GOVERNMENT ORDERS

FINANCE

FIFTH REPORT OF STANDING COMMITTEE

That the House take note of the fifth report of the Standing Committee on Finance presented to the House on Thursday, December 5, 1996.

Mr. Jim Peterson (Willowdale, Lib.): Mr. Speaker, I am very pleased to have this opportunity to speak on the basis of our report. I intend to speak on a number of things. First, I will look at Canada's economic record over the last three years. Second, I will look at some of the difficulties we faced as a finance committee in making the difficult decisions needed to make our recommendations for the next budget. I will then go through some of the decisions we did take and then conclude.

Looking back over the last three years, the financial record of the government and the Minister of Finance is truly remarkable. When we took office, Canada's debt was at $500 billion. Combined with the provincial debts of $188 billion, every single Canadian, man, woman and child, owed $24,000.

When we took office the deficit was $42 billion. In his three budgets, the Minister of Finance has taken us from that $42 billion, or 6 per cent of our gross domestic product, down to a figure well below 3 per cent of our gross domestic product. In his economic statement to the House of Commons, the finance minister said that by the year 1998-99, the deficit will be down to 1 per cent of gross domestic product or $9 billion.

When this figure is achieved it will no longer be necessary for the government to borrow from the markets to fund its annual deficit. This will mean that the deficit will be balanced in the eyes of every other country in the world because they go on the basis of financial requirements as opposed to the national accounts that we have pursued.

Part of this has been achieved through low interest rates. Because of the minister's fiscal responsibility, Canada has been able to lower its interest rates 20 times since March 1995. Interest rates have come down by five full percentage points. It started off two and a half percentage points higher than the Americans on the short end. It is now two and a quarter points lower for short term bonds and debt instruments. We are also equal to or less than the Americans going out to 10-year bonds.

Foreign borrowing requirements, which were the highest of the G-7 when we took office, are now being brought under control. This means that a degree of economic sovereignty has been reintroduced into the fiscal process. International financial markets will dictate to us less and less in terms of what Canada can and cannot do. This is so important in giving us the options for the future to set our economic agenda.

Over this period of time economic growth has increased. The Bank of Canada now recognizes that next year the economic growth rate will be 4 per cent or greater. This will be the fastest rate of economic growth of any of the G-7 countries.

In spite of all of this good news, one of the very difficult and agonizing facts of life is that unemployment is still very high at 10 per cent. If members from every side of the House could have one wish, I am sure it would be to see that every Canadian who wants a good job has a good job.

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What is our record in spite of this very sobering fact about unemployment? Over the past three years, Canada has created 644,000 net new jobs. This is not to be scoffed at. This is at the same time that the federal and provincial governments have been going through incredible downsizing and unfortunately having to lay off public servants.

When we look at the record of 644,000 new jobs, what has happened in other countries in the world? Those 644,000 new jobs created in Canada is 87,000 jobs more than the four European members of the G-7, more than Germany, England, France and Italy combined over the same period of time.

The growth in jobs in the United States has been about comparable to that of Canada. We still have a huge gap. Therefore the finance committee of the House of Commons asked Professor Andrew Sharpe to come before us because of the work he had done in putting together a number of research papers and economic thinkers in this area.

He explained to us that the Canada-U.S. unemployment gap can be explained as follows. Seventeen per cent of it is definitional because United States does not count passive job seekers. Eight per cent of it is because the U.S. has about four times as many people incarcerated in jails and prisons. Naturally, these are going to be the people with the lower educational levels and the ones who would not likely fit as readily into the job market. That accounts for 25 per cent.

Fifty per cent of it is because of the cyclical weakness in the Canadian economy and the output gap we have vis-à-vis the United States. The remaining 25 per cent, he explained, was largely due to structural differences, namely higher benefits for the unemployed and second, different immigration policies.

We do not take any consolation from this because we realize that what we have to do is get more and more Canadians back to work. This has to be our major priority and preoccupation.

How can we best do this? We are seeing how the low interest rates are now creating incredible benefits for Canadians. We are seeing how the decrease in interest rates have resulted in a saving to a homeowner on a $100,000 mortgage of $3,600 a year.

We have seen how this decrease in interest has resulted in a decrease in the cost to a person buying a car on time of $525 a year. That is a $15,000 car. This decline in interest rates has resulted in savings to a business person who is borrowing $1 million a year of $34,000.

It is critical to the economic progress, to the increase in the growth rate and to job creation to maintain a course of monetary and fiscal policy that will ensure low interest rates. Nothing can do more to help create jobs in the future.

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Over this period of time we have been in office, the Minister of Finance has had a record of achievement unparalleled in my generation not only in terms of the things I have talked about but in meeting his deficit targets and reintroducing a sense of credibility into the office of the Minister of Finance.

In the past, deficit targets had not been met. They never were. They were done on a five year rolling target basis where governments typically put off the difficult decisions until the fourth and fifth years. On the other hand, our minister has stuck to the two year rolling targets and in every year has not only met his deficit target but has surpassed it. His last deficit target of some $32 billion for 1995-96 he surpassed by more than $4 billion.

We in the Finance committee had to deal with the issue of what we do now that we are in a surplus position vis-a-vis our deficit targets. We had three alternatives. One was to use these surpluses to further reduce the deficit and eventually perhaps start to pay down our enormous and growing debt load.

The second one which many people called for was to introduce at this time a major tax cut. We had many suggestions as to what the tax cut should be.

A third option, urged on us by many, was to increase expenditure programs. One big item where we were called upon to increase expenditures, including by the official opposition, was in transfer payments to provinces.

We wrestled with all the options that were open to us and we felt that on balance we have come up with an approach which is balanced. We must above all else continue to finish the job of meeting and surpassing our deficit targets. But because we do have a little room to manoeuvre and subject to an update of economic circumstances before the next budget, we have suggested targeting six different areas. Those selected target areas were selected based on our Canada wide consultations, listening to Canadians and hearing their priorities, and also as members of Parliament listening to what we have heard in our constituencies and from our own colleagues.

The six areas we have chosen to target for action in the forthcoming budget, all within the context of finishing the jobs we have started, are the following.

First, children and poverty. We have suggested that the working income supplement might be increased in order to target the children of the working poor. Families that are among the working poor, as we heard before our committee, often have benefits of $3,000 a year less than those who are on social welfare. This creates the welfare wall, a disincentive for those on social welfare benefits to go into the workplace.

Second, we have targeted Canadians with disabilities. Over the past number of years, decades, the benefits going to those with a disability have eroded mainly because of the lack of indexation.

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A wonderful job was done by the hon. member for Fredericton-York-Sunbury and his task force in identifying the increased cost that people who have a disability suffer simply because of that disability, increased costs which can prevent them from becoming active members of Canada's economy. We have called for modest measures to help recognize the added costs of those with disabilities.

Third is the area of literacy. We were shocked to learn in our deliberations that 42 per cent of Canadians do not possess the literacy skills necessary to deal with basic reading material such as newspapers. Even more shocking, only 22 per cent of Canadians have the highest literacy skills which are required in the new knowledge based economy of the future.

We owe a great deal of credit to Senator Joyce Fairbairn who established the Secretariat for Literacy which mobilizes thousands upon thousands every year to deal with this issue of literacy. We have called for substantial increases in its small budget which is only $22.3 million.

Fourth, we have asked that consideration be given to helping students who are bearing highly increased costs to get their own education. We have suggested three income tax measures which could help recognize the increased costs of tuition and attending a post-secondary institution.

Fifth, one of the great reasons that we have this huge unemployment gap with the United States is, as Dr. Andrew Sharpe pointed out, the problem of our output. It is basically a question of productivity. Since the 1980s Canadian productivity has not gone up and this is the major reason for our high unemployment.

One of the reasons we have not had this increase in productivity is that Canada does not fare well by international standards when it comes to our level of research and development. We feel it is important to target research and development and science and technology at this time. We have called for three different measures.

The first is to renew the program which funds the Networks of Centres of Excellence. According to George Connell, who appeared before us, this program for the Networks of Centres of Excellence is the most effective instrument yet discovered for capturing the benefits of academic research for the advantage of the Canadian economy; universities and businesses collaborating on a nationwide basis to apply our basic research and get it commercialized.

Second, we have called for increases to Canada's three granting councils. These are the Medical Research Council, the humanities council and the NSERC, the engineering council and science and council. They grant moneys to post-secondary graduate students in our universities to help them do their research on a post-doctrine basis. It is one of the most effective programs we have for ensuring that we have highly educated people here in Canada who do stay here to do their graduate work and hopefully afterward.

Third, we have called for a new type of infrastructure program.

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Infrastructure one was good. Six billion dollars was mobilized in the three levels of government to replace wasting infrastructure at the municipal level. This was a concrete and mortar type of program. We of course cannot afford that type at this time.

We have said we should have a new type of infrastructure investment in our future going into our research and development facilities of our universities, hospitals and other research institutions. The Government of Canada would put up one-third and another one-third could come from the other levels of government or the private sector. This is the type of infrastructure that would

create short term jobs during the building, yes, but even more important, it would give rise to an expanded base for R and D in Canada and the creation of those long term jobs which conduce to our productivity and our economic future.

The sixth area where we have asked the government to target in the next budget is the voluntary and charitable sectors. We have had enormous cutbacks over the past three years. We realize that many Canadians have seen their programs diminished. Many Canadians have suffered as a result of that. We take no joy in that.

However, at the same time, we have seen a renewed commitment by the voluntary sector to help make this a better and stronger country. Over six million Canadians every year volunteer their time and efforts to help their fellow Canadians. This amounts to about a billion hours of contribution in terms of work. That is the equivalent of 617,000 full time workers or 5 per cent of all jobs in Canada.

An hon. member: At what salary?

Mr. Peterson: At zero salary, contributing their knowledge, their time and their efforts to help their fellow Canadians.

At the government level we have had to cut back because of economic necessity. We are now calling on the government to increase the tax incentives available for charitable donations in order to help these voluntary organizations and charitable agencies. They impact so vigorously on the lives of each one of us.

We have looked at a number of proposals. We have 10 recommendations. Some are designed to help the major foundations and our major institutions in health and the arts get some endowment funding, but they also apply right down to the United Way and the smaller charities; enhanced tax incentives which we believe will not be costly but will help to mobilize the funds to enable the voluntary and charitable sectors to do those thing which government no longer can do.

Having discussed these six priorities, children in poverty, the disabled, literacy, students, research and development and the charitable and voluntary sectors, let me go back to talk a little about our tax levels in general. There were many people who came before us and told us that we had to reduce their payroll taxes and income taxes.

Since 1980 Canada's overall level of taxation in relation to the size of our economy has gone up about 20 per cent, whereas in the United States it has remained fairly constant. Overall now we are about in the middle of the G-7 countries in spending, with 35.4 per cent of our GDP coming from taxes. In the United States, however, this figure is 27.6 per cent, 30 per cent lower than in Canada. This is the group we have to compete with because 80 per cent of our trade and investment is with the Americans.

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When we look at the individual taxes, in Canada our personal income tax rates are 13.4 per cent of GDP whereas in the United States they are 9.8 per cent. We are significantly higher in terms of personal taxes. In terms of corporate taxes, our level is just the same, 2.5 per cent of GDP. In terms of payroll taxes, we are actually below where the Americans are. We are at 6.1 per cent of GDP and they are at 7 per cent.

With respect to the necessity for being competitive in terms of job creation, our corporate taxes are comparable to those in the United States in terms of overall levels and our payroll taxes are actually lower. This is one of the reasons we cannot conclude at this time that we actually need a cut in payroll taxes in order to be competitive. What we have done-

Mr. Silye: Their taxes are 30 per cent lower.

Mr. Peterson: Mr. Speaker, I will be happy to talk to the hon. member from Calgary afterward and respond to his concerns. I am always delighted to hear from him.

Look at what we have already done in terms of payroll taxes even though we have a lower level of payroll taxes than the United States. Since we have been in office, we have taken six major reductions in those payroll taxes.

We reduced the statutory formula which would have taken us from $3 to $3.30 and we held it at $3. We reduced the rate from $3 to $2.95 in 1996. Just recently the minister announced that it was going from $2.95 to $2.90. Every time we reduce it a nickel, it costs us $350 million. We reduced the maximum insurable earnings from $875 to $750, again for monstrous savings. In December 1995 we gave premium relief for small businesses and we extended that again last year. The sum of these six reductions has been to reduce payroll taxes by some $4 billion since we have come to office.

We recognize there is a surplus building in terms of employment insurance. We recognized that but we said that because of our priorities in order to be competitive we do not have to further reduce the payroll taxes or the corporate taxes because when we combine them they are already lower than those in the United States.

Where we have really high levels is in terms of our personal income taxes. We heard from the scientific community and the high tech community how these high levels of taxes in Canada are hurting us. We have heard, and the finance critic for the Reform Party has mentioned this many times, that Canadians with an income over $50,000 constitute 10 per cent of tax filers but they pay 50 per cent of the taxes. We also heard that a single wage earner earning $6,500 is also on the tax rolls.

Our priority as a committee was to say that because our personal income taxes are out of line, in the future when we might be able to afford cuts, which we cannot afford today and we did not

recommend them for today, our priority for tax cuts would be in terms of personal income taxes. What did we recommend in our majority report? Apart from targeting the six priority areas I mentioned, we called for minor tax reductions.

Again this year as last year we called for income averaging for people whose income fluctuates significantly from year to year and they suffer a tax penalty, people such as artists and writers. We have called for extending the deduction for medical and dental benefits to those who are self-employed. We called for abolishing the tax on jewellery, the 10 per cent excise tax and we looked at some other measures such as ones dealing with heritage property and the high cost of mechanics tools for those who are required to purchase them before they can get a job in a garage.

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We called for tax increases as we did last year in terms of tobacco. We want those taxes on tobacco products to go up just as quickly and as often as circumstances relating to smuggling will permit. We know it is a deterrent to the iniquities of smoking. We have called for a tax on lotteries, a 15 per cent withholding tax on winnings from government run lotteries of anything over $600, as we did last year. We have also asked that the government consider a few other measures.

We recognize that big businesses are not going to be the job creators of the future in Canada. Job creation will largely fall on our small and medium size enterprises. We are still concerned about the role of our financial institutions in providing financing for small business start-up, equity and operating capital. We are pleased to note that this year, due largely to blandishments from the Minister of Finance and from the industry committee, the banks have taken very seriously their role of providing funding to small businesses. I compliment the banks on the number of steps they have taken in this area.

We have seen a tremendous blossoming of the labour sponsored venture capital fund. There is now $3 billion available to help small businesses get started, to expand and create jobs. We urge those who cannot get money from traditional lenders to take a look at this fund.

We are pleased that the business development bank has extra capital of $350 million. We were pleased that a group we recognized last year, the Calmeadow foundation, under the leadership of Martin Connell has increased its efforts to lend money to the small entrepreneur. We call it micro lending. It is for the person who needs $3,000 or $5,000 to get into a business. We commend these efforts and the steps taken in concert with our financial institutions to try to institutionalize this type of initiative, to take it beyond just the simple efforts of Calmeadow. This means co-operation with the banks.

Our finance committee recognized in its report on financial institutions which was tabled in this House in October, that it would be very helpful to consumers and small and medium size businesses if we increased competition. We have asked that Canada's doors be opened wide to foreign lending institutions, that the administrative barriers be removed. This will help meet the future needs of our small businesses.

We have also said that one of the biggest bangs for the buck we can get is through encouraging foreign direct investment in Canada. We recommended this last year and the government has taken steps. I understand there are now about 15 individuals working directly on this.

Studies done by KPMG Peat Marwick Thorne and others have shown that cities right across Canada have a competitive edge over American cities as places for new foreign direct investment. We have to get this message out to the big companies and investors right around the world. We recommend expanding these efforts to attract direct foreign investment in Canada which would create jobs here. We have such an incredible product to sell.

We heard from many Canadians, not just those in the voluntary and charitable sectors, who are making a tremendous difference in the lives of Canadians. There is one person in particular who came before us, Mr. Charles Pielsticker from Toronto.

A couple of years ago Mr. Pielsticker realized that business was not getting involved with our educational institutions so he formed the Learning Partnership which is funded basically by business contributions. It is doing many things, for example taking kids to work for a day, which involves hundreds of thousands of kids and their parents; and having volunteers work with teachers in public schools to help them teach science. This type of thing is all done on a voluntary basis.

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A woman who is doing the same type of thing also appeared before us. It is another voluntary organization which teaches science to teachers to make it particularly interesting for their students. Again, it was another volunteer driven organization. We commend these people for the type of leadership they are giving us.

We heard considerable cries for Canada to increase the payments for transfers to the provinces. This came from the official opposition. Part of the cutbacks we have had to do unfortunately fell in the areas of post-secondary education, health care and helping those who are on welfare. Like everything, they had to be cut or we would not have got to our targets.

It was our finance committee having listened to Canadians a year and a half ago said that we cannot cut all the cash transfers, we have to have a minimum cash base in order that we can as a federal government ensure the five principles of the Canada Health Act are adhered to. We saw how the Minister for Human Resources Development went across the country talking to his provincial counterparts to try to get agreement on the principles that underlie

the CHST to the provinces, the transfers for health care, welfare and post-secondary education.

As Judith Maxwell who appeared before our committee said, we can no longer impose these federal standards unilaterally. We have to work in dialogue and in co-operation with the provinces. This is what she called the management of our interdependence. We encourage the government in its efforts to do this. This is so important, particularly in terms of the Canada Health Act because we all know that health is critical to Canadians but good health is also good for our economic future.

Tax harmonization was an incredible theme we heard going right back to the summer when we met with people working with the task force headed by Dr. Jack Mintz. He was appointed by the minister to look at our business taxation to see if it was competitive.

We heard in testimony before us how one corporation with four affiliates had to file 1,100 pages of tax returns. This is insane. Why should we have provincial and federal income tax, capital taxes, sales taxes, excise taxes and different payroll deductions, different administrations, different tax laws and different enforcement officers going in?

Canadians said: ``We are only 30 million, we cannot afford it as taxpayers. We cannot afford it as companies that have to comply. Get your act together. You are politicians. You can agree on similar harmonized laws in all these areas. We expect you to. We expect nothing less of you. We do not want these petty jurisdictional turf wars''. This is why we want a national securities commission. Why do we need 11 or 13 different jurisdictions dealing with securities in this country?

We heard from Canada's cultural industries. Our cultural industries employ one million Canadians. They contribute $30 billion to our gross domestic product. One of the wonderful things about people who are artists, performers or whatever, is that they do not need high paying jobs. They have found ways to cope and to supplement their income. To create a new job in the arts costs only $20,000. But these are the people who give us a raison d'etre for being Canadian. They are the ones that give us the heart and soul of what we are. We cannot do without our culture.

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We encourage the government to look at a number of the measures we have suggested. In particular, we feel that the recommendation for vastly enhanced tax incentives for charitable donations are the ones which will impact very directly on the cultural industries and will give them the multi-year stable funding they need in order to plan for the future.

In closing, I would like to thank all members of the committee from all parties who worked so co-operatively. I thank the incredible staff of the House of Commons who arranged the meetings, the researchers, the person who advises on the text, Mr. David Abbott, people in our offices who worked with us.

Mostly I would like to thank Canadians. The last three to four years have not been easy. We have had to cut back in order to restore fiscal health and to protect the programs and the way of life which we consider to be so important. It is Canadians who have had their programs cut and have been the ones who have suffered. They have borne with us and shown a fortitude, an acceptance and a generosity of spirit toward their fellow Canadians and toward one another in sharing the burden we have imposed.

We must not detract from the overall goal of keeping on a sound monetary and fiscal track so the deficit targets are met and surpassed. In the meantime, because we have exceeded those targets to such a great extent, we believe it is good for the economic future but it is fundamental that we make some strategic investments at this time. These investments will introduce greater fairness into the system and are critical for a vigorous economic future. I am talking about investments in disadvantaged children and those with disabilities, in literacy, in students, in research and development and charitable and voluntary sectors.

I thank members for their indulgence and I look forward to the debate.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe-Bagot, BQ): Mr. Speaker, thank you for allowing me to speak in the debate on pre-budget consultation. I will start by addressing two remarks to my Liberal colleague, the chair of the finance committee.

The first is that it is very difficult for the official opposition to buy the compassionate speech made by the hon. member, since, for the past three years, this government has been trampling on the clientele he claims to defend on behalf of his government.

For example, as far as assistance to students is concerned-this was one of the recommendations in the Liberal majority report-along with assistance to the sick, to the most disadvantaged in our society like welfare recipients and the least well off, and to the unemployed, as well as job creation, we have trouble believing the sincerity of the hon. members across the way for one simple reason: this clientele, the most disadvantaged, has been attacked by the government.

The cuts this government has implemented in the past three years in the Canada social transfer were intended precisely to reduce transfers in the areas of social assistance, postsecondary education and health.

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We judge the government not on the wish of Liberals that appears in the Liberal majority's report, but on the government's actions. In the last three years, these actions consisted in bullying people who are among the neediest in Quebec and Canada.

The second remark on which we can agree partly with the chairman of the Standing Committee on Finance concerns the government's performance in terms of sound management of public finances.

When we compare these results to what we observed three years ago, there certainly are notable differences. But, we must also say that four factors contributed to these results, and they have nothing to do with the Minister of Finance's sound management. They have nothing to do with the government's sound management. And this sound management played only a minimal part.

Four factors contributed to the situation. First, the situation in the U.S. When the U.S. is doing well, chances are Canada will also do well. In the last three years, the situation in the U.S. was conducive to economic growth in Canada, to an increase of Canadian exports to the U.S., which helped our economy.

Second, the situation in Canada, which is clearly influenced by the situation in the U.S. In the last two years, the interest rates have dropped in a way we had not seen for years. However, this drop was attributable partly to the situation in the U.S. and partly to the problem of underemployment in Canada, where the unemployment rate is higher than 10 per cent, where people work less, where they consume less, where inflation is lower, and, consequently, where interest rates are lower. This is not a result of the government's policy.

Third, the massive cuts in transfers to the provinces. It is easy for a finance minister to say: ``I am putting our fiscal house in order so I am not giving you any more money''. That is what this government and this finance minister have done. One of the largest contributions to the objective of putting the federal fiscal house in order was cutting transfers to the provinces. It gave the federal government some room, but it made it hard for Quebec, for example, to put its own fiscal house in order.

I remind you that Bernard Landry, Deputy Premier and Minister of Finance, said recently-and we do not repeat it often enough-that if it were not for federal cuts in transfers, the Quebec government would not have a deficit today. It would be a zero deficit. It is easy to say: ``We will meet and even exceed our objectives''.

Fourth, and this is not insignificant, the finance minister and his colleague, the chairman of the finance committee, can brag all they want about this excellent performance with regard to the sound management of public finances, but it does not change the fact that, without a $5 billion surplus in the unemployment insurance fund, the finance minister would not have the same results. And that surplus did not come from his contribution or his government's contribution, but from the contributions made by employers and employees to the unemployment insurance fund.

The government took this $5 billion surplus in the UI fund and instead of spending it, or at least part of it, to create jobs, applied it to deficit reduction. This is easy to do. Anybody could have done as well or maybe even better than the finance minister.

When you look at the overall spending cuts, the largest savings come from cuts in transfers to the provinces and to individuals. This is how the government has put its fiscal house in order. Cuts in departmental operating budgets over the last three years represent about 17 per cent of the overall cuts. It is not much.

With regard to sound management of public finances, the government could have done a lot better, which is what the auditor general has been telling us for three years. Recently, he also reminded us that there were significant shortcomings in the management of public funds and public stocks.

The fact that Quebecers and Canadians have been paying more taxes in the last three years is not mentioned, even thought that fact goes hand in hand with the situation I was describing earlier and with getting our public finances in order. Did you know that in the last three years, the individual tax portion of the federal revenues increased by 17 percent?

Quebecers and Canadians saw their federal income tax increase by 17 percent in the last three years but their personal revenues increased by only 7 percent. That means that after three years of Liberal management of public finances, Quebecers and Canadians are poorer. Federal taxes increased faster than individual taxpayers' wealth. And the Liberal majority's report boasts about the government's accomplishments.

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We made recommendations to the Minister of Finance about what he should put in his next budget. If I may, I will describe these recommendations briefly, for the benefit of members and of those watching.

The first recommendation made by the official opposition-and I see the chairman of the finance committee across from me, perhaps to intimidate me, you never know-was to say to the finance minister: You have managed to come up with some leeway. We may or may not agree on the means, but you have come up with some leeway. Furthermore, in the Liberal majority report, this point is emphasized, and I quote: ``This year, after two thirds of the period, it is virtually certain that the government will exceed its objective; a deficit of $24.3 billion, or 3 per cent of GDP''.

As a result, and I mentioned this earlier, we look to the federal government and see some breathing space; we look to the provinces, however, and they are scrambling. Only the provinces, Quebec in particular, have found ways of balancing their budgets.

I was telling you earlier that, after three years, the government had slashed provincial transfer payments for social assistance, postsecondary education, higher education and health. These are areas that come under provincial jurisdiction. Just like that, the government decided it was making cuts, despite its bilateral contract with the provinces.

We are, therefore, asking the Minister of Finance to do everything within his power to restore part of what he has sneaked away from the provinces in order to solve his own public finance problems, so as to allow the provinces a little more leeway. That is the first recommendation. I might make an aside here: while he is at it, he could perhaps allow Quebec a little leeway in order to compensate it for having harmonized its provincial sales tax with the federal tax, since it has received no compensation whatsoever, unlike the three maritime provinces with their billions in compensation. Perhaps it is time for him to give some thought to some form of compensation for the Government of Quebec.

The second suggestion we made to the Minister of Finance, in our dissenting opinion accompanying the Liberal majority's report on pre-budgetary consultations, was to use part of the surplus generated by the unemployment insurance fund, not to absorb his deficit but to promote job creation. And as we suggested many times to the Minister of Finance, that is what he should be doing. The position taken by the Bloc Quebecois, the official opposition, was supported by the Canadian Chamber of Commerce. We asked the Minister of Finance to substantially reduce employer and employee contributions to the unemployment insurance fund. When we say ``substantially'', we mean up to 60 cents for every $100 of insurable earnings. That is not peanuts, not 6 cents or 7 cents, but something substantial that could boost job creation.

The contribution rates to the unemployment insurance fund have a significant impact on the capacity of businesses to create jobs. This is a payroll tax, a tax on employment.

Yet, despite the efforts of the government-and I do recognize, as the chairman of the finance committee said earlier, that there has been a light reduction-we are talking about a significant reduction, which is extremely urgent, in my opinion. The situation is getting worse every day. Despite the number of jobs created in the last three years, we still have a deficit of 900,000 jobs. It was 850,000 jobs one month ago but the most recent data indicate that we would need up to 925,000 new jobs to regain the level of activity and the rate of participation in the work force that we had before the 1990 recession. We are unable to create jobs, which should be our absolute priority.

Speaking of which, in our third recommendation, we suggested the finance minister reform the corporate income tax system. We in

the official opposition were very happy and flattered when the finance minister took note of the corporate tax expenditure analysis we released three weeks ago. We conducted an extensive analysis of tax expenditures. For the sake of our listeners, tax expenditures are any means available to Canadian corporations to avoid paying taxes or to have them deferred.

Some tax expenditures are quite appropriate and still relevant in view of the way Canadian businesses have evolved. However others, according to our analysis-analysis which, I will remind the House, had not been carried out for 25 years-should be scrapped. Others yet should be streamlined in order to redirect the potential savings through the years toward job creation support. This is what the Bloc Quebecois did. This is what the official opposition did.

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We have worked on this analysis for weeks. I will remind you that there had not been a comprehensive analysis like the one carried out by the Bloc Quebecois over these many weeks since the Carter Commission in the mid-1960s.

We have analyzed 30 tax expenditures, or 30 ways businesses can avoid paying taxes for various reasons, some good, some not so good, depending on the economic situation and the times. Of these 30 expenditures, 22 were identified as warranting further analysis, because of their importance either in explaining federal government revenue losses or for their impact on both Quebec and Canada, according to the tax experts we consulted. Of these 22, 12 were the subject of an in-depth analysis and led us to make recommendations to the Minister of Finance three weeks ago.

This close scrutiny of corporate taxation has shown that federal government revenues could be increased by up to $3 billion per year without raising the corporate tax rate, without increasing the tax burden on small business. Simply by redefining objectives, we could use this $3 billion to create thousands, if not hundreds of thousands of jobs.

Let me give you just one example. One of these tax expenditures is the partial tax exemption on capital gains. This is offered to both corporations and individuals but we had given ourselves the mandate of reviewing corporate taxation; personal taxation will be next.

Let us get back to fiscal spending. On every dollar you earn as a private citizen, you may have to pay as much as 40 per cent in federal and provincial income tax. This dollar is the basis on which your income tax is calculated.

However, if you make one dollar in capital gains, only 75 cents of this dollar is taxable at a rate of between 19 and 20 per cent. Twenty-five per cent of this capital gain, for instance, if you have

shares and each share earns a dollar, 25 cents of this dollar is not taxed at all.

Wage earners who pay income tax cannot shelter part of their income from the tax tables. However, in the case of wealthy people with a lot of capital, especially companies with portfolios of shares which increase in value, only 75 per cent of the value is subject to a minimum tax on capital gains.

This measure made sense until the wealth tax was abolished. When this happened, there was no longer any need for the capital gains exemption. It was the subject of heated discussion under the Conservative government, not so much under the Liberal government, because they did not have the same political will to deal with problems where taxation of the rich is concerned. They are worse than the Conservatives, and sometimes more astute.

We can say that under every government there has been a heated debate around this exemption. The conclusion was always a rational one. And the conclusion we heard from the tax experts was that it made no sense to maintain this exemption.

So we suggest abolishing this exemption, which would allow the federal government to collect around $400 million in new revenue without increasing the tax burden on corporations or private citizens. The exemption should not exist because it makes no sense at all and costs and the government a half billion dollars annually. All the tax experts we consulted, without exception, told us that this measure was entirely unfair.

Another area where we asked the Minister of Finance to act, and I am still on subject of corporate tax reform, is the whole issue of deferred income tax. As you know, businesses in Quebec and Canada have the option of deferring their income tax for seven years and also the option of going back three years, and I am referring to taxes they would normally have to pay because of their profits.

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Deferring income taxes is not a bad principle per se; we think it should be upheld because new companies could need some help in starting up for example. Profits made the first year should be ploughed back into a business since this increases profitability and efficiency.

There are also companies which operate in very cyclical sectors. They can make considerable investments for two or three years and see the results only seven years down the road. At the end of the seventh year, they have to offset the loss of income from three years before. That is normal.

However, added to other provisions of the corporate tax legislation, the system creates situations where some very profitable companies never pay a single penny in income tax, year after year. Some business people even boast about it. That is not normal.

The amount of deferred income tax accumulated to date is certainly not trivial; it stands at $36 billion. This is $12 billion over and above next year's deficit according to the estimates of the finance minister.

It seems to me we could strengthen the rules so that one day profitable businesses, most of them large corporations, will have to pay at least part of what they owe Revenue Canada.

Those are two examples of tax reform that we have proposed to the finance minister in order to help the government put its fiscal house in order and, most of all, to support efforts to create jobs.

Besides, now that some of these tax expenditures have been tightened or abolished, we urge the government to adjust some of them so that small and medium size businesses as well as VSMs or very small businesses-which have created the most jobs in the last ten years-can continue and be encouraged to create even more jobs, since we still need about 1 million jobs to get back to the conditions that existed before the last recession.

Fourth, we recommend that the federal government immediately launch a review of individual income taxes. We came to the conclusion, and the Liberal majority report agrees with our concerns, that individual income taxes have reached a ceiling. The underground economy problem is related to that. We should undertake a comprehensive review of our tax system.

It is perfectly useless to make suggestions right and left the way Reform members have been doing. Besides, that is all they have been doing ever since we came here. There is no point in making piecemeal proposals to reduce personal or corporate income tax before a very probing assessment of the situation is done.

We had an opportunity to sort out the problems in the personal income tax system. Major changes may be in order, because there has not been a comprehensive review of this system since the Carter commission in the 1960s. We do not advocate lowering or increasing taxes. Certainly not increasing them.

There are still loopholes in the personal income tax system, and some very rich taxpayers-with taxable revenues of $200,000 to $250,000 and more-still do not pay their fair share. There are some gross inequities between these wealthy individuals and the people who make from $30,000 to $125,000.

We are currently carrying out an in-depth review of individual taxation. We are also developing options for families, single people, the elderly, etc., to be applied before and after the reform we will put forward. We will prepare very succinct options, because the government is not doing its job.

For three years now, we have been asking the government to review the tax system and all it ever had to say was that it was

going to set up an expert panel to examine the corporate tax system. A few weeks ago, the government announced that it was postponing this review until after the election.

In terms of individual taxation, nothing was done. The government does not want to address that issue. Maybe there are some people around the government who benefit from these loopholes, we do not know for sure. But the lack of political will is quite obvious.

What are we going to do? We will do as we did for the corporate tax system. We will suggest to the minister ways for him to do his job.

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We will also give him some hints on ways to make the individual income tax system fair and equitable. Who knows, maybe we will go as far as to suggest a reduction of the individual tax burden. But that would require an in-depth review, so we urge the Minister of Finance to at least consider that option for his next budget, because he has been at it for three years now. He is just coasting along, carried by the economic conditions, with the four main factors I mentioned earlier, without making any great effort to try to put his own house in order. Maybe the time has come for him to take a good look at his own back yard.

Speaking of his own back yard, the auditor general-and this is our fifth recommendation-raised serious questions in his last report about good management of public finances by this government. Referring to stock management, among other things, the report mentions excess spending of $1.25 billion. This is not normal. This government is boasting about being a good manager. There is a limit. I will show that this government has nothing to baost about.

As I said earlier, as a result of the government's effort to put its fiscal house in order, the real reduction in spending in departments and crown corporations represents between 16 and 17 per cent of the effort of the last three years. It did not play a major part. It should have but it did not.

The sixth recommendation of the Bloc Quebecois proposes that the finance minister-and it should be one of his major efforts- review in a minor, non-diruptive way, the inflation targets of the Bank of Canada. The government has had the power to do so since 1967. While leaving the Bank of Canada as much autonomy as possible, the finance minister does have the power to establish a general direction for general inflation targets, for instance. He does have that power.

Moreover, the Liberals, in the Liberal majority report, acknowledge-and I see the chairman nodding, although I do not understand why there was no recommendation on this, yet he is nodding.

I quote the Liberal majority report: ``The tightening up of Canada's monetary policy aggravated the 1991 recession, but it had two other consequences as well: it produced the very low rate of inflation we have at the present time, but it also led to the high unemployment levels and high cost of servicing the debt, as a result of the high interest rates, which go along with this policy''.

Why did this analysis not include some approaches for ensuring that what has happened since 1991 does not continue in 1997, 1998, or any other year? Why was this not taken to its logical conclusion? The government has got us used to a bit of logic, but it never follows it through. Sometimes its actions are totally illogical in relation to the logical analysis that preceded them. Why not follow the reasoning through to the end?

There is no doubt that the monetary policy has hindered job creation. There could have been a balance between the optimum rate of unemployment in the economy and the rate of inflation. The government preferred the role of obsessive inflation fighter-that is going a bit far.

The Governor of the Bank of Canada, Mr. Thiessen, acknowledged only last year that, three quarters earlier, they should have loosened controls on increases in interest rates in keeping inflation in check and that they probably weakened the economic recovery that gives rise to new jobs. He acknowledged it himself.

That is not where the problem lies. The Liberals also acknowledge it, but made no recommendation on the effect of the monetary policy. No recommendation was made on the approach of the policy and yet there are studies, including that of Professor Pierre Fortin, which say essentially: we should keep inflation at 3 per cent over the long term. The Bank of Canada would intervene on the money market to keep inflation at 3 per cent in Canada. A 3 per cent rate of inflation is no big deal.

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It is now under 1 per cent, which could mean deflation. That is disastrous, because deflation is worse than an inflationary spiral. I will spare you the demonstration for the time being.

If we had a long term objective of 3 per cent like the U.S., where the inflation rate is currently between 3.2 and 3.3 per cent, we could eventually bring the unemployment rate down to 7 per cent or thereabouts. Do you know how many jobs that would represent? An additional 460,000 jobs would be created. That is half the total number of jobs we need in the Canadian economy to restore pre-recession labour market conditions.

Instead of considering the possibility of readjusting the inflation target range-they need not redefine the thrust of the monetary policy from A to Z, but only to set a new inflation target-the Liberals would rather say: ``No, we are staying the course. There

are problems with job creation; we realize that we may have squeezed a little too tight in our obsessive deficit reduction effort, but that is the way it will be.'' I wonder what the logic is behind that.

The Bloc Quebecois is not calling for a relaxation of inflation control efforts, quite the contrary, but for balanced control. There is no need for this manic-depressive attitude over inflation control. We are now asking ourselves a number of questions, and so are experts who do not necessarily support the Bloc Quebecois or the official opposition because, with an inflation rate of less than one per cent, given the margin of error, we may well be, as I said earlier, in a period of deflation.

A period of deflation is basically an indication that wealth may be decreasing. If prices are expected to stay at the same level or even to fall, how can entrepreneurs be tempted to invest in the economy? Less investment means less production. And if there is less production, there are fewer jobs. It is all interrelated and the deflationary spiral causes a general downturn affecting the economy and job creation. It is worse than an inflationary spiral.

With a one per cent rate of inflation, it seems to me we should try to redefine the targets, or at least try to avoid triggering deflation, which would be worse than what we have been experiencing for the past three years with the attempts to create jobs. It is time the government thought about this; it is time Liberal members stop conducting analyses and start making recommendations that make sense, recommendations that are relevant.

Things are going well in the United States. The inflation rate there is 3 per cent, while the unemployment rate stands at 5.2 per cent. There is a connection between the unemployment and inflation rates. Americans have managed to maintain their unemployment rate at 5.2 per cent, which is described as a balanced unemployment rate. Interest rates come into play, as does the money supply, and rates remain at around 3 per cent for inflation and 5 per cent for unemployment.

The United States does not have a one per cent inflation rate and a 10 per cent unemployment rate like Canada does, something which makes no sense. Year in and year, out we forgo billions of dollars in economic spinoffs because we have decided to be overly scrupulous, as my mother would say, we have decided to outdo the right wing in the United States and to be blindly obsessive in our war against inflation. It is time to put an end to this madness.

In essence, these are our suggestions to the finance minister. We would rather have the finance minister listen to what we have to say, instead of praising the work of the Bloc Quebecois in matters of taxation, congratulating us as he does for the seriousness of our work, our great ability to analyze the corporate tax system, our good recommendations.

We will accept the government's congratulations, since we do not get them often. We will accept them also because they show, at least in part, how useful the official opposition is, how useful the Bloc Quebecois is. And we will be even more useful over the next few years, until Quebec decides to go for another system than the federal system.

I would like to tell you this: when I look at the remarks made over the past three years by the Bloc Quebecois, by myself and by all my colleagues, who are doing a wonderful job, and when I compare them with the remarks made by government members and members of the other opposition party, I see that every time a member of the Bloc Quebecois rose in this House, it was to defend the interests of those who sent us here.

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I see that every time a member of the Bloc Quebecois rose in this House, it was to defend the interests of the people we are here to represent. We rose to defend the disadvantaged, the unemployed, students, seniors, the right of women to dignity through work, day care centres. Then I looked at what the others did.

The finance minister rose to defend the right of large corporations to do whatever they want as far as taxes are concerned. He rose to defend the tax free transfer of a $2 billion family trust to the United States. He rose to defend the right of very rich Canadian taxpayers to a partial capital gains exemption. Every time he rose, it was to defend the interests of rich people and large corporations.

I will not say a word about Reform members. They did the same thing as the government. That showed me how useful the Bloc Quebecois is. That is why my colleagues and myself are here, to defend the interests of real Canadians, to defend the interests of the disadvantaged, to defend real job creation measures and not measures to help the rich get richer and the poor get poorer.

I thank you for giving me this opportunity to speak. I am sure my colleagues from the Bloc Quebecois will rise again, during the next two days, to defend the interests of real Canadians and not the interests of very rich taxpayers and large corporations.

[English]

Mr. Herb Grubel (Capilano-Howe Sound, Ref.): Mr. Speaker, as you may know, I will not be seeking re-election and therefore this will be my last opportunity as the Reform finance critic to discuss the prebudget hearings report brought down by the finance committee. I do so with pleasure because I believe that the rosy Liberal coloured interpretation of the history of the last three years leading up to this budget consultation needs a bit of correction.

In 1994 we had a quick budget that was essentially a do nothing budget. I give the Minister of Finance some credit for at that point resisting the demand for increased spending. And except for a few

special categories of spending, he kept everyone in line and it was more or less a steady as she goes budget.

However, between the 1994 and 1995 budgets I believe having read Double Vision, a book I recommend highly to all members of Parliament who have lived through this period and to the general public, that between that time in 1995 there was a serious conversion of the Minister of Finance and his cabinet and caucus. What we saw was an intellectual integration of the concept of compound interest. I think during that period it became obvious that there was no way that this government could grow out of the deficit simply by slowing down or even holding constant the increase in expenditures. Therefore that was a major achievement.

The second thing that happened that was fortuitous in retrospect but at the time probably a very agonizing terrible thing to all those Liberals who wanted to spend more, because that is how they had been brought up, was that the Mexican crisis hit the country. High interest rates raced through the world, the Canadian dollar came under attack and a series of articles and outside events brought home like nothing else would have in the absence of those events the seriousness of the crisis facing Canada. Moody's gave a down rating of our debt. There were editorials in the Wall Street Journal and everywhere else that this country was really in trouble.

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As it turns out, in 1995 the government produced a major breakthrough budget. I said so at the time and I say so again. The government is to be congratulated. It first initiated a program review which was a code word for downsizing the operations of government. It could not do anything about the debt and I will talk shortly about transfers to others.

The day to day operations of the government had grown and become bloated in the post-war years. It was decided through the program review that the best way to go was not to cut across the board but to select certain items that needed to be eliminated and others that needed to be trimmed. The ministers were given a lot of latitude. They resisted heavily but they finally committed themselves to an $11 billion cut in departmental spending. That was a 20 per cent cut.

It is still beginning to bite. All the layoffs, all the spending reductions have not yet taken place but it was a major cutback. In the Reform Party's view it should have gone further and in our budget we propose to do more of it, mainly by more decentralization of functions, the ideological anathema to the Liberals.

In the 1995 budget provisions were made for downloading to the tune of $7 billion. It said to the provinces ``you used to get that money from us for welfare, higher education and medicare but in the next few years we are going to cut all of that to the tune of $7 billion''. Where did all the wonderful figures for the government come from that the previous speaker was talking about? It was said that the deficit would be almost eliminated by the year 2001. It has come from increased tax revenue.

About one-quarter of that amount is through 35 small increases in different taxes. They were not called tax increases but just making the system a little fairer. It hurt like a tax increase, it looked like a tax increase, it raised government revenue but it was not really a tax increase. There were 35 of those steps.

All of that will amount by next year to over $25 billion. Let me repeat that this government started with a deficit of about $40 billion. It tried to eliminate this with a $25 billion increase in revenue which it took from the pockets of Canadians. It is also taking the $7 billion out of the pockets of Canadians except that it has put the burden, the political cost, on the provinces by saying that the provinces will get $7 billion less. The only thing the government has done where it really hurt was the $11 billion in the local bureaucracies, in the local functions of government. If all goes well, all that will lead to a balanced budget by the fiscal year 2000-2001.

The 1996 budget essentially carried on with the promises made in the preceding budget and it seems to be working all right. Interest rates have come down and there is a slightly better than expected performance. I congratulate the government again for having done what it has done. However, it should have done it much faster because what is lying ahead of us within the next year or two is still the possibility of a recession. There is a possibility of an increase in interest rates.

We have been warned by economists all along that economic expansions do not last forever.

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I am worried about how the stock market is doing today. That indicator of economic well-being tends to forecast change in economic activity. One of the big troubles is if we do get such a turnaround in the economic activity or interest rates rise or both-this has nothing to do with ideology-as the Minister of Finance has said again and again, it is simply a matter of arithmetic that in fact such events as a slowdown in economic activity and higher interest rates could put this government, after all this pain, back to where it was when its term started.

For the sake of Canadians, not for the sake of the Liberal Party, just for the sake of Canadians, I hope none of this will happen. The outcome of the policies that the government has already undertaken is really quite a dismal record. It could have been better if there had been more decisive action more quickly.

The debt this government inherited was $500 billion. Next year it will be over $600 billion. In some budgets it was forecasted to be $625 billion. This will be $11 billion more in interest costs on just

the amount of debt that the government has added to the one which it inherited.

One of the most tragic things is, as I mentioned, that $25 billion increase in revenue, partly through increased tax rates but simply through economic growth, has resulted in a reduction in average family income in Canada of $3,000 per year. People feel like they have been squeezed. The average Canadian does not have enough money to pay the interest on all the debts that they have. On top of that, however, it is not getting better. It is getting worse.

That is why they have not increased spending. That is why our recovery was export driven. That is why we have been coasting along at a very anaemic growth rate, why employment creation has been large by the standards of the six European countries that are tearing their hair out because they are having such great difficulties. The famous Germany, the economic miracle, is stuck at unemployment rates over 10 per cent. Its best corporations are opening factories everywhere except in Bavaria and places where they should be. It is looking at what the problem is and we do not want to imitate it. We should look to the Americans.

As the House knows, as the result of this we have been just coasting along at a very unfortunate rate. Because of the slowness and the lack of incisiveness with which the government attacked this deficit we saw a large risk premium on our interest rate relative to that in the United States and the rest of the world. That risk premium has severely reduced investment and of course investment is the source of productivity growth and the source of higher income.

This government's record which was described by looking through such rosy coloured spectacles is really nothing very much to brag about. This government offers no tax cuts, no relief for all the hard working Canadians who are wondering how to make ends meet. The only thing the government did was to take money away from Canadians to the tune of $25 billion to eliminate the deficit, another $7 billion away from Canadians by downloading on the provinces.

In relation to that $32 billion all it did was spend $11 billion of reductions in departmental spending on its own bureaucracy. No wonder people are disappointed and worried about the power and strength of the bureaucracies in Canada and how individual ministers are captured by them. However, they are Liberals and they are willing to be captured and do all this good spending.

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One of my greatest disappointments in this document that we are discussing today is that the restraint which the Minister of Finance has been able to keep on his Liberal spenders now appears to be ready to be broken. This restraint is about to go because we have the all-Liberal tradition.

During a press conference one after the other, disadvantaged group marched up to the microphone and television camera and said they needed more money. Sure, these are tragic problems besetting the people who come to the government wanting help. Reform would love to give them help and we plan to give them help through tax cuts, by lowering spending on the local bureaucracy. That is how it can and should be done.

The tragedy is that allegedly, on the basis of performance in the budget being better than had been expected, there now sits maybe $1.5 billion. This Liberal government, speaking through the finance committee, has said ``let's start spending again''. This is at a time when the deficit still adds $100 million a day to the debt that the young people sitting around here, the pages in university, will have to pay the interest on.

The Bloc was talking about how it speaks for this disadvantaged group and that disadvantaged group to give more money. I would love to be able to do so. However, the Reform Party, and especially myself, have made it our task to speak for those who cannot speak for themselves, who do not have a vote and therefore do not count at all, zilch, negative in the Liberal calculus on what should be the policy.

Our youth will have to face $50 billion a year in interest costs, which are still rising and will be even higher if these Liberals get their way and start spending again. They also have another $50 billion or $60 billion to pay to us in the form of medicare expenses and CPP expenses, unfunded liabilities which will require at least $50 billion a year.

It is a crime what we are doing to our unborn generation and to those who cannot yet vote. Yet just when we are about to move slowly, surely and with some sanity toward reducing this debt on future generations what do we get? We get opportunistic Liberals, who cannot look beyond their own selfish noses, proposing again to increase spending before the battle is won. We are not even half way there yet. The risk of higher interest rates and a recession makes this totally and completely irresponsible.

Imagine what it will mean when we balance the budget and then start spending again. If we do not want a deficit again where is the money going to come from? It is going to come from further increases in tax revenue from overtaxed Canadians. They will suffer another $3,000 reduction in family income as they did in the last three years because these Liberals, as they indicated in this particular report, are just waiting for the Minister of Finance to weaken ever so slightly and give in to one special interest group, however worthy its cause, and the flood gates will open.

There are lists of people from the natives to battered women. I could go on and on about the people we heard from in the finance committee, all of whom had good causes to come to the federal government for more support. But at whose expense would that support come? At the expense of the young people I see right here in the House, who when they have grown up will find their debt burden even higher than it would be otherwise.

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I would now like to turn quickly to two pet projects which I believe are worth supporting. They will cost a little bit of money and maybe will have to wait another year or two, but I will not be here to talk about them. Therefore I would like to put them on record right now.

The first is the elimination of the luxury tax on jewellery and watches. This is an antiquated tax. Hardly anyone today would believe that these products are a luxury and should be carrying in a very discriminatory fashion another 10 per cent tax on top of all the other taxes that are paid. Why pick on those particular products? They have created an underground economy and it is totally counterproductive. If we could recover the revenue on smuggled goods, on underground production and unreported income, the government would probably be away ahead. It is a kind of micro management which I do not think is justified in this day and age.

The second thing I would like to support is the idea of removing all restrictions on the tax benefits that accrue from charitable donations. A very interesting study has been made of American history, the wealth created during the monopolies in the late 19th century of the oil barons, railroad barons and the steel barons, the Mellons, who had accumulated huge fortunes which have since been dissipated. In what way? They have all been given to foundations and to universities. The entire accumulated fortunes, capital gains, invested dividends, everything, was given to these institutions. Today Harvard has a $4 billion capital fund; Yale has $2 billion; Stanford, $2 billion or $3 billion.

We heard statistics that our universities have tiny little endowments. It is believed that the main reason for the difference between the two countries is the tax treatment. The Americans simply do not tax the accumulated capital gains on the assets are given away.

I am pleased the chairman of the finance committee supports the report that we should also do this in Canada as soon as the budget allows. It is not a great revenue loss relative to the huge benefits to be achieved.

I think I am running out of time soon. I would like to talk about the presentations we heard from economist Andrew Sharpe about the role of labour market imperfections and barriers to the reductions in the unemployment rate. This is a topic I have spoken about regularly in the House whenever I had the opportunity. I will dedicate the rest of my professional life at the Fraser Institute after the election to pushing and increasing public awareness of this problem.

On a personal note, Mr. Donald Macdonald, the former finance minister and head of the Macdonald commission, was a witness in a committee hearing the other day. I first met him about 11 years ago, after a luncheon speech. I introduced myself and he said: ``Your paper on the effect of unemployment insurance on the rate of unemployment hung over our commission like a shadow''. Last week he reminded me of that meeting.

I find it unbelievable that we have so many blinders on that we cannot see that when a country just across the border with the same macro economic policy produces an unemployment rate of 5 per cent, we are stuck at 10 per cent. What a tragedy. I do not want to necessarily replicate what is being done in the United States.

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What I think we need in this country is a lengthy, major in-depth discussion on the trade-offs. If we tell people to stay in that place, that if they are poor and unemployed we will give them a guaranteed amount of money every year, they will stay there. It is simple economics. We may want to do this as a society. But at least we should talk about it and not stay stuck at an unemployment rate of 10 per cent.

I would like to close by reminding the House that I disagree with the presentation of the witness who said that those overly generous Canadian welfare and social programs were responsible for only about a quarter of the 5 per cent difference between the American and Canadian rates.

I worked on my Ph.D. at one of the leading left leaning universities of the world, Yale. We got our degree by doing a study which showed that the market failed. All the professors would say, with a few exceptions: ``Right on. Here is your doctorate. You found that the market is not working''.

Then I spent three years as an apprentice at the University of Chicago. I was an assistant professor. There if we found out that the market was not working we were told to go back and do more research until we found out that it was the government's fault that the market was not working.

That is the kind of attitude I bring to this debate. That kind of attitude will show that the bulk of the difference between the unemployment rates in Canada and the United States is due to policies which we make with the best of intentions but which have these unfortunate, unintended consequences.

Mr. Andy Mitchell (Parry Sound-Muskoka, Lib.): Mr. Speaker, I am pleased to have an opportunity to ask the member a question.

I noticed, in reading the committee's report, that it went out of its way to quote the member directly on the subject he addressed at the end of his speech which dealt with the structural differences with respect to unemployment. The report at page 15 quotes the hon. member, who is the finance critic for the Reform Party. It says that the hon. member stated that structural differences were causing higher unemployment in Canada and that these included unemployment insurance, minimum wage rates and the degree of unionization. Those were the three that were mentioned in the report. I do not know whether the member mentioned any others during the committee hearings.

I want to make sure that I am very clear on his theory. It would seem to me from what is in the report and from what I have heard that the member is suggesting that we as a nation pursue a policy of restricting access to unemployment insurance, restricting minimum wages or lowering them so that people are not able to get unemployment insurance and have to accept lower minimum wages, and restricting people's rights to organize unions and to enter into collective bargaining negotiations. He is suggesting that if we did all of those things as a country, it would mean we would have lower unemployment.

Is the member suggesting that as the route to getting increased employment in Canada?

Mr. Grubel: Mr. Speaker, I am pleased to respond to that excellent summary of the points I made.

The member will remember that I was very careful to say, since I am now a politician and not an academic, that this is indeed what scholars around the world, scholars who are published by the OECD are finding. They are finding that there is a trade-off for societies, a trade-off on the generosity of programs of the sort he mentioned and the unemployment rate.

My point is that what this country has to come to grips with is however much we would like to fly by flapping our wings, we are never going to fly. There are certain realities in this world. In this case the reality is that we cannot have it both ways: more generous programs than other countries and the same rate of unemployment. I do not know if it has ever been explained to the people of Canada what the trade off is and what they would choose if they really had been given the alternative by the government. We should at least start a dialogue.

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I think I know where we will end up but since I believe in democracy that would be up to the people. The main thing we have to do is start a dialogue on that subject.

Mr. Ian McClelland (Edmonton Southwest, Ref.): Mr. Speaker, first of all I would like to acknowledge what a privilege it has been to serve in the same caucus as the hon. member for Capilano-Howe Sound. It has been very illuminating for many of us to have an economist of his world stature participating in the debates of the House and speaking honestly about problems.

We cannot solve the problems of the country if we do not address them honestly. That is what we are trying to do here. We are addressing the problems that the nation has. We did not get into a $600 billion federal debt by accident. We are in this mess because people of good heart and little else took us down this path unknowingly. We are not suggesting that they got up in the morning and said: ``How are we going to screw future generations of Canadians?'' It just happened. Now we have to deal with mess, do something right and only straight talk is going to get us there.

There is some straight talk but it is not normally found in this House. Early in his comments the hon. member for Capilano-Howe Sound mentioned a very excellent book which should be required reading for all members of Parliament, including members opposite of the Liberal Party. That is the book ``Double Vision'' written by Edward Greenspon and Anthony William-Smith about the first three years of the Liberal reign at the end of this millennium.

It speaks very eloquently of the battle that raged within the Liberal Party on whether they were going to finally fess up to the fact that our country was and still has the potential to be a financial basket case if we do not stay the course.

I would like my colleague to amplify on page 276 of that book. I remember it very clearly because it was like a lighthouse. It just exemplified what has gone on in this Parliament. On page 276 the Minister of Finance was defending his budget to the bond traders, Salomon Brothers, 400 of them. Their question to him was: ``Why should we believe the Liberals have got the forthrightness, the ability, to stay the course on the deficit reduction when they have never had that strength before, when they have never been able to do it. In the face of another election they open their wallets and give away future generations of Canadians' money. It is not their money. It is future generations' money. They have never had the strength to do it before, why should we believe you have the strength to do it now?''

His response was: ``In his opinion the political competition in our country is the Reform Party. The Reform Party is committed to getting our financial house in order and the Reform Party will keep our feet to the fire''. Would the hon. member for Capilano-Howe Sound respond to this?

Mr. Grubel: Mr. Speaker, I thank the hon. member very much for that softball. Yes, it is correct that the Reform Party should be given much more credit than we are being given for having been one of the sources that pushed in the crucial months before the 1995 budget for a much more restrictive budget than the Liberal ideology would have produced otherwise.

At the same time what the hon. member just mentioned makes this Liberal report that we are talking about right now such a tragedy. That the hard won victory of 1995 turned the corner. It meant a shift in the battle but the battle is only half way there. This year's deficit is still around $20 billion. It still adds $75 million a day to the debt clock. The debt clock has slowed down somewhat but it is still ticking like a time bomb. Here we have the first revolt of the left-wing Liberals who believe it is time to start spending again.

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It was defended on the floor of this House and it is something which is very scary given the history of this government in this country in its inability to resist the siren songs of spending.

Mr. Andy Mitchell (Parry Sound-Muskoka, Lib.): Mr. Speaker, I will be sharing my time with the member for Ottawa West and I suspect sharing my time with the upcoming question period.

The Speaker: I suspect that is a good suggestion. It is almost 2 p.m. Perhaps we could proceed to Statements by Members. My colleague, you will have the floor as soon as we get back.

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