Herb Grubel

[The Budget, February 15th, 1994]

Mr. Speaker, my question is for the Minister of Finance.

The minister stated in the House that in the next budget he will reduce the tax allowance for business meals for the sake of greater equity. The best estimates are that this change in the tax code endangers 24,000 jobs in the restaurant industry.

Would the minister please explain to the people of Canada and to the workers in this industry how the likely effects of his proposed tax measures are consistent with his party's campaign slogan jobs, jobs, jobs?

[supply, February 11th, 1994]

Mr. Speaker, it is obvious that I would never say that all of the programs of CIDA are failures, having been involved as deeply as I was in the CIDA project. It would be condemning what I have done. I may be foolish, but not that foolish.

I am also glad to hear that the hon. member had such a great feeling of being a proud Canadian when he walked by a project financed by us. The question that is being raised by my constituents, by people around the country and that the Auditor's report reflects is in this period of financial difficulty can we afford to pay money so that this gentleman can feel good about walking past a garden that was financed by our money? That is the question.

I also would like the hon. member to notice that I was very statesman-like in this report of mine. I did not do what the media loves to do and pick on individual bad projects. That is cheap. I did not do that. We ought to approach this in an objective way. It was approached by the Auditor General in an objective way. He did a tremendous amount of research to evaluate these projects.

The fact is that we spent $3 billion and he is getting again and again from those people who ask objective questions that they do not believe they are getting their money's worth, that there is too much bureaucracy and making sure that bureaucrats do not get caught doing anything wrong rather than looking to see if they are achieving the right thing.

I did not say all are doing it. The auditor said that this is characteristic of the program. I believe and go along with the auditor, as the Reform Party does, that one way to improve the quality of what CIDA does, one way to raise the quality, which is undoubtedly quite high, is for the people running CIDA from the minister downward to be more responsive to this House.

[supply, February 11th, 1994]

Mr. Speaker, the Auditor General noted last year that CIDA, the Canadian International Development Agency, spent about $3 billion. It has spent similar amounts during the last 25 years of its mandate. Bangladesh alone has received over $2 billion over the last 25 years. The Auditor General notes that the people of Canada are asking whether this money has been spent wisely and whether they are getting a good return on their taxes.

I have a weak spot in my heart for CIDA. In 1978 I lectured and did research at the University of Nairobi in Kenya. My salary and my family's moving expenses were paid by CIDA through the University of Alberta which administered the program of technical assistance under a contract from CIDA. My housing expenses in Nairobi were met by the Government of Kenya.

My personal experience illustrates some of the difficulties which the Auditor General found to exist with CIDA programs more generally.

CIDA had a very tight control over the design and delivery of the technical aid program or what might be called the input. The University of Alberta had worked closely with the University of Nairobi and the Government of Kenya in the determination of the role which Canadian professors would play in the teaching program and development of an effective business curriculum. There was also much care taken in establishing my suitability for the task in preparing me for the problems I was likely to encounter.

As many critics, in particular the Nielsen task force report of government spending programs, have noted, input control and accountability are the easy parts. The difficult part is showing that spending has achieved specified goals and that the investment has yielded the expected rate of return. Let me illustrate the problem, again by reference to my own experience.

I look proudly back on the services I delivered in Nairobi. There were the large courses I taught, the research papers I wrote and published, the students and faculty I induced to go on

to graduate work at my university and the influence I have had on the public discussion of the government's economic policies, including an invited lecture at the School for Kenyan Civil Servants.

What I do not know and what has plagued me ever since my experience is whether the positive things I accomplished were worth the money Canadian taxpayers invested in the project. I do not know that I or anyone else could make such a calculation, even with large resources and the best of will. Nielsen noted that the inability to do so is exactly at the heart of the problems which many Canadians have with their government.

However, as Nielsen and the Auditor General noted, not all government programs have non-measurable outputs. Roads, water works, factories and other tangible projects fall into this category. It is with these that the Auditor General has found particular problems. The most important of these, repeated a number of times in the chapter, is that some have been undertaken at great cost and have failed to deliver the expected benefits because the host government did not have the resources to continue its operation or even maintain the physical structure. I personally have seen roads built with foreign aid deteriorating at alarming rates and some ending in the middle of a desert.

Reform supports the Auditor General's request that CIDA engage in a systematic assessment of the availability of local support funds before it commits Canadian resources to any project. In addition CIDA should be required to report to Parliament the results of its efforts in this direction and in following up the use to which the projects have been put.

Reform also hopes that the government will follow up on the Auditor General's most basic recommendation: that the minister in question is accountable for measuring and reporting on the results of CIDA's programs. Reform would push for this recommendation further and urge that Parliament have greater involvement through consultation and debate over CIDA's budget.

The Auditor General's report identifies a large number of issues which are of a fundamental nature and that lend themselves to such a debate without interfering with the agency's efficiency in its day to day operations.

I recommend to hon. members a reading of this chapter. One of the issues raised by the Auditor General concerns the fact that historically CIDA has given aid to many countries. He and his consultants have agreed that this approach should be changed and that spending should concentrate instead on a limited number of specific countries. Parliament can make valuable contributions to the solution of these matters.

Another important issue identified by the Auditor General is the conflicting nature of some of the most important mandates of the agency. Thus it is required to help the poor directly but also increase the productive capacity of the poor. These two objectives involve an irreconcilable conflict. Food aid keeps down the prices of agricultural products and discourages local production. It creates dependence.

It is ironic that the exact same problems face domestic Canadian spending on social programs and the interprovincial equalization program extended through Bill C-3. I discussed these problems and offered possible solutions the first two times I spoke in this House.

The proposals of the Minister of Human Resources Development for the redesign of domestic social programs will be discussed by Parliament. So should the CIDA programs and mandates. In this context there would undoubtedly be an evaluation of the Auditor General's view that programs in some countries lack coherence, that they use an inadequate knowledge base and may have failed to review development effort in the light of recent changes in the understanding of the nature of the basic development process.

In the evaluation of the CIDA spending in Bangladesh the Auditor General noted that the country's structural weaknesses make self-reliant development very difficult. I wonder whether this assessment is a code for one of the ideas advanced by some students of development aid, namely, that aid should be made conditional upon the receiving country making structural changes that support the development process such as freeing of markets and prices, the protection of property rights and the introduction of democracy. Certainly this topic would be one on which many members of Parliament would want to have an input.

One of the criticisms of the Auditor General is that CIDA is overregulated and suffers from the widespread bureaucratic disease which makes staff more concerned about following a risk minimizing process for spending money than in getting good results. These are almost the verbatim words of the Auditor General. He believes this state of affairs should be changed by making the management staff and process simpler and more transparent and focused on goals identified in co-operation with recipient countries.

In addition, CIDA should adopt a learning culture and devote more effort to the identification of problems that develop while projects are under way. The Auditor General believes that such a change will be forced on CIDA by making its staff, management and ministers explicitly and directly accountable to Parliament and through it to the general public whose taxes finance its operation.

Reform agrees with this assessment made by the Auditor General. It urges the government to force CIDA into becoming more responsive to Parliament, not only in its day to day operations but in setting goals and processes for the selection

and evaluation of its programs. The people of Canada deserve no less.

[Federal-Provincial Fiscal Arrangements And Federal Post-Secondary Education And Health Contributions Act, February 9th, 1994]

Madam Speaker, I am pleased to hear probably for the 15th time now that hon. members from the Bloc are insisting that we hear repeatedly the story that Quebec is getting a raw deal in the extent to which it is sending money to Ottawa and the extent to which it is receiving money. I really have no more comment to make on this. It is a very complicated issue and that is why there is a dispute over the merit of this case.

However on the substance of what I tried to say, I would point out that if in the 1960s we had not retarded the incentive for outward migration from some of the outward lying regions of Canada, the process which had gone on for the preceding 50 or 60 years would have continued.

The hon. member is an economist and realizes there would have been increased capital per worker and increased natural resources per worker remaining behind. Therefore the incomes would have gone up. Maybe more resources would have been discovered. Then outward migration would have slowed down. In the end we would have had a solution making everyone happy, those who were moving as well as those remaining behind.

We have destroyed this welfare maximizing process through our programs and I urge that they be re-examined.

[Federal-Provincial Fiscal Arrangements And Federal Post-Secondary Education And Health Contributions Act, February 9th, 1994]

Madam Speaker, I welcome the opportunity to respond to some of the points the hon. member has made. I do not obviously know all the reasoning behind the statements made by my colleagues, but I can attempt to give an answer.

The people of my riding are reacting to the fact that a province like Manitoba which according to Statistics Canada has a higher per capita income than Saskatchewan receives more per capita in transfers than Saskatchewan. This simply does not make any sense to people who are no experts in this complicated formula the Prime Minister referred to.

Using the same idea with respect to Quebec, 47 per cent of the benefits are going to Quebec. It has 60 per cent of the population. I am sure the hon. member would like to look at the statistics in light of the per capita income. The per capita incomes of that 40 per cent of the population receiving transfers is way below those of Quebec.

This has to be seen in the light of the complicated formula but also using some intuition. The income of Quebec is only fractionally below that of the average. That is why it is receiving this money. The statement about 47 per cent of the total transfer going to Quebec was not made in any disparaging way. It was made, as far as I remember, in response to a challenge that Quebec is not benefiting from this program.

My constituents certainly are asking why a province with such a high income is receiving 47 per cent, even though it has 60 per cent. This is the formula but I am returning to the point that the hon. member had made on how difficult all this is to understand.

I apologize about the third point that somebody said transfer payments should be reduced. I do not know who said that and in what context. I do not really wish to presume that I could answer that question for the hon. member.

[Federal-Provincial Fiscal Arrangements And Federal Post-Secondary Education And Health Contributions Act, February 9th, 1994]

Madam Speaker, the Reform Party supports the principle of Bill C-3 as was noted by the two Reformers who spoke on the subject before me. Reformers, as well my constituents, believe that it is important to preserve and cultivate the humanitarian instincts of Canadians that drive us to want to help those who find themselves in financial or other difficulties.

My two colleagues have noted two criticisms of Bill C-3. One is its planned increases in the level of transfers while the government is beset by very serious financial problems. All spending needs to be curtailed. Interprovincial equalization payments ought not to be exempted.

The second criticism was that the government has been carrying the principle of equalization too far. If Bill C-3 does what it is designed to do there is no need to use other spending programs to favour provinces with low income and taxation capacity.

These two objections to Bill C-3 are valid. I would like to add an additional one which involves the very nature of the equalization program as it functions now. My criticism is based on my academic research and understanding of the problems which are caused by subsidy programs of all sorts. It is also based on messages which I have received from my constituents.

Finally I should note that the criticism is based on the same kind of reasoning which underlies the recently announced government review of all social programs in Canada. These programs have failed to deliver on the promise which underlies their design. They have blunted incentives, increased unemployment, trapped people in poverty and made them dependent upon government support. These are almost identical words to those used by the Minister of Human Resources Development in the House.

In addition, the programs, not the innocent victims who have reacted to the incentives created by the government, have contributed much to the present fiscal crisis of the country. I believe the compassionate people of Canada are fully in favour of helping others who have fallen on hard times. However, many Canadians have told me they also insist their aid be conditional upon efforts being made by the unfortunate to change their own lot. Some, like those with permanent handicaps, cannot and are not expected to do so. For those the support is happily given on a permanent basis. For others, however, the aid must be limited and conditional.

It is well known that the interprovincial system of equalization payments was designed to create greater equality. However, when the program was designed it was hoped that such transfers would be temporary because the federal government simultaneously started a substantial program for regional economic development.

Since the beginning, regional economic development programs have been beset by difficulties. There have been experiments with a variety of models and with locating responsibility for their administration in different ministries.

During the 1980s I was the academic director of a research project on the Canadian service industries undertaken by the Fraser Institute and financed by what was then the department of regional industrial expansion. One of the prime motives for the study had been the realization that the spending of billions of dollars on infrastructure and megaprojects, as well as direct subsidies to industry, had not narrowed the income gaps between the have and the have not provinces.

The fact that over 70 per cent of all Canadians are working in the service sector had awakened interest in the possibility that perhaps more development per dollar could be obtained by support of service industry projects than the traditional investment in structures and machinery.

I mention this study of the service industries to illustrate the problems which regional development programs have encountered, problems which in the view of many have been so severe they made the programs an almost complete failure. The reasons for this failure are quite clear now.

Historically regional disparities in income in Canada and all industrial countries of the world were due to different endowments with natural resources. The maritimes enjoyed one of the highest levels of income in Canada at a time when rich fisheries and coal were the primary base of the income of people and regions. Later the fertile plains of the prairies gave that region one of the highest incomes in the country.

For at least the last 70 years, however, the wealth of nations has been increasingly based on the accumulation of human and knowledge capital rather than natural resources.

Just look at the per capita income of Singapore and Hong Kong, tiny geographic regions with zero natural resources. Singapore does not even have enough water for its people. Some estimates suggest that as much as 60 per cent to 70 per cent of the wealth of modern industrial states consists of such intangible human and knowledge capital.

Unfortunately for regional development prospects, human and knowledge capital are most productive only in large population centres, where the so-called agglomeration economies generate the high productivity that underlies high personal incomes. In these centres, the proximity of people lowers transportation and communication costs, allows increased specialization and creates other productivity increasing benefits like competition in markets for labour and goods and services.

For this reason, in Canada and all industrial countries, megacities with high population densities have the highest incomes and outlying areas are further behind the more remote they are from the urban centres.

According to this view of the role of human and knowledge capital and the economics of agglomeration, the solution to regional income inequalities lies in the movement of people from outlying areas to the centre. Such movement, which in Canada until the 1960s had been gradual and low cost, permitted higher incomes to be earned by the migrants and, more important, it raised the income of those remaining behind.

Just imagine incomes in the fishing industries in the maritimes or the farm sector in the prairies if the population of these regions were perhaps half its present level. The adoption of the best production technology, regardless of the effect on employment, would permit the smaller number of workers in these industries to enjoy higher levels of productivity and income. No one knows at what population levels emigration would have ceased. It is clear that eventually it would have equalized incomes in the centres and outlying regions, where income is broadly defined to include such intangibles as the quality of rural life and the cost of congestion in cities.

The tragedy of many post-war government policies for Canada was that they disregarded the decreasing role of natural resource wealth in the increasing role of human capital and cities in economic development.

The income equalization program being extended by Bill C-3, the regional development programs and the payment of unemployment insurance benefits to workers in seasonal industries like fishing have severely retarded outward migration from remote regions with low incomes. The natural adjustment which market forces were generating gradually were short-circuited by these policies.

The policies undoubtedly were well intentioned but basically flawed, unfortunately. They have had several unfortunate effects. To finance the transfers and fruitless development efforts in the outlying regions the productive areas had to be taxed more heavily. Extra payroll taxes going to the unemployment insurance funds have raised labour costs and discouraged employment.

The disincentive effects of such taxation on investment, work and risk taking retarded the growth in the entire country's income and wealth. The lower rates of economic growth which started more or less with the initiation of these regional assistance programs in turn retarded the increase in government tax revenue. They therefore contributed significantly to the financial crisis and the need for the redesign of social programs that will be discussed in the House in upcoming months.

Equally unfortunate has been the impact of the policies on the people in the outlying regions. I find it most distressing to see videos of workers in the maritime fishing industries and of farmers in the prairies who have lost their jobs and are afraid of losing their homes and possessions. Perhaps more important, as the Prime Minister kept noting during the election campaign, these people have lost their dignity. They have become dependent upon government handouts, the generosity of the House.

The predicament which these people find themselves in is not of their own making. They are the victims who simply have acted rationally in their response to the incentives created by government policies.

These people deserve better. They deserve that the government and this House initiate a review of the existing programs for regional assistance and development. The government has already announced plans for a major review and redesign of social programs affecting individuals. Regional assistance and development programs should be included explicitly in such a review.

I have my own views on the insights which such a review might produce. Abstracting from all political considerations, Canada needs to restore market incentives for migration, the only fundamental and lasting solution to the problem of regional inequalities that does not also create dependence and a loss of dignity. To create these incentives all present forms of regional transfers must be phased out. Such phasing out should be gradual but certain.

In place of current programs we need to have programs that are both economically efficient as well as consistent with the compassionate nature of Canadian society. Financial transfers to regions and provincial governments must be limited to situations where incomes are reduced to events beyond the control of those affected.

Outstanding examples are the disappearance of fish stocks, bad harvests or low world prices for certain products. The payments must be limited to the duration of temporary adverse influences on incomes. In the case where incomes are lowered by permanent changes in conditions, financial support must be conditional upon the adoption of policies that bring about real adjustment to the new environment.

People who are asked to make payments to help others should have a right in deciding on how this money is being spent. Many people believe the proposed characteristics of regional assistance programs must also be incorporated into social programs serving individual Canadians if the country ever wishes to restore the government's fiscal health and at the same time maintain a sound social security net for those in genuine need. They also agree that the sooner such a review is accomplished and acted upon, the better.

For these reasons I recommend that the government append Bill C-3 to mandate such a review. In addition I recommend that the government send a message to the recipients of the equalization payments suggesting that future transfers will be made conditional upon real adjustment needed to equalize regional productivity and income.

[Pre-Budget Consultations, February 1st, 1994]

Mr. Speaker, I appreciate the rhetoric that I received from the distinguished member who just spoke.

The Governor of the Bank of Canada did not very happily raise the interest rate. He was forced into raising the interest rate because of developments in the world and because of pending inflation.

There is simply no way in which a government or a private corporation can sell its obligations in an environment of inflation and charge a low interest rate. It is now a well established fact among those who are economically literate that if we have inflation we will have high interest rates, otherwise nobody will lend money.

I think we should see the episode of high interest rates in the early 1980s as part of that process.

I would like to respond to the member's notion that high marginal tax rates would be an equitable thing to do and that there is no distinction between taking back or not paying out in the first place social program spending transfers. High marginal tax rates throughout the world have been shown to generate disincentives which feed back on the welfare of the entire society. That is why universally throughout the world high marginal tax rates were removed. In fact, in many countries when the marginal tax rates were lowered total revenue was increased because effort and attempts to hide income disappeared.

When I asked a student who came to me the other day what he would do after he graduated, he said: "I will move to the tax haven, Seattle". This is what our distinguished member will have to remember, unless he is prepared to close the borders from Canada, if he imposes very high marginal tax rates on Canadian citizens. They, especially those who are productive, original and entrepreneurial, will go to where they do not have to pay these high taxes. One might say good riddance, but I can tell the hon. member it will not be in the interests of Canadians that these young entrepreneurs, the originators of small business stimulation, the innovators will go to where the tax rates are lower.

[Pre-Budget Consultations, February 1st, 1994]

Mr. Speaker, as an economist I know most of the jokes about my profession. If you laid all of us end to end there would be no agreement. We never seem to hold the same opinion on anything.

Given the reputation it is amazing, however, how much agreement there was among the 42 economists whom the hon. Minister of Finance had assembled for some pre-budget advice in the middle of December. Of the 42 about 36 agreed on a number of points that I think are important to recall on the occasion of this House debate.

First, the budget deficit has three highly undesirable consequences that make lowering it one of the most important tasks facing this Parliament. Other speakers in this debate have presented or will present projections of recent trends and I will not repeat them here. Suffice it to note that since I started speaking about a minute ago the federal debt has increased by another $75,000.

One of the points made by the economy experts was that continuing deficits threaten the viability of our social programs. Under some reasonable assumptions by the fiscal year 2000 the interest on the then existing debt will take up 50 per cent of total government revenues as compared with the 31 per cent it will in 1993 and only 21 per cent it did in 1983.

As the hon. members of this House know, program spending has already been cut so much that future cuts will result in serious inefficiencies and public resentment. Therefore if the deficits continue, required increases in interest payments will have to come at the expense of social programs. It is precisely because of this threat to social programs that Reform continues to put so much emphasis on the need to eliminate the deficit.

The experts also noted that deficits raise the interest rate and therefore lower investment, economic growth and home construction. These effects are due to the fact that every year there is only a limited amount of savings generated by the economy. Lenders who use their money to buy government bonds cannot lend it to firms that want to build factories or to Canadians who want a mortgage to buy homes.

Future generations of Canadians will be hit by a double whammy: lower capital stocks and productivity, as well as tax burdens to pay the interest on the debt.

One of the most serious concerns expressed by the experts was that continuing deficits raise the probability of a financial crisis. We have all heard about the problems which face New Zealand, Sweden, Britain and Italy when international investors lost confidence in the ability of their governments to restrain deficits.

No one can predict what might set off such a crisis in Canada. The Minister of Finance's economic experts were almost unanimous in their judgment that the probability of such an event is increased the longer the deficit persists.

The second major point on which there was overwhelming agreement among the economic experts was that it will be impossible to eliminate the deficit without substantial spending cuts. An economic recovery cannot generate enough revenue to reduce a deficit to 3 per cent of GDP, no less eliminate it. The rate of economic growth required to achieve this goal simply is without historic precedent and virtually unachievable.

At the same time, it is clear that the deficit cannot be eliminated by higher taxation, either through higher rates or a broadening of the base. Any such attempt would further stimulate the growth of the underground economy or tax evasion and therefore is unlikely to raise sufficient revenue.

The third point of major agreement among the experts was that the deficit could not be eliminated by inflation. Until the 1970s, perhaps inflation could be used to depreciate the real value of government debt. However, in today's world of integrated and highly sophisticated capital markets neither national and especially not international lenders will buy Canadian bonds whose purchasing power is depreciated by inflation unless they are compensated by a corresponding increase in the interest rate.

It is easy to see what the public demand for such higher interest rates will do to the size of the deficit. Every one percentage point increase in the interest rate quickly translates into an increase of $5 billion in debt payments and therefore the deficit.

For this reason I hope that Gordon Thiessen, the new Governor of the Bank of Canada, will continue to pursue price stability in the tradition established by his predecessor, John Crow.

I should further note here that inflation also cannot be used to decrease unemployment and raise economic growth. The idea that this is possible represents a theory that was found invalid as a result of the experiences of the 1970s and later in Canada and elsewhere.

As the last point in my contribution today I would like to note that the economic experts assembled by the Minister of Finance offered a wide range of suggestions for spending cuts. However, none had so many supporters in principle as did the suggestion that spending cuts should be achieved through the so-called restructuring of social programs. To the best of my memory, only Michael Walker of the Fraser Institute elaborated on the term restructuring. Mr. Walker's suggestion was based, much like that of the Reform Party during the election campaign, on the realisation that vast amounts of government transfers go to families with high incomes.

Without further elaboration let me just note here that in 1992 families in the upper decile with incomes over $100,000 per year received $2.5 billion and $1.5 billion in UIC and old age security benefits, respectively. Similar large amounts were received by families with high incomes by any other standard.

From these facts follows a clear and precise definition of restructuring of social programs. It means the elimination of transfers to those who do not need them. Would the hon. members of this House please note this important point that needs repeating. In the Reform lexicon, restructuring of social programs does not mean reduction to payments to the poor. It means eliminating payments to those families that by a wide consensus do not need them.

During my election campaign the vast majority of high income earners I met expressed their willingness to forego their receipt of these benefits if other Canadians made similar sacrifices to balance the budget.

In summary, I remind the members of this House that finance minister's economic experts urge the government to take prompt action in eliminating the deficit with spending cuts, not tax increases or inflation, and that the spending cuts be achieved predominantly through a restructuring of social programs.

[Social Programs, January 31st, 1994]

Mr. Speaker, I am somewhat confused now by the minister's reply.

It was excellent rhetoric but did the hon. minister retract his earlier statement that there will be no cutting of costs?

[Social Programs, January 31st, 1994]

Mr. Speaker, my question is for the Minister of Human Resources Development and concerns his speech this morning.

In his speech, he received much applause from his caucus colleagues when he stated that his planned "redesign" of social policy is not a code word for "cutting costs".

Given that social programs take up the bulk of total program spending, how does the minister expect his government to reduce the deficit to 3 per cent of national income promised in the red book without cutting the costs of social spending?