable funding it says that the government will claim that per pupil funding will increase if enrolment increases, but to a maximum of 4%. If there is an enrolment increase beyond 4%, school boards do not receive any additional funds, so even in that definition there is a cap. If that cap is pierced, school boards in effect lose.

Our report on the first page also points out that some of the additional requirements for boards and staff to implement some of the reforms that have been identified are for the most part unfunded and not included in the funding formula, so they represent an additional cost that's over and above the so-called stable funding.

Finally, when it comes to stable funding I want to refer to the Education Improvement Commission, the government's own self-appointed commission, when it says that boards have been living off the avails of mitigation and transition funding to assure program delivery, that there are cuts coming. They have been deferred for a year or two, but they are coming, and in that definition of stable funding, those cuts will be imposed next year and the year after and the year after that. So the government has built mitigation and transition funding into part of, I would say, the mythology of stable funding.

I think we all have to be concerned about that because the passage of Bill 7, the taxpayer referendum legislation, establishes an artificial ceiling for education spending, but it does not provide a floor for public education to stand on. What happens is that as these cuts come in and as there are further cuts to business and property taxes, that will automatically mean less money for public education unless there is going to be some offsetting funds from other general revenues, and we don't have any guarantee of that. If the economy ever turns bad, it would require a referendum just to maintain the status quo on funding in the future. That concerns us greatly.

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It's very real, because right now you know the government has told municipalities only to give 98% of business and property taxes back because they have changed the accounting practices. They have changed the approach to taxation of vacant properties. All of those mean, because the province has taken control over education, an automatic decrease to education funding unless it's offset by other revenues. I hope to hear today from the government members that that's not going to happen. That's one of the reasons why OSSTF does not believe a provincially controlled system of education funding is going to be sensitive to Ontario's diversity.

The third interim report of the EIC I think supports our concern. They mention, for example, the new Toronto District School Board and its predecessor boards, that they had worked in partnership with municipalities in the past to try to ensure the diverse social and economic needs of children were met. They relied on a common property tax system to do that. They developed integrated services, which is something this government purports to believe in, yet they are unable to provide them now because some of those services they were providing in concert with the municipality are not covered by the funding formula.

One of the other areas that the EIC identified was the learning opportunities grant. It is a grant to try and address socio-economic, new immigrant needs in various communities. However, it's based on 1991 census data. I think everyone would agree that a lot has changed in the last decade in this province.

I'll just give you one example. London, I understand, is one of the fastest-increasing areas for new immigration to this province, yet it's not being recognized in the current funding formula because it's based on 1991 census data. That has led to, for some reason-and I don't have an explanation for it-the Thames Valley public board getting just about half the learning opportunities grant that the London Catholic board receives. So, one, we're not dealing with up-to-date data, and, two, it seems that the public board in particular has been hit the hardest by changes in the funding formula, one of the reasons why it is on the list on the downward cycle.

That is why our first recommendation is saying that we hope the government will consider that there has to be some flexibility built into the funding formula to deal with local needs through the local taxation system in co-operation with municipalities to get the kind of integrated services we all want.

Let me remind you that Minister Eves pointed out on May 4 and July 21 that the growing Ontario economy, which is riding the coattails of the US economy, means the government can reinvest in items that mean most to families, like education. Despite the minister's assertion, our public education system continues to experience cuts.

I would ask you to look at page 7. There you will find a chart which shows you the decline in the number of elementary and secondary staff per 1,000 students in our school system across the province. I want to emphasize that this graph is not about administration. It's about school secretaries, who are the first contact to students who are absent. It's about custodians, who are often the eyes and ears and who protect students and identify unauthorized people in our schools. It's about maintenance staff. It's about library, computer and audiovisual technicians. It's about educational assistants. It's about professional student service personnel such as speech language pathologists, psychologists and attendance counsellors. It's about teachers of adult education and English as a second language, library teachers, guidance teachers, special education teachers.

They have been declining. I would think that all of us in this room would agree that they are not administration, yet in the funding formula some of those people, who provide very important services in the school, are identified as administration. You can see the result in the last few years, what has happened to those employees. They don't know that we live in a prosperous society in Ontario anymore. They're not sure there is prosperity in the future when they see government documents that are leaked purporting to cut a further $800 million from education.

I want to emphasize that OSSTF does not support the definition of the government about what is "administration." Those personnel we've just identified I don't think are administration, and I don't think anyone believes they are administration, yet they are being cut today. That's something we've got to address.

While the total number of staff has decreased, average class sizes are increasing. That just makes sense. If enrolment is going up and the number of teachers is decreasing, you can do the math. That means the average class size has to go up despite what it says in Bill 160, because Bill 160 only described an average maximum class size, and the word "average" unfortunately means nothing. For every special-needs class of 12 students, there will have to be an academic class of 32 to meet the funded average of 22. There are many, many classes over the average, and the biggest classes are often those which parents feel are most important; for instance, English and math. Many collective agreements I want you to be aware of prior to Bill 160 included maximum class sizes for various programs, but going to an average class size has put pressure on school boards to cut programs for students at risk which require lower class sizes and are not funded for those lower class sizes or, on the other hand, increase academic class sizes well beyond what they had thought was a reasonable standard maximum in the past.

I should also point out that the funding formula doesn't even mention remedial programs that are mentioned liberally throughout the new curriculum documents. If we're to provide those programs, probably with lower class ratios, then that issue has to be addressed.

I want to talk about staffing a little further and ask you to look at table 1.7 in appendix A, which highlights the fact that student-teacher ratios in Ontario have been climbing since 1995, while in Quebec and the United States they've been declining. We're becoming less competitive in the education sector as a result.

I want to point out too that under freedom of information, OSSTF received documentation from the ministry which showed quite clearly that prior to Bill 160, the average class size in the public secondary school system was below 22, so that in actual fact mandating an average class size of 22 hurt the public school system. It meant our classes had to go up in size.

I think you can see from the chart that two thirds of those job losses have been in teaching positions as a result of that and other cuts. That is money from the classroom. It's had an effect, and I want to re-emphasize that there are fewer teachers and support services as the student population continues to climb.

There are other storm clouds on the horizon, and those have to do with staffing shortages. I'm not just talking about teachers; I'm talking about all staff. There are reports of increased use of temporary staff because we cannot get employees, secretaries, to work in schools. We have education assistants who have not gone through the college system. And of course the study by the Ontario College of Teachers shows that serious shortages of qualified teachers will soon affect schools in every part of the province and that almost every teaching specialty will be hit. This will be exacerbated if the gap between public and private sector salaries grows, as was pointed out in the London Free Press article reporting on the Conference Board of Canada survey that showed the wage gap between public and private sector workers was continuing to widen.

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I think we all know that if you want to ensure you have good, qualified people in front of the classroom in our schools, there's a good way to attract that staff. You make sure you pay them well and you make sure the working conditions are there so that they can do the best job they possibly can.

I note on page 12 that even the Canadians for Responsible and Safe Highways say the same thing in concerns about a driver shortage. We've had a lot of this talk about our highways lately as well. They say exactly the same thing.

Educational employees have seen their working conditions and salaries deteriorate over the last eight years. You know as well as I do that teachers and support staff, for the most part, have not had a raise throughout the 1990s. That has to be addressed if we're going to overcome that looming problem on the horizon.

I won't spend a lot of time on other parts of the funding formula that we have concerns about, but we are concerned about the closing of schools, especially in rural and northern communities. The reason that's happening is that the funding formula encourages school boards to consolidate schools. You get money for every student. If you can house those students in bigger warehouses, you can keep the money. So it's encouraging school boards to create the big box buildings, much like we see in suburbia now, replacing our small-town stores that were the heartbeat of our communities. That's the same logic that is being used in our education funding formula. That's why even the Ontario Federation of Agriculture has come out and said that they are taking an interest in education, because when a school closes in a community like where I taught, in Flesherton, Ontario, that community dies.

I don't want to portray everything as bleak. I want to go back to what I stated as a fact at the beginning. We live in a prosperous province and we can afford to do better for our education system. Ontario, over the last four years, has slipped to 55th place out of 63 jurisdictions in per pupil expenditure, but we know we're not the 55th best economy in North America; we're much better than that. I think our support for education should reflect that.

The Ontario alternative budget suggests that if we are going to restore the funding cut from education spending over the last four years it would require some $570 per student in Ontario. Inflation has been running a little in excess of 1.8% in the last six years, so it's going to cost more than that. You can see our statistics on that at the bottom of page 15.

I know members of the government have not accepted this calculation of 55 out of 63, but I think there is an-other way to compare expenditures on education and that's on gross domestic product. If you take a look at the graph on page 16, you'll note that Ontario is 10th out of 12, out of the 10 provinces and two territories, in per pupil expenditure as a percentage of gross domestic product.

If Ernie Eves is correct, and I believe he is, that the Ontario economy is growing by some 7% perhaps, as he said, then that percentage is going to get even worse un-less our public education system benefits from the prosperity. We would accept a definition of stable funding that is tied to the increase in the gross domestic product as one way to ensure that our education system is getting the kind of support that it deserves.

In our recommendations we are saying clearly that we need to build in some local flexibility and input into the funding of programs for our school system. We have to make sure that public education benefits from the growing prosperity by ensuring that we fund many of the components in the foundation grant to take into account inflation, to improve and restore staffing and learning conditions in our schools, to recognize that our educational employees deserve a raise and that per pupil expenditures have to reflect student need. The learning op-portunities grant, for one, is an area that needs attention, as does our special education grant.

Finally, one way perhaps to address this in the future is to establish an independent and public process for the annual review and revision of the funding formula that's accountable to the Legislature and not just to the govern-ment of the day. That way we would have a bipartisan approach to education funding and support for students and each new generation.

I want to conclude by reminding you again of Ernie Eves's statement, in both May and July 1999, that we have a growing economy and that we can afford to invest in what is important to families in Ontario, like public education. My only question is, when are we going to see it?

The Chair: Thank you very much for your presentation. We have approximately 12 minutes for each caucus. I'll start with the official opposition.

Mr Phillips: Thank you for the presentation.

The Chair: Oh, I'm sorry, it's not 12 minutes; it's about six minutes. It was a half-hour presentation.

Mr Phillips: Everything is cut in half here, grants to the schools-they keep chopping.

Mr Manners: I'll keep my answers short and to the point.

The Chair: When you're Chair, you can chop.

Mr Phillips: Yesterday the government provided us with the educational expenditures. I don't know whether you've had a chance to look at them or not.

Mr Manners: I haven't had a chance to look at them closely.

Mr Phillips: They released the wrong chart initially. I'd appreciate OSSTF looking at it and seeing whether in fact it's consistent with what you're experiencing. What it seems to show is that the money raised off property taxes has dropped by about $360 million to $5.5 billion, and it appears to show that the province has increased its share by a similar amount. It appears to show that total school board operating expenditures are about $12.7 billion, which is up marginally over the last five years, from roughly $12.4 billion. Would that be consistent with what your belief is?

Mr Dale Leckie: As the municipal taxes are generated locally, the design of the funding formula is that whatever level the municipal tax creates, the ministry tops it up to the funding formula allocation. One of our concerns is, as the municipal level decreases, the requirement of the government to make up the difference, according to the funding formula. At some point, we're concerned that they're not going not to top that up. If that requires some sort of referendum to do that, then that's our concern.

Mr Phillips: One of the challenges we face is that the language around this is kind of all "funding formula" and it's relatively antiseptic. It's difficult, certainly for the public and I think for many of us, to humanize this. It has been a debate around the funding formula, and as long as the debate is on that ground, frankly, probably the government can avoid the debate on the other stuff.

You do have one recommendation in here which suggests that there be some kind of an independent body that can provide an objective view of it, which intrigues me, although realistically the government will want to control that. I am very interested in trying to quantify what's really happening out there, because as long as the government says, "We're increasing classroom spending and it's just that the dastardly school boards aren't doing it properly," you can get away with a lot. I wonder if OSSTF can help to humanize this and give us a human scorecard on what's happening.

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Mr Manners: We'll be producing a report in March that summarizes all of the 5,000 responses of teachers and support staff from across this province in secondary and elementary schools about the impact of all the chan-ges that have occurred to our education system over the last few years-from the new curriculum to the funding formula and its impact on various programs, to the textbooks issue. We are going to be publishing that in March. It's based on 5,000 random responses to a questionnaire, and we think that will give us very much a human picture of what teachers and educational workers are facing in schools and classrooms and school boards today.

We are working with some university personnel in order to do that and to ensure that it's objective, and we hope that it will lead to some suggestions about how we can do further research, with the assistance of education departments in various universities from around this province, to provide us with some clear data about what is actually going on in our schools. We look forward to releasing that in March.

One of the reasons we talked about things like student-teacher ratios and the number of staff to students was an attempt to humanize it. I think everyone understands that if there are more students in a school but fewer staff, the students aren't getting the same level of service, whether it's the teacher in the classroom, whether it's the custodian who cleans that classroom or whether it's the secretary who's making sure that student's application for university or college gets there on time. You can't guarantee all those services as the actual number of staff decline. That's the easiest way we think we can try and portray the funding formula and its impact in human terms.

The Chair: With that, Mr Phillips, I'm sorry that I cut your time in half, but that's the reality of it.

Mr Phillips: Twelve minutes fly by.

Mr Christopherson: Earl, thank you very much for your presentation. Three quick things in the time I've got.

Number one, on page 11 you refer to the number of teachers who are retiring and that they have "jumped at the first opportunity." I think we've all seen that. I just wanted to add my voice to that.

The level of discontent and stress and concern within the ranks of teachers in Ontario ought to be something that alarms all parents. It's sometimes so convenient for many in the public to sort of lump all teachers together and then start commenting on the things they don't like. But individually, it's been my experience that nine times out of 10 the teacher is sort of up on a pedestal like the family doctor in terms of "I've got to pay close attention to everything they have to say about my kid; it has major implications." Those very individuals are under so much stress that I'm not surprised they're jumping.

Where it really registered with me was the number of doctors in Hamilton who told me that the number of teachers they have who are off on stress has jumped to numbers they've never seen before. When you get that kind of endorsement of the message from someone who has no vested interest whatsoever, for doctors to be saying, "I've got more teachers coming in with health problems, stress leaves and all kinds of ailments they didn't have before," then we'd better start realizing that those are the very individuals who are standing in the front of the classroom and their mental attitude towards the work they're doing and whether they feel they're getting the support of their government or not makes a huge difference to the kind of classroom instruction and education that our kids get. Your working conditions are our kids' learning conditions. I don't think you can put it more succinctly than that.

Very briefly, and then I'll give you a chance to respond on those, you mentioned the school closures. Again, how many teacher groups do we have to have come in who continue to talk about yes, some of their own circumstances around funding issues, but the vast majority of the presentations, I say to the government members, from teachers who have come in so far are talking about everything else that's going on around teachers except teachers themselves. They're concerned about school closures and the impact-you talked about this, Earl-on small communities. I've talked to you about this and I know you're aware of it. The impact on inner-city neighbourhoods, where you have schools that are the centre of social activity for a lot of families and kids, is the same impact as one school in a small town or a village, except that it's replicated maybe a dozen times across a community like Hamilton-Wentworth.

The EAs continue to be an issue in Hamilton-Wentworth, and again I've spoken to you about this. I speak about it everywhere I can. It's outrageous that we've got kids who a few years ago were receiving all the supports they needed to get the education they're entitled to and now they aren't. It's simply because the funding formula has shortchanged our boards. That's it. We've got disabled kids not getting the education they deserve and they're entitled to because this government cut the money that school boards get in order to give effect to their tax cut. It's disgusting.

The last thing-and this one is a question-is you talked about the ranking of per pupil funding in terms of us being 55 out of 63 right now. I want to ask you what your and your association's impression and feelings are about how that's going to affect the quality of the education that our children will have once they come out of the school year. What does it mean in terms of their ability to market themselves, the quality of life they'll be able to build for themselves and their families as a result of the income they can generate and, on an issue we hear over and over here all the time, on competitiveness? What do you think it means to us overall in terms of our ability as we move more and more into the information economy? What does it mean for us as an economy in Ontario if our kids don't have the knowledge and skills they should have?

Mr Manners: If Ontario is 55 out of 63 in terms of investment in education and every surrounding American state is investing far more, then I think we are leaving ourselves vulnerable, not only in the short term but in the long run, to hurting one of the factors that contribute to a strong economy, and that is a well-educated workforce, a well-educated citizenry. You can't keep making cuts and asking people to do more with less without it having an impact on the way they are able to do their jobs.

I think that's why you are hearing more and more concerns about stress and morale. I think teachers and educa-tional workers bend over backwards to do an effective job for kids, because that's what they are there for, but what I'm hearing is: "I'm reaching the last straw. I can't keep doing it at the levels I am and being expected to do more." There's proof of this now too. You talked about LTD. In 1995, the level of LTD among teachers was 7.8 teachers per 1,000. It has jumped, more than doubled, to 16 per 1,000 in 1999. You can't ignore that statistic. That means something. That's a human statistic. That's about people who are saying, "I can't take it anymore." That does affect the classroom and we've got to do something about it.

I don't have the statistics for support staff, but if you are an education assistant and you are trying to deal with four special-needs kids instead of one, as you had in the past, something's got to give. I think what has given in various areas around this province is that some kids are not getting the service they had a couple of years ago. That's not me speaking; that's their parents.

Mr Christopherson: Could I just ask for a clarification, Chair? The 7.8 was in 1995 and the 16 was in what year?

Mr Manners: In 1999.

Mr Christopherson: Thank you, Earl.

Mr O'Toole: Thank you for your presentation. The tone is appreciated, because there have been difficult relationships. I think there are always two parties to a debate or disagreement, and I appreciate that the tone isn't totally adversarial. That's productive. I just want to be on record as acknowledging that, because I recognize there has been some dislocation; you translated it into LTD, or the use of that. I think if we could slow down the rhetoric part a bit you may be able to help as well.

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I hope too that historically you would recognize that-I don't want to simplify this, but I'm limited to only six minutes. The debate on this chart has been going on since 1982, about 1980 roughly. It's public versus separate. My point-it's two questions really. When you break your arm in Ontario, whether you are public, separate, Jewish, Arab or whatever, it's the same. Do you support both systems-four systems, actually-being funded equitably across the province, called public education? That's part one. Part two is, what is your view with respect to the UN ruling that denominational schools, more or less in a voucher sense, might be a prudent way of making sure parents of various cultures and values, inner- and outer-city school issues, have a significant role in this issue?

For instance, our culture is changing. Many of our teachers aren't culturally prepared to deal with the issues, let alone technologically prepared to deal with the virtual classroom or distributive learning. These are very complex issues. I think teachers today, as in most jobs, should be thanked. They are going through a tremendous amount of change, which I think sort of articulates itself in the curriculum.

I would put a third part to this: Don't you think we had to freshen up the curriculum and standards? I mean this in a positive way. If you think "no" is the answer to all of these, then get out of the sand, because it's-as much as I dislike it, I had a job for 30 years: That's finished. Would you agree? Not just teachers but all careers will go through significant change.

Mr Manners: I appreciate you comments regarding my tone. Your last comment about new curriculum, I think, is one thing that may have been forgotten in some of the rhetoric of previous opportunities where we have had a chance to meet, Mr O'Toole. We were very much involved in the secondary school reform process and in the assessment review process. We continue to be and always were-even when our differences were at their height, we continued to put a strong emphasis on improv-ing the quality of our schools and improving curriculum. I think you will know that it was our recommendation to the government that the best way to improve schools is to improve the curriculum. We are really glad the minister adopted our position on that. I'm quite pleased about that.

With respect to public versus separate and the chart we put in, I would make a different interpretation. What that chart is showing is that the public school system is being shortchanged, that they had a standard or a level of education they had become accustomed to and, rather than trying to ensure that everyone had that standard, the standard has been lowered and now the public school system is being ratcheted down.

Quite frankly, if you are asking me if that's fair, no, it's not. I don't believe I should be paying for other people's religious convictions, and I would hope you don't either.

Mr O'Toole: Well, I think it's fair to-

Mr Manners: Let me finish; you asked a question. I don't think you would disagree that there is a separation of church and state in our society. We believe in a fully funded English and French school system. We also believe that in a multicultural society we believe in one strong public school system and that we can provide, like we do with heritage language programs, heritage religion programs.

But I want to correct you on one thing. The United Nations did not support vouchers. They said that the current system of funding was discriminatory and you had two choices. You have no obligation under the United Nations human rights covenant to fund religious schools. So other states-other provinces, recently, Newfoundland and Quebec-have chosen to fund one strong public school system. That is something they said was a viable option. It's one I would support. I do not believe in going the other way and funding all religions. I can think of some pretty wacky religions that you and I, through our taxpayer dollars, would have to fund. I'm sure you don't want to support that.

Interjection.

The Chair: Mr O'Toole, I'd like to thank the presenters for their presentation, but we've run out of time.

COUNCIL OF ONTARIO CONSTRUCTION ASSOCIATIONS

The Chair: Our next presenter is a representative from the Council of Ontario Construction Associations. Could you please step forward and state your name for the record. You have 30 minutes. On behalf of the committee, welcome.

Mr David Surplis: Great. Thank you very much, Mr Chairman. My name is David Surplis and I'm president of the Council of Ontario Construction Associations. I notice on the agenda it's singular, but we are in fact a council of many associations, and that's one of the things I want to talk to you about.

With me is Andy Manahan. He knows all the answers. We intend to be brief in our presentation-as you can see, it's not all that voluminous-so that we can in fact engage in some question-and-answer with you. That's what we would like to do, and I think you would too.

For those of you who haven't met us-I don't see very many around the room who haven't, actually-we represent the Council of Ontario Construction Associations, a federation of more than 40 associations across Ontario, in the non-residential construction field. We'd throw in all those big names there-PCL, Ellis-Don and so on-that you'll recognize, right down to the mom-and-pop, two-person construction companies familiar in all your neighbourhoods and all your ridings. So we cover everything. About 7,000 companies, actually, are represented through COCA, all trades, all disciplines; everything, as I said, except residential. We're not in that. The Ontario Home Builders' Association looks after that aspect.

We would like to start off by saying to the government, to Mr Eves, yes, thank you, we are growing, we are rebounding. The crane is not an endangered species any more. You see more of them on the horizon every day, and we're grateful for that. But to put it into perspective, as we start here, we did drop. We dropped a lot from 1989, roughly. We got to a low of 6.7 billion-that's all our sector of construction did in 1995-and we're up to about 9 billion, as Mr Eves's figures show, for 1999. But in 1990 we were at over 12 billion, many millions of hours. We've got a long way to go. They're crying where we are. There are cycles and all that, but we haven't rebounded to where we were. As we say in our presentation, the SuperBuild fund and the amounts committed to universities, colleges, hospitals, schools and so on are very welcome by all our members and we're certainly hoping to get the 2008 Olympics here. That would be a real shot in the arm.

Yes, we're grateful, but even with the boom I wanted to point out to you that historically the construction employment-and that's all, including houses-is roughly 6% of the workforce. Right now we're at just over 5%. So in other words there's growth in the Ontario economy but we're not sharing in it, we're not growing as the rest of the economy was. That's a concern to us. So is the drop in apprenticeship applications-a drastic drop in apprenticeship applications. Of course, we've been following these hearings today on the television, as much as our doctors advise us it's bad for your health to do that, but we have. I would like to say, for instance, Mr Galt mentioned the loss of jobs over the last decade. In construction, we actually lost 85,000 jobs in that period-that's just construction-and over 100,000 from the workforce disappeared in that period of time.

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What concerns us, of course, is nobody seemed to notice that. When a van plant shuts down or something, everybody goes into high gear, "Let's fix that up," but when 85,000 jobs are lost in the construction industry nobody seems to notice, which is perhaps as much our problem as anybody else's.

But as we point out, and we will talk about it, we hope, perhaps later, one of our problems is we don't have a minister or even a department of a ministry responsible for our sector of construction. Mr Kwinter would know that well, having been the Minister of Economic Development and Trade. Over there in MEDT they have all kinds of sector areas and so on. The non-residential construction industry, all thousands of companies and billions of dollars of output that we have, merits in that ministry one half of one researcher. There's no department for construction or anything like that. There's aerospace and IT, and all of those are important, but there's one half of one researcher in that ministry devoted to non-residential construction.

We hope things can change. We're not asking for a ministry of construction or anything crazy like that, but there are things we're starting to talk to the government about that we can do to do that.

Now let's talk about the budget. That's what we're really here for.

We're thrilled that the deficit is being wrestled down and that the jobs are returning. We're torn, as others are presenting to you, with what to do with the income after the deficit is removed. Keep paying down the debt or spend some on capital projects? Naturally, we're asking for capital projects because we frankly see them as an investment. Sewer and water main, for instance, is in dreadful shape, as the Provincial Auditor told you more than a couple of years ago now, but it's a thing that's easily forgotten. It's underground. People forget about it, take it for granted.

We, frankly, agree with one of our main members, the Ontario Sewer and Watermain Construction Association, who have been pushing for years for full cost recovery of water systems in Ontario. We don't see why the average household is subsidized to the tune of around $500 a year. We don't see consumers trying to pay less for their gas, their cable, their telephone or anything like that. Why is water subsidized?

I know the answer from the government has always been, "It looks like we're raising a tax on somebody." We don't quite see it that way. We see it as full cost recovery. That's what the freight is. Let's pay the freight in water and then require the municipalities to have funds to maintain and upgrade those very precious systems, especially with regard to water, that are important to us all.

So we're very keen on infrastructure and, as our Catherine Swift said earlier today, real infrastructure. That's what we want to see: real sewers and water, real roads.

Roads, of course, are another very important concern of ours. We think that Queen's Park has done a pretty good job. In fact, our members tell us that with the maintenance and upgrading of the highways under your control, the job is pretty good. But those ones that were passed off to other jurisdictions, they have some concerns about. They don't see the other jurisdictions being able to keep up and certainly to expand, and that's what we need. With NAFTA, with the pressures of international trade and so on, we need more attention paid to highways-we really do-border crossings and so on.

We recommend, as does our member the Toronto area Road Builders' Association, that you co-operate with the federal government on the federal highways program. It sounds to us from the noises coming out of Ottawa as if the federal government caucus in Ontario wants to spend money on roads, is willing to spend money on roads in Ontario. Fine. If that's the case, let's do it. We're not sure if politics interferes with that or what, but if there's money, let's get to it.

We want to talk to you briefly about revenue leakage, because it isn't just at the Workplace Safety and Insurance Board, which is a whole other problem and it isn't under your purview right now. We see that problem as a huge one at the board, and it carries over to the provincial sphere.

We think that this business of the so-called independent operators, which are just burgeoning all over the place-according to our research less than 50% of the workforce in construction is registered at the Workplace Safety and Insurance Board.

The rest are-we don't know-well, frankly, we do. Lots of companies are evading by just not reporting. But all kinds of other companies-and this is a fascinating concept-are firing their employees on Friday, the employees whom they had for years and they were paying for this, that and the other thing, making the deductions, and hiring them back on Monday as independent operators for whom they make no remittances and no deductions. They pay them cash at the end of the week and "presumably" the worker pays those remittances himself or herself. We don't think that's the case. We certainly know it's not the case in terms of WSIB.

Just a quick example for the economy, for the budget here-and we have mentioned this to Mr Eves's staff: The cut-off for EHT is a payroll of $400,000. If you have 10 construction workers averaging roughly $45,000 per year for 1,500 hours, you get nine of those workers and you break that barrier and you pay EHT. You remit EHT to Queen's Park. But if the nine workers are independent operators not one cent is paid to Queen's Park.

Frankly, we think that's wrong. If the test is not met, if they're not true independent operators-and most of the ones we see, believe me, are not independent operators-there's something wrong there, and we'd like to work with the government on that kind of thing. We frankly think that if that's the case and if there is that kind of interesting arithmetic, shall we say, at the board where people are avoiding their payments-which, by the way, causes huge problems for us in terms of the companies that can't avoid-the companies that pay are going to have to pay higher and higher premiums as more and more people escape their obligations and don't pay. The board, for instance, says, "Oh, well, you have a dreadful accident record." Not so; our accident record has been dropping like a stone, but people have been diving out of the rate groups and declaring their own rate groups and so on. Anyway, we think that transfers into the sphere of provincial income, especially with regard to EHT. It's so easy to avoid and evade.

We want a competitive and growing construction industry. That goes without saying. A dynamic, growing construction industry reflects greater production, investment and revenues, both private and governmental. We don't have a minister responsible for construction, but you can carry that message back.

We want very briefly to mention-we'd like to start discussing with somebody in government, and we did have a chance with the one window to get started on that process with Mr Beaubien-that in the state of Victoria in Australia they've made some wonderful advances, amazing changes. They have taken the whole construction industry and packaged it. They've required everybody to be registered and show your coverage on this, that your liability insurance is there and all those things are there before you get a building permit. Simple carrot and stick. If you don't have a health and safety program that works, if you don't have this, if you don't have workers' compensation coverage, you don't get a building permit, so there's compulsory registration.

They've privatized the inspection and approvals process-great idea. Much like the TSAA here, the Technical Standards and Safety Authority. They've hived it off from government. It's self-funding by the industry in Australia. It ought to be a natural for the government to look at. They've also put limitations on liability for the practitioners but have required them to have liability insurance that covers that period. In other words, 10 years is your liability window, but you must have coverage. If you design a building or a bridge or something and you retire, your insurance has to be there for the next 10 years.

Those are some of the things we wanted to bring to your attention. Basically, our message is we are improving, very much so, in the industry. We could improve a lot more and we'd like to, and we'd very much like to have a minister to talk to in terms of non-residential construction. So, any questions, monsieur?

The Chair: We have about three minutes for each caucus.

Mr Christopherson: Thank you for your presentation. I wanted to echo your concern around the sewer and water systems. Again, having spent five years on local-regional and city-council prior to coming here, I'm quite familiar with this as a problem, both in terms of what it means for the environment of local communities, the health of the residents of those communities and the cost. You're right: Out of sight, out of mind. People flush the toilet, turn on the tap, and never give it another thought. In Hamilton, and I'm sure you've run across this in a lot of the older established, larger communities like ours, we still have a lot of the combined sewage and it still creates huge problems. We have the overflow tanks that help during some storms, but you still can't catch it all that way. At the end of the day, they've got to be replaced, they've got to be separated, they've got to be brought up to date.

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I know the Americans had talked about undertaking an infrastructure renewal program, and I wonder if you could tell me what you know about that. Are they still at the advocating-lobbying stage or have they actually got money committed, cost-sharing with states, and is the work getting done? If so, where does that leave us vis-à-vis the relative comparativeness of our mutual infrastruc-ture systems, recognizing that in some ways it's like the roads? If you have problems there, things are going to shut down and you're not going to get services. But can you give me an update on where we are with that?

Mr Surplis: The Ontario Sewer and Watermain Construction Association had a big presentation on that last year. Federal and provincial things-the things you're talking about would be more looked after by the Canadian Construction Association. We would take our lead from there.

Mr Christopherson: I see.

Mr Surplis: But we do understand-just a quick answer-the program is underway. Money has been alloca-ted and is being spent on those very things. Everybody at the conference was saying, "How about here?"

Mr Christopherson: Do you have any sense of why the provincial government so far has not signalled more positively to our federal government their willingness to partake? Do you have a sense of what that is? Or maybe colleagues from the government backbenches can do that for us.

Mr Surplis: I haven't a clue, no. Well, for instance, we've got a similar sort of problem that we talked to Mrs Cunningham about on apprenticeship. We don't have an agreement, Ontario and the federal government, to flow some funds on that, and we recognize there's a problem there. We'd like it resolved but that's all we know, that there's a problem.

Mr Galt: I thank you for your presentation. I'm a little surprised you watch the legislative channel. I thought it was only my mother who watched it on a regular basis.

The figure I was using was net job loss during the first half of the decade, not the grand total job loss.

Just a clarification. The way you were saying it, it sounded like once you went over $400,000 in payroll to that ninth person, you then had to pay it for them all. My understanding was that the first $400,000 was deductible, so to speak.

Mr Surplis: Absolutely, but if you have a payroll over $400,000, you pay.

Mr Galt: It's a little bit over.

Mr Surplis: It's the cut-off or whatever, yes.

Mr Galt: Your comment about "fire on Friday and hire on Monday," is that all about the excess payroll taxes that companies found themselves in and to bail out of that, that requirements are so much less if it's contracted? Is that the reason they went that route?

Mr Andy Manahan: There was a study released in November 1998 by the Ontario Construction Secretariat, a labour-management type organization. They looked at the underground economy and they looked at a number of factors that precipitated that. They said one of the major ones was the introduction of the GST in the early 1990s. Obviously we were in a recession during that time, and so there were contractors and workers and so forth who wanted to avoid certain obligations.

That attitude, unfortunately, has pervaded the industry so that now certain companies are underground. Even though things are a little bit buoyant, they've become accustomed to that system and so they've tended to remain underground.

In the whole issue about gravitation towards an independent operator, we're seeing a trend, certainly in the non-residential side as well right now, in terms of piecemeal type work. A company that used to be very large and had, let's say, 15 employees has now subcontracted a lot of that work out. That gets passed down the line and everyone is responsible for paying their own benefits, so you're actually getting down to a situation where you might now have 15 companies with one individual so they don't have to register with the board, they don't have to pay the EHT and that sort of thing. It's an unfortunate trend in the industry. To a certain degree it represents an efficiency in the industry, but it certainly hasn't helped governments and organizations like the WSIB collect money and has put those other firms that have to pay for the injured workers and so forth at quite a disadvantage because there are fewer legitimate companies that are trying to cover those costs.

Mr Galt: Is there a little time for my colleague Mr Arnott to ask a quick one?

The Chair: He's got 45 seconds.

Mr Arnott: I want to ask about your suggestion concerning full-cost pricing for the provision of water services. Water's an essential service for every household, yet I think your idea would lead to improved water conservation and we should be concerned about that over the long run. You said the provincial government ought to set standards. Can you expand somewhat on that?

Mr Surplis: We could and we will. Actually, we're carrying the message for our member, the Ontario Sewer and Watermain Construction Association. They have all the studies on that and can tell you more about that. But yes, they have the figures. They have a very convincing argument. It was just always that people were loath to pass it on because people's costs would go up: "It looks like I'm going to pay more." Well, yes, they would.

Mr Arnott: If it means ensuring over the long run-

Mr Surplis: Exactly. If the provincial government sets those standards, requires a fund to be set up by the municipalities for those purposes-there's more detail. We will send it to you and obviously to the Treasurer.

The Chair: Thank you very much. For the official opposition, Mr Kwinter.

Mr Kwinter: Thank you very much for your presentation. This whole underground economy situation is something we've looked at over the years, and it would seem to me that it's really endemic to your particular industry because of the nature of it. It's a transient kind of thing. It isn't that you have a factory at one site and someone can come in and do an audit, say what you're doing. Unions are a problem when tendering takes place. They want to be competitive, so they want to get non-union labour. There is all sorts of motivation on behalf of the general contractors who are bidding on jobs to get competitive and to try to be so. How do you deal with that as an industry?

Mr Surplis: It's so hard. Everybody's had a look at it. As I suggested, in Australia they've done it by requiring everybody to register-everybody. You just can't get a building permit unless you do that. That's pretty strong stuff, and a lot of our members weren't very thrilled about that kind of talk a number of years ago, but when they saw that it might correct things-we have an interesting experiment going on right now; labour and management together are promoting the use of smart cards in the construction industry to show people's health and safety training and their this and that, all of those things. It's very economical. You can track everything. We're not suggesting Big Brother statism here, but the costs are so horrendous. It's getting to the point-and by the way, I would like to point out that it isn't just the construction industry. There are all kinds of industries that are hiving off their employees and having people work at home and so on as independent contractors. They don't have employees any more, so therefore they don't make the deductions and so on. There are lots of big companies out there that have maybe four or five employees and 200 or 300 independent contractors working with them.

But back to construction. It took four years in Australia to bring their system into place. It required bargaining and horse trading and all of that kind of thing, but believe me-we're expecting a third report on how things are operating in Australia in about another six months-everybody apparently down there loves it and it's really working. I think it's helped stem the underground economy there too. So perhaps that's the answer.

Mr Kwinter: Do you have any idea of what proportion of your business is underground?

Mr Surplis: It depends. According to the study done by the construction secretariat last year, anywhere up to 40% and 50% in some areas.

Mr Kwinter: That's significant.

Mr Manahan: It was higher on the renovator side of the residential industry, less so in non-residential, but we have seen a gravitation on both sides.

Just on the aspect of the smart cards, there was a presentation put together by an individual from the millwrighting council which is quite good, and I will get you a copy of that presentation.

The Chair: Thank you very much on behalf of the committee.

That completes the agenda for today. This committee will reconvene in this room tomorrow morning at 10 o'clock. We're now adjourned.

The committee adjourned at 1800.

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