Finance Committee on May 26th, 2008

[The Chair, Conservative, Rob Merrifield]

We have enough members at their desks to be able to hear witnesses. We have our witnesses at the end of the table.

We want to start the meeting. This is our last meeting with witnesses with regard toBill C-50. Tomorrow we'll be going clause by clause, starting and finishing it tomorrow. We just want to let the committee know that.

We'll start in order. I'll yield you the floor as I introduce you.

We'll start with the United Steelworkers. We have Erin Weir, economist. Erin, the floor is yours for seven minutes.

[Erin Weir, Economist, United Steelworkers]

Thank you very much. I really appreciate the opportunity to appear before this committee.

I'd like to talk a little bit about the general direction of the budget being implemented by Bill C-50 and then make some more specific points about the changes to employment insurance proposed in the bill.

Budget 2008 was formulated in the midst of some very serious national challenges. The manufacturing sector is in crisis. We've lost about 378,000 jobs since November 2002. That's about one in six of all the manufacturing jobs that existed in Canada in November 2002. The recently released census confirmed that employment earnings have been essentially flat over the past quarter century, and that the gap between the rich and the rest of us is growing ever wider. Canada's greenhouse gas emissions continue to increase, our public infrastructure is crumbling, and the list goes on.

Given these pressing needs for government action, I found it quite surprising that the government chose to unveil a budget with the least new public spending of any federal budget in more than a decade.

This severe lack of public funds for important purposes is a direct result of very deep tax cuts that will disproportionately benefit wealthy individuals and profitable corporations. When the tax cuts implemented by this government are fully in effect by 2012-13, the cost will be $14.8 billion of lost corporate income tax revenue, $14.2 billion of lost GST revenue, and $11.2 billion of lost personal income tax revenue. These numbers come to a grand total of $40.2 billion.

Interestingly, this exceeds the $40.1 billion the federal government expects to spend on the Canada health transfer and the Canada social transfer combined, in 2012-13. In other words, if the government had not implemented these destructive tax cuts, it could have afforded to double federal transfers in support of health care, education, and welfare.

My principal objection to Bill C-50 is that it implements a budget that does not address these pressing national challenges and that deprives future governments of the fiscal capacity to do so.

Moving on to employment insurance, Bill C-50 proposes to put that program into a separate fund. Over the past 15 years, when the Canadian economy was growing, unemployment was falling, and employment insurance premiums consistently exceeded employment insurance benefits, the federal government was quite happy to treat employment insurance as part of general revenues. Now we're in a situation where the Canadian economy is slowing down, unemployment is trending upward, and there's the possibility of employment insurance premiums falling short of employment insurance benefits, so now the federal government is saying that employment insurance needs to be in a separate fund, apart from its general revenues.

Philosophically we agree that employment insurance should be administered through a separate fund. Our concern, though, is that the government is proposing to put only $2 billion into that fund. That falls far short of the $54 billion accumulated surplus of premiums over benefits in the employment insurance fund. It also falls far short of the $10 billion to $15 billion needed to maintain employment insurance benefits without increasing premiums during a recession, according to the former chief actuary of the employment insurance fund.

If a recession occurs, the regime proposed by Bill C-50 could require either increases in employment insurance premiums or reductions in employment insurance benefits, which would be the worst possible response to a recession. I think it's very important to maintain employment insurance as an automatic stabilizer for the Canadian economy by providing adequate funds to maintain benefits during a recession without an increase in premiums.

A related concern is that Bill C-50 rules out improvements to employment insurance benefits. It's well known that the proportion of unemployed workers eligible for employment insurance benefits has declined dramatically. The $54 billion surplus is more than enough money to expand those benefits to cover almost all unemployed workers, but Bill C-50 takes this surplus off the table.

In addition to that, Bill C-50 proposes a new rule for the administration of employment insurance that would require new surpluses in the separate fund be used to finance premium cuts as opposed to improve benefits.

To summarize, the concern I have with the changes Bill C-50 makes to employment insurance is that this new fund will not provide adequate employment insurance benefits to Canadian workers who become unemployed.

Thanks very much for your time.

[The Chair, Conservative, Rob Merrifield]

Thank you very much for your presentation.

We'll now move on to the Canadian Restaurant and Foodservices Association. We have Joyce Reynolds, executive vice-president, government affairs.

Joyce, the floor is yours.

[Joyce Reynolds, Executive Vice-President, Government Affairs, Canadian Restaurant and Foodservices Association]

Thank you, Mr. Chairman.

The Canadian Restaurant and Foodservices Association appreciates the opportunity to present the views of the nation's restaurant and food service operators on part 7 of Bill C-50. I'm here today on behalf of Canada's largest hospitality association, which has 33,000 members right across the country. We represent a $59-billion industry with more than a million employees.

I have been before this committee many times on the subject of employment insurance. Because of the labour-intensive nature of our business, where $3 out of every $10 in sales goes to payroll, restaurant operators pay a disproportionate amount of taxes as payroll taxes.

Recognizing the burden artificially high employment insurance rates place on labour-intensive industries, CRFA is on record as objecting to the setting of EI premiums at excessively high levels and has argued against the use of EI funds for purposes unrelated to EI.

CRFA, long ago, concluded that the only way to ensure employment insurance premium rates were set on a break-even basis was to establish a dedicated trust fund that is separate from Canada's public accounts and operated at arm's length from government.

Over the last 10 to 12 years, EI premiums have been set at rates that consistently far exceeded program costs, resulting in the accumulation of a $54-billion surplus in the EI account. This has resulted in an enormous financial obligation to the employers and employees who exclusively fund the program.

In principle, building up a surplus during times of economic growth makes sense, so that premium assessments do not have to increase during a prolonged recession. In practice, the intention behind establishing surpluses has not been respected.

As far back as 1994, in a submission to the Standing Committee on Human Resources, CRFA expressed concerns about this approach. We said at that time:

Unfortunately, our experience has been that surpluses have been too irresistible for government, and have been diverted to other initiatives. CRFA cannot support the anti-cyclical financing approach unless there is a statutory guarantee that the surplus would be accumulated for an economic downturn only.

Our fears back in 1994 were obviously well-founded. Governments quickly became dependent on the funds in the EI account.

The 1986 directive of the Auditor General to integrate the employment insurance program into the overall finances of the government has been used as an excuse to justify the diversion of EI funds. It has been clarified many times by the Auditor General that it was never the intent of the Auditor General to have EI revenues as part of the government's general tax revenue stream, nor was it the intent to have them used for purposes unrelated to EI. The only reason for the directive was that back in 1986 the EI account was in a deficit and contributed to Canada's overall deficit, which in turn impacted the overall borrowing requirement of the country. As we all know, there has been an enormous improvement in federal government finances since then.

We also know there will always be pressure on any government to increase spending on a multitude of programs and activities and to lower taxes in a host of areas. As a result, we are very pleased that part 7 of Bill C-50 will no longer allow the EI program to be treated as a cash cow. Payroll taxes are profit-insensitive and regressive, and should never have been part of the government's general tax base.

A counter-cyclical approach to rate-setting was pointless, as long as the EI account was consolidated with general revenue, because government's accounting principles do not allow surpluses to be carried forward from year to year. Employers and employees were always vulnerable to premium rate increases when the unemployment rate went up, regardless of the reserve in the EI account.

CRFA recognizes that the $54-billion EI surplus is a notional account and, given fiscal realities, cannot easily or immediately be turned over to the proposed Canada employment insurance financing board. We could debate whether the $2-billion reserve to be provided to the new crown corporation is adequate. The long-term economic outlook suggests low unemployment levels and intensified labour shortages. This is in stark contrast to the double-digit unemployment rates during the 1981-82 and 1991-92 recessions, which significantly reduces EI reserve requirements.

In the case of a prolonged or severe recession resulting in a significant increase in EI expenses, CRFA would certainly expect the federal government to make up for the revenue shortfall. Given the $54-billion surplus, the federal government would be expected to respect its obligations to employers and employees even if it meant raising other taxes or cutting spending.

To conclude, CRFA supports the establishment of the Canada employment insurance financing board and a stand-alone EI fund to be administered at arm's length from government. This is the only fair and responsible way EI premiums can be set on a counter-cyclical basis. It also allows the program to be maintained on a sound financial footing without temptations for government.

CRFA believes that part 7 of Bill C-50 provides necessary statutory protection for employers and employees by removing the option of having their hard-earned premiums used for other purposes.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to the Investment Industry Association of Canada. We have with us Ian Russell, president and CEO, as well as Barbara Amsden, director, capital markets.

I'm not sure how you're going to divvy it up, but the floor is yours. Please go ahead.

[Ian Russell, President and Chief Executive Officer, Investment Industry Association of Canada]

Good afternoon, Mr. Chair.

Ladies and gentlemen, I'm Ian Russell. I've come before the committee many times, but this is the first time I've been here in my capacity as president and chief executive officer of the Investment Industry Association of Canada to talk to you on the singular subject of tax-free savings accounts, or TFSAs. With me today is my colleague Barbara Amsden, who will be helpful to me in responding to a number of the questions that may come from the committee.

The IIAC is one of Canada's oldest and youngest associations. It was founded in 1916 as the Investment Dealers Association, which began as a trade association that over the next 90 years became increasingly a self-regulatory body. From 1996 to 2006, the IDA grew rapidly as a regulator, tripling in size. In April 2006 the organization separated its dual mandate, creating a single self-regulatory organization and a trade association.

The Investment Industry Association is the trade association for the Canadian securities industry. In that capacity we've been able to lobby effectively or advocate on behalf of our members, some 210 firms in the Canadian investment industry, for improvements in regulatory and tax policy to strengthen the capital markets in the Canadian economy and to meet the government's objective of productivity improvements. We've been better able to publicize what our industry does to promote the savings investment process and encourage capital formation.

As I said, we have 210 members. They range from very large, national, full-service investment dealers to small boutique operations, which operate as an institution with an institutional focus, and also as a regional focus, in all parts of the country.

The role of the Investment Industry Association of Canada is to promote the growth and development of the Canadian investment sector. The IIAC represents a strong and proactive voice that seeks to represent the interests of the investment sector and all market participants. Our corporate members range from regional companies employing few persons to major corporations that employ thousands of Canadians. Our members assist Canadian investors in building and protecting their capital to ensure their financial future and that of their families.

For our members to successfully begin offering TFSAs and to promote further savings by Canadians, we believe it is in the best interests of investors, governments, and TFSA providers that TFSAs be made as simple as possible to introduce and manage, and to this end that they be as similar as possible to and able to leverage the current RRSP framework.

A great deal of work needs to be done by our members between now and the January 1, 2009 start-up date. Technology changes don't just occur at the push of a button. We hope to have your help with legislative changes, as well as the help of the Department of Finance and the CRA on regulatory and administrative matters, to ensure a smooth launch and an excellent good-news story for the front pages of the first newspaper editions of the new year.

With your permission, I won't read the rest of my remarks, but I will touch on four problems and amendments that we suggest.

First, Bill C-50 limits TFSA offerings to a trust annuity contract or deposit, and excludes securities accounts. Interest and annuity rates have dropped since the early nineties, and more and more Canadians now rely on investments, rather than just term deposits and annuities, to finance their retirement. Requiring that brokers still resort to the trust structure of using third-party trustees to offer TFSAs adds costs and inefficiencies, and we believe it is really unnecessary.

Second, the CRA proposes more frequent reporting than for RRSPs, but based on the RRSP example, we believe this is not cost-justified, as material over-contributions to RRSPs are proportionately small, excess amounts are usually low, and penalties can be imposed to dissuade over-contributions. As for RRSPs, an annual report with contributions and withdrawals will enable the CRA to identify over-contributions, even if those are withdrawn in the same year in an effort to unfairly take advantage of the tax system.

Third, the treatment of TFSAs upon the death of the TFSA holder differs from that of RRSPs. Income or capital gains on the TFSA become immediately taxable at the time the holder dies, in contrast to RRSPs, where there is an exempt or transitional period after death, which allows for a period to learn of the holder's death and a process for deeming the disposition of assets and for resetting costs at fair market value, and various other points. As we know, the death of a family member means a difficult time for everyone, and treating RRSPs and TFSAs differently will lead to additional complications and frustrations at a time when complexity and administrative complications are particularly difficult for the bereaved.

Fourth, on implementation, Bill C-50 provides that qualifying TFSA arrangements must be entered into after 2008. This would prevent the opening of accounts with a zero balance earlier and would lead to a rush following the new year. Our members are already getting calls about opening TFSAs. This risks negative publicity for TFSA providers and the government, if there is congestion at the beginning of the year.

So we are requesting four legislative changes.

First, we recommend amending the legislation to allow brokers to offer TFSAs directly under an account agreement, and not just as a trust.

Second, for efficiency and cost-effectiveness—while leaving CRA's ability to manage the integrity of the tax base undiminished—we ask or recommend that you amend the legislation to require annual transaction-related reporting by TFSA providers to the CRA without a requirement for reporting transfers between the accounts of the same TFSA holder. This government is committed to reducing the regulatory burden and not adding to it. We believe that more frequent reporting will in fact cause more problems for investors and intermediaries than necessary.

Third, for simplicity, and given little risk to the tax base, we propose an amendment to standardize and simplify processing on the death of the holder, treating TFSAs like RRSPs, or in the same manner.

Fourth, for smooth implementation, we recommend that you allow TFSA providers to open accounts before the new year while still preventing contributions or transfers until January 1.

So those are the recommendations that we have before you, Mr. Chairman.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now we will move on to the Canadian Federation of Independent Business. We have Corinne Pohlmann, vice-president, national affairs; and Garth Whyte, executive vice-president.

[Garth Whyte, Executive Vice-President, Canadian Federation of Independent Business]

Thank you, Mr. Chairman.

On behalf of the Canadian Federation of Independent Business and the 105,000 business owners we represent from every sector and every region of the country, I want to thank the committee for inviting us to provide comments on Bill C-50.

Small and medium-sized businesses play a major role in Canada's economic growth and job creation, accounting for almost 50% of the GDP and 60% of total employment. I ask committee members to refer to the first graph in the document we've provided. The first graph tracks the GDP to CFIB's business barometer, based on small business owners' expectations for their own business. This is used by the Bank of Canada on a regular basis and by the Department of Finance. As you can see, our members are cautiously optimistic concerning the economic downturn.

And some good news can be seen with the graph on page 2. Thirty percent of the small and medium-sized enterprises said they plan to increase employment in 2008, compared to 8% who plan to decrease employment. This is good news when considering future unemployment rates, EI premiums, and EI surplus.

We have included several surveys based on thousands of responses from business owners. I may not have time to go through the entire presentation. However, I thought it important for the committee to have this information. Perhaps we can discuss it with the questions afterwards. But if you look on page 3—this is about 10,000 responses—it identifies the high priorities for small and medium-sized enterprises, and you can see that Bill C-50 touches the top six.

Our immediate reaction to the budget is summarized in the report card we attached, which you also have in front of you. We'd be happy to answer the questions you might have on any of these issues, but I want to focus the rest of our presentation on the establishment of the Canada Employment Insurance Financing Board.

The overall message we are delivering today is that EI is a major concern for small and medium-sized enterprises, as you can see on page 3. They feel the EI system needs to be fixed because the rate-setting process is flawed; the EI surplus continues to grow; and the EI program does not address today's labour market needs. This concern is so high that we currently have over 20,000 of these action alerts signed by business owners sitting in our office right now. We'll be delivering them to HRSDC Minister Solberg in a couple of weeks and we'll deliver them to each MP in a little while too.

As you can see on page 4, of all the various taxes a business must pay, business owners identify payroll taxes like EI affecting the growth of their businesses the most. The graph on page 5 shows that reducing taxes and EI premiums allows business owners to increase wages, hire additional employees, and provide more training. Page 6 shows that our members, 74%, feel a good first step to fixing EI is to move the account from general government revenues to a separate fund. They also think there's a need to improve the management and governance of the EI account. Currently, only one-third of our members are satisfied with the federal government's approach to managing EI, as you can see on page 7. They believe EI premiums should be used exclusively for EI purposes.

Having said that, CFIB supports the creation of the Canada Employment Insurance Financing Board. The rate-setting mechanism has been improved, while still retaining some of the positive aspects, such as a fixed date, November 14, to publicly announce the new premium rate, and limits to ensure rates do not fluctuate wildly from year to year.

We are very pleased that the EI operational surplus will no longer flow back to general revenues. The new reporting mechanism should ensure accountability and transparency. However, we do have some concerns and issues that should be addressed. For example, will there be significant operating costs that employers' and employees' premiums must cover? Will this be a truly arm's-length board, or will it be a partisan board, with members changing as political parties are newly elected? Will this board be able to address the issues of hundreds of millions of dollars paid by employers with EI over-contributions, an issue that's a high priority for our members, as you can see on page 8?

We are also concerned that the new system will create pressure to increase rates rather than to decrease rates because of the administrative costs and the limited EI surplus provided on top of the annual increase in the maximum weekly insurable earnings.

Finally, we're concerned that employers and employees must bear the risk of paying for economic downturns after having built up a $54-billion surplus. It's shameful and unfair. At the very least, the federal government should cover off any future shortfall on the EI account, if the need arises. However, it is a good first step to fixing EI.

We agree that the Canada Employment Insurance Financing Board should not be involved in EI policy and programs, but that is where there's a dire need to fix EI. The EI system is failing. It does not address employers' needs.

In 2006, only 44% of EI premiums were spent on regular benefits, as you can see on page 11. The vast majority of the over 9,000 business respondents to the survey--on page 12--were unaware of, or did not use, EI programs such as the labour market partnerships, self-employment assistance, job creation partnerships, and employment assistance services.

It's not fair that business, especially small business owners, continue to pay 60% of the EI premiums. The rate should be gradually moved to a 50-50 split, or 40-40-20 split for premiums, where government pays 20%.

Finally, the EI system needs to be fixed because it does not address today's labour market needs. With the aging population, many companies are begging for employees. The graph on page 14 clearly shows that as the unemployment rate decreased over the past decade our members' concern with the shortage of qualified labour has increased dramatically. This is not a coincidence. Both are linked to a demographic trend caused by an aging workforce.

The shortfall of qualified labour has steadily increased, and it is expected to increase over many years to come. In March of this year, CFIB released its “Help Wanted” report. The report looked at the long-term vacancy rate. As you can see on page 15, the long-term vacancy rate has almost doubled since we first did the study in 2004. Our study found that a 4.4% long-term vacancy rate meant there would be an estimated 309,000 long-term vacancies last year. Page 16 shows that there were long-term vacancies in every province, and page 17 shows that, not surprisingly, our members have told us it's getting harder and harder to find employees for the future.

Canada needs a long-term comprehensive strategy to deal with the labour shortage challenge. CFIB has been working with the provincial and federal governments in several areas to deal with this critical issue, such as education and training, apprenticeship programs, co-op education, business succession, and immigration strategies. However, EI policy is one area where little has been done.

EI policy can play a significant role in either alleviating or exacerbating the labour shortage issue. We are concerned that the current EI program is hindering rather than helping employers and employees deal with the labour shortage issue. As you can see on page 18, one out of five employers stated they had difficulty hiring people because some people would rather stay on EI benefits. In some provinces the people who would rather stay on EI are close to 40%.

We need to fix EI so it better meets the needs of employees and employers. It's too important a program to leave in its current state for another 15 years. The creation of the Canada Employment Insurance Financing Board is a good first step, but more needs to be done in the near future.

Thank you, Mr. Chair.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to our last presenter. We have the Canadian Manufacturers and Exporters of Quebec, Jean-Luc Trahan.

The floor is yours. Thank you for coming.

[Jean-Luc Trahan, President and Chief Executive Officer, Canadian Manufacturers and Exporters of Quebec]

Thank you, Mr. Chair, and thank you, members of the Standing Committee on Finance.

Allow me to introduce myself. My name is Jean-Luc Trahan, I am the President and Chief Executive Officer of the Canadian Manufacturers and Exporters of Quebec. I'm accompanied of Mr. Robert Davis, who is the Vice-President of Research, Analysis and Government Affairs.

We are pleased to share our observation about the budget tabled by the government this past February. We'd also like to share with you our assessment of the situation prevailing in the manufacturing sector in Quebec.

The mission of the Canadian Manufacturers and Exporters of Quebec is to enhance competitiveness within the industry and stimulate export growth. The manufacturing sector represents 10,000 companies that generate approximately 20% of Quebec's GDP and employ more than 550,000 people. The industry conducts 75% of private research and development activities and accounts for 86% of Quebec exports.

The five major challenges export manufacturers are facing, not only in Quebec but throughout Canada, are the following: finding ways to make ongoing improvements to manufacturing companies' productivity and global competitiveness; improving access to world markets; advocating the application of a more competitive tax system and flexible regulatory regime; developing the skills of employees of the manufacturing sector; and lastly, intensifying the shift towards sustainable development and the use of clean and efficient energy.

We are in a situation that we describe as a perfect storm. In the manufacturing sector this perfect storm can be explained by four factors: first, the rapidly rising Canadian dollar; second, a strong increase in energy costs; third, the intensification of globalization; and finally, the economic slow-down in the U.S. economy.

The demands we are submitting to the government are based on the Rajotte report released in February 2007, and can be summarized in eight points.

Firstly, the two-year capital cost allowance on investment in manufacturing and processing equipment should be extended to five years; secondly,

consider measures to monetize tax losses or to monetize depreciation if companies are in a loss position;

thirdly, harmonize provincial sales taxes with the GST; fourthly, improve the tax credit system for R&D; fifth, grant tax credits to employers for training and reduce employment insurance premiums accordingly ; sixth, organize a conference of provincial premiers and the federal minister to discuss problems arising from globalization; seventh, support the creation of a trade agreement with the European Union; lastly, provide financial support to associations such as ours whose mission is to provide concrete assistance to manufacturers in helping them become more competitive and productive.

Our biggest disappointment in this budget is the new measure concerning accelerated depreciation. Manufacturing made it clear to the government that the two-year write-off for investment in manufacturing and processing equipment, introduced in last year's budget, had to be extended for five years to give companies time to make investment decisions, to customize equipment, and to meet regulatory approval. Manufacturers are under the gun to innovate, and this measure basically takes us back to where we started.

A one-year extension at current levels doesn't fit into the business planning cycle for Canadian companies, so many hard-pressed businesses won't be able to take advantage of this. The timeframe proposed by the government in this year's budget is simply too narrow to allow manufacturers to take advantage of this measure. Companies must respond to a capital planning process that, in some cases, will require several months for determining capital allocation and the most attractive or competitive investment opportunities. Many manufacturers rely on customized machinery and equipment for their operations. Lead times for equipment suppliers are lengthy. And additional time is required to install the equipment and train workers in time to bring the equipment into full operation.

Our association now also proposes a recommendation for improving the SR&ED program, including the need to make tax credits refundable. In doing so, the benefit of the tax credit should be extended to companies operating in Canada that, because they suffer a decrease in profit, are forced to invest their own funds in R and D before they make a profit.

Lastly, the association had recommended to the government that it grant a 15% tax credit on investment to help to maintain and develop skills. The credit would also serve to reduce employment insurance contributions made by the employer.

Our association supports the implementation of recommendations put forward by the Standing Committee on Industry, Science and Technology; those recommendations are supported by the members of this committee.

The budget does not meet the expectations of manufacturers, and corporate tax cuts are not sufficient to allow manufacturers to make the necessary investments in manufacturing technology, innovation and skills development. Canada is lagging behind other countries in this regard.

It is essential that manufacturers are able fight on a level playing field in international markets.

We have referred to certain measures put in place by the federal government as unveiled in the economic statement of October 30, 2007, and the budget speech of February 26, 2008.

The reduction of the business tax rate was an important step that would allow Canada to maintain internal private investment levels and to continue to attract foreign investment.

On February 26, 2008, we also applauded the responsibility and prudence demonstrated by the Minister of Finance, who chose to not significantly increase the pace of government expenditures. We also recognized the benefits of the Community Development Trust, and pointed out that the federal government had acknowledged the changes that the Canadian manufacturing sector is facing, particularly single industry communities in Quebec and the rest of Canada that are feeling the strain of highly turbulent and competitive times.

However, in all of these cases, we signaled that the government should have completed these efforts with measures targeted specifically to the manufacturing sector, in keeping with the actions of the Quebec and Ontario governments. The association believes that measures announced to date are a step in the right direction, but we described them as insufficient, and continue to believe that.

In addition to alleviating the tax burden, the Government of Quebec adopted another approach, that of concretely supporting the manufacturing sector to stimulate productivity and increase competitiveness.

Over the course of the last 18 months, the Government of Quebec has suggested specific initiatives tailored to the manufacturing sector in an effort to stimulate innovation, increase productivity, spur investment, support the development of new markets, make up for the lack of liquidity of manufacturing companies, encourage the development of manufacturing workers' skills, and strengthen the financing capacity of specialized investment funds.

We believe that these measures are indeed positive for our sector, as can be supported by recent statistics on the economic outlook, as prepared by Statistics Canada. On May 14, Statistics Canada reported that Quebec's productivity increased by 1.5% in 2005, at a rate in excess of the national average. The Statistics Canada study shows that Quebec's manufacturing productivity increased by 3.2%, double the figure recorded in 2006.

Things are not good in Quebec. There is a reason for this. We believe that the Quebec government's openness toward the sector, and the approach of Premier Jean Charest and his minister Raymond Bachand, have had a positive impact on the situation.

Our governments must take action, because other OECD countries are focusing efforts on their respective manufacturing sectors. For instance, simply look at the actions of the Department of Trade and Industry in England, and the Agence française pour les investissements internationaux in France.

Our manufacturers are fighters and winners. They are firmly resolved to fight; but to win, they need certain essential conditions, and the assurance that the rules of competition are being followed, so that they can confront foreign manufacturers on an equal footing.

The Government of Canada must play an active role as a partner of the Canadian manufacturing sector and support the industry with structural and economic measures.

We also want to inform members of this committee about the support to non-profit organizations dedicated to economic development by the Economic Development Agency of Canada for the regions of Quebec.

Several organizations such as ours have had their funding cut back by the Economic Development Agency of Canada. In Quebec, the Association of Manufacturers, along with others, plays a significant role in economic development. We must be taken into account.

Thank you for your attention, and we would welcome your questions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll start our first round of questioning. We have seven minutes, and we'll start with Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

Thank you, witnesses.

I'll direct my comments first of all to Mr. Whyte and then Mr. Trahan and Mr. Weir with respect to this proposed EI board.

It strikes me as a bit of a half-pregnant solution. For those who argue EI should be segregated from consolidated revenue and set up under its own board and in effect act at arm's length from government, there is a step in that direction. But they've only funded the board to the tune of about $2 billion, while the actuaries say it needs to be funded to the tune of about $15 billion so that it doesn't act as a counter-cyclical measure on the economy.

So I'd be interested in your thoughts on this proposal, because on the face of it the proposal appears to be attractive. Mr. Whyte, you in particular express some enthusiasm for the proposal. But I'd suggest to you that in fact it may be counter-productive to some of the other things you have on your check list, particularly on down economic times when the government or the board in particular is going to have to raise its premiums in order to be able to maintain its $2 billion surplus. So the only place the premiums are going to come from is the people you represent, and they're going to be really unhappy campers if in fact the economy is going down. Their businesses are under pressure, as are Mr. Trahan's companies under pressure, as are Mr. Weir's on the other side of the equation, and yet those premiums are going to have to go up in order to be able to maintain what many argue is an insufficient level of reserves. I'd be interested in your comments.

[Garth Whyte]

I agree with you, and I said it in my commentary. But that was the same case when it wasn't a separate fund, because the surplus—as the government of the day and the government before it said—was gone, so if we were ever going to go into a deficit the option was to increase premiums. We're in it anyway. So the first step is to shut off the tap and quit building on the $54 billion surplus. That's the first step. You're right. Half of it's done.

The second issue I think all of us brought up was whether $2 billion is enough to put into the surplus. No, it isn't, even though if you look at the chart we have based on the annual reports, the lowest—and I remember this clearly—it went was a $6-billion deficit, and times are changing and we do have a shortage of qualified labour. The EI rate is going down as we continue to stay at those levels.

Having said that, we don't know if $2 billion is enough. We'll have to see, but I think it should continue to be topped up by government. Employees and employers should not have to pay any increases whatsoever until we get this fund in shape.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So would you propose that in fact instead of consolidated revenue transferring $2 billion, it would transfer $15 billion out of the so-called $54-billion notional surplus?

[Garth Whyte]

I don't know if we can do that. I don't know if we can transfer it, because I don't think our members will support now going into a deficit situation to put $15 billion back into the account.

However, in a—

[John McKay, Liberal, Scarborough—Guildwood, ON]

In effect, you can't have it both ways.

[Garth Whyte]

It's done, but at the same time as the surplus builds up, some of that surplus money should go into the fund or the government should guarantee with a zero interest loan to make sure it doesn't go into a deficit situation.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So if there were a surplus on an annual basis above $2 billion, you wouldn't propose sending it back to the consolidated revenue fund.

[Garth Whyte]

I wouldn't, but I have a concern, and this is where I would like to work with the committee, because I don't have the full answer. But we have worked with workers compensation boards before, and there will be a bias by the board to increase premiums not to reduce them, because if you and I are board members we want to make sure it doesn't get below that $2 billion threshold, and it's going to be very difficult for them. So there will be a bias to still build up that surplus. The difference is at least it stays in the EI account.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I just want to let Mr. Weir and Mr. Trahan in on the conversation.

[The Chair, Conservative, Rob Merrifield]

Ms. Reynolds wants to answer as well. You may not be able to see her from where you're sitting.

Go ahead, Ms. Reynolds.

[Joyce Reynolds]

Garth mentioned that the $6 billion was the largest deficit—and that was back in the early nineties—but you have to remember that the buildup happened between 1990 and the beginning of 1993, and the government before that paid 15% to 20% of the cost of EI until 1990. So when that government funding was removed, it certainly contributed to that $6 billion deficit. And as Garth said, I think times have changed remarkably since then.

I also think that all of the employer and employee associations are going to be beating down the government's door to transfer more money to that account if we run into a prolonged and severe recession. Right now, with the 15¢ maximum reduction or increase, there is some protection against—

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's going to take a long time to build it up to the necessary amount, though, at 15¢ a head. It's going to take a while.

I'll just go to Mr. Weir.

[Erin Weir]

I certainly agree with the question. Essentially what the government has proposed to do is to create a separate fund for employment insurance, but to take all the money out of it. The $2 billion is far less than the accumulated surplus of $54 billion in the employment insurance account. As you said, it's also far less than the $10 billion or $15 billion that the actuaries say is needed to maintain the program in a recession without premium increases.

In response to that, Mr. Whyte suggested in part that at least what's being proposed is no worse than the status quo. But I would quibble with that a little bit. The former government's position when employment insurance was part of general revenues was that if there ever were a deficit in the fund, it would be backstopped with general revenues. My concern is that now that it's being hived off from general revenues into this completely separate entity, the government may be abandoning its commitment to backstop the fund and to make sure that benefits continue without premium increases during a recession. So things could actually be getting worse as a result of the changes in Bill C-50.

I'd like to see, at the very least, the bill amended to ensure that the government continues to maintain its commitment to providing employment insurance benefits in the event of a downturn without raising premiums.

[The Chair, Conservative, Rob Merrifield]

Mr. Trahan.