Debates of Feb. 14th, 1995

Questions Passed As Orders For Returns

[Peter Milliken, Liberal, Parliamentary Secretary to Leader of the Government in the House of Commons]

I ask, Mr. Speaker, that the remaining questions be allowed to stand.

[The Deputy Speaker]

Shall the remaining questions stand?

[Some hon. members]

Agreed.

Supply

[Herb Grubel, Reform, Capilano—Howe Sound, BC]

moved:

That this House urge the government to respond to the demands of Canadians for decisive spending cuts and no net tax-increases to eliminate the deficit and to produce a smaller federal government.

Mr. Speaker, as one of Reform's co-critics for finance, I have the honour to lead today's debate of this resolution. I will discuss its importance by drawing on my background as an economist and a long time teacher of international finance courses.

A number of my colleagues later in the day will expand on the theme in the light of their roles as Reform critics of different ministries. All of our remarks reflect consultations with constit-

uents through personal and town hall meetings, electronic media consultations and the return of questionnaires.

As a preliminary, let me note that Reformers do not enjoy our role as advocates for spending cuts and a smaller government. The government's involvement in the affairs of Canadians is so pervasive that few of us, our families or friends will escape the effects of such cuts.

As a professor, I am personally concerned about their effects on higher education, my own future and that of my friends and colleagues. We all dislike it when changes in government policies force us to alter our habits and way of life. Reformers therefore appreciate very much the personal difficulties which these cuts will bring. We know these difficulties will seem puny in relation to those that will be forced upon Canadians if we do not get our fiscal house in order on our own terms.

Consider what may happen to the exchange rate, interest rates and Canada's foreign position if the forthcoming Liberal budget does not satisfy both Canadian and foreign investors. Investors sell Canadian government bonds and move their money into some other governments' bonds, be they American, German or Japanese. Such sales depress bond prices and increase interest rates, sending the Canadian dollar on a downward slide.

How far will these adverse developments go? No one knows. There is no doubt that at some interest rate high enough and exchange rate low enough, investors will once more purchase Canadian bonds and dollars and the slide will be halted.

It is often said that rationality or real economic values take a back seat to investors' mass hysteria during such speculative bubbles. Falling values create expectations of further falls. Investors rush to liquidate their holdings before they are worth even less. Some hope to buy them back once the bottom has been hit, expecting quick profits. Others are made to move their money into foreign assets which increase in value at the same time that Canadian asset values fall.

At some point a new class of speculators enters the fray. They hold no Canadian assets but sell Canadian dollars short at today's price in the expectation that they can deliver it a few days later at an even lower price.

Some domestic investors will borrow Canadian dollars and buy foreign currencies. The hot money ready to enter such speculation is so large that no country in the world, certainly not Canada, can stop the slide once it has gathered enough momentum.

Many can understand what goes on during such speculative bubbles. They are likely to have been caught in the fever of buying real estate, gold or similar investments in the past. They will remember how profitable it can be to participate in the exciting events and how difficult it is to resist the herd instinct.

We need only to look at the recent experience of Mexico during the last few months to appreciate what can happen to Canada. The Mexican peso depreciated by over 50 per cent against the U.S. and Canadian dollars before stability was restored and a slow recovery started. Interest rates went sky high.

Canadians had a foretaste of possible developments in the middle of January when a small speculative bubble hit the Canadian dollar. The interest and exchange rates moved by extraordinary amounts in a very short time.

In the case of both countries the dramatic interest and exchange rate changes were halted by the interventions of governments. They bought bonds and currency that were being dumped by investors. They used at first the dollar and gold reserves in the accounts of their own central banks. They then drew on credit with private banks, foreign central banks and international organizations that have been negotiated before. They then went, hat in hand, to arrange new lines of credit, asking other central banks to help them by buying their national currencies.

The Government of Mexico went down very far on this road of using ever more costly sources of intervention. It ended up arranging for huge direct loans and standby credits from foreign governments and international organizations.

The cost of such borrowing is now quite transparent and not just monetary. The U.S. Congress debated loan conditions and came very close to requiring Mexico to adopt very stringent policies.

The important thing is that such loan conditions would have represented an almost unprecedented interference in the domestic economic, social and foreign aid policies of an independent nation state. In the end, President Clinton avoided the imposition of such extreme conditions by the use of administrative devices which bypassed Congress.

It is not clear that Congress will let presidents use these devices in the future. The American people and their elected representatives are in a foul mood when it comes to bailing out foreign governments which have what they consider to be inappropriate social and economic policies.

Reformers are not willing to gamble on any of these eventualities. Our first objective as a country must be to never be placed in a predicament like that experienced by Mexico. We want to retain Canada's sovereignty over its economic and social policies.

In the middle of January Canada came very close to the point where we too had to go hat in hand to foreign lenders. As some put it, we came very close to hitting the wall. An economist who watched the tickers flashing interest rates and exchange rates

dropping by the minute suggested to me that the situation was saved this time by massive intervention of the G-7 central banks. He is worried that we may not be so lucky the next time or that we can escape really burdensome loan conditions.

The next time may well be in the wake of the upcoming budget, not immediately but when some other event upsets investors. That may be a few days, weeks or even months later.

Investors will look for four major policies in the budget. The finance minister had better not goof.

First, investors will look for tax increases. Individual Canadians oppose tax increases because they feel overtaxed and want a smaller government for understandable personal reasons. Investors would interpret tax increases as a signal that the government does not have the courage to make the spending cuts needed to eliminate the deficit.

Higher taxes mean eventually a bigger government, one which during the last 30 years has grown but has not solved and instead has increased the problems of slow economic growth, increased poverty and unemployment, the breakup of families and which to boot, has created frighteningly large and persistent deficits. It is big government which has created among Canadians the pervasive sense that their and their children's lives are getting worse, not better.

Second, investors will look for cuts to social spending. Social spending programs broadly defined use about $70 billion or 60 per cent of the federal program spending of $120 billion. The current deficit of $38 billion cannot possibly be eliminated through cuts in non-social spending even in the face of rapid growth in revenue during the current boom without a threat to essential efficiency increasing government services.

Past governments have lacked the courage to tackle social spending. That is why the fiscal situation has deteriorated to the present cliffhanger. I predict very confidently that if the upcoming budget does not contain hard-nosed cuts to social spending, investors will be very unhappy. They will point with some justification to a lost opportunity since most Canadians are ready for such cuts.

In addition, it is now official. The OECD noted in a recent report that Canada's social programs are an outstanding example of excessive generosity.

Third, investors will look for a plan for the complete elimination of the deficit during the current economic boom. The Liberal red book target of $25 billion two years from now has been criticized roundly by many experts. It implies an increase in the federal debt by $100 billion or 20 per cent of the $500 billion during the first years of Liberal rule.

Like the Conservatives during the 1980s, the Liberals will find that the debt will cease to grow as a percentage of national income during the upswing if they achieve their deficit target. But this is a hollow victory because the cause of the debt will resume the moment the economy slows down again as inevitably it will.

Predictions are that this may well happen before the end of the present election cycle. Few expect decisive spending cuts during the last two years before the next election. Therefore, one of the crucial aspects of the budget that investors will study is whether and by how much spending cuts go beyond the $25 billion deficit target in two years.

They will also look for further plans for deficit reduction beyond the last fiscal year covered in the budget. Will the Minister of Finance have the backing of cabinet and the Prime Minister to plan for further cuts in the future?

Fourth, I believe that investors will look to the budget for one other important subject. They will look for evidence that the government has accepted certain radically different ideas about the causes of unemployment which have moved out of conservative think tanks and are now discussed freely by the Auditor General, the OECD and many academics.

According to these ideas Canada's high and persistent unemployment rates are caused to a considerable degree by the generous social programs themselves. The unfortunate but unavoidable reality is that Canada once had the choice of having high unemployment rates and generous UIC and welfare benefits as a matter of deliberate public preference. That choice has disappeared with the debt, deficit and slow growth of the last decade.

These are harsh messages for a Liberal government to accept, which on these matters is caught in its own rhetoric. Investors are watching to see if the Liberals can live up to their reputation as the ultimate non-dogmatic pragmatists.

Let me close by suggesting that Reformers have listened to the public and to investors. Our own alternative budget will reflect what we have heard. It will outline steps we would be prepared to take in order to address the four issues crucial for investor confidence and most thoughtful Canadians.

My colleagues speaking after me will elaborate on some of these matters without revealing too much about our specific recommendations. We invite the Liberals to present a budget which will take the news out of the policies on these matters we will propose very soon.

After this gloom and doom, a few words of hope. Once Canadians have gone through three years and deal with the necessary deliberate and thoughtful spending cuts, there is a light at the end of the tunnel.

Such cuts will restore investor and consumer confidence. The economic boom will be fueled and expanded. Economic growth will return to the high levels we have not seen since the pervasive government intrusion of the last three decades.

In a few short years after the budget is balanced there is a prospect of tax reduction, a smaller debt, or both. Mild, short run pain will not only avoid catastrophic pain in the intermediate term, it will also bring large and important gains in what in retrospect will seem like a very short time of sacrifice.

We hope the Liberals will hear this message, not because we want to be right, but because it is right for Canada.

[David Walker, Liberal, Parliamentary Secretary to Minister of Finance]

Mr. Speaker, I welcome this opportunity to remind the House of the fiscal commitment and philosophy that will frame our government's upcoming budget. I believe this debate should also include some plan and some plain, positive talk about the Canadian economy and outlook.

This Reform motion cites "the demand by Canadians to cut spending and hold the line on taxes to eliminate the deficit and produce a smaller federal government". Our government does not need this grandstanding motion or any of the stage managed events of a publicity starved party to be deeply aware of what Canadians want.

Starting last October, we put in place the most extensive and most public consultation process in budget history. In my view, these consultations prove that Canadians have a more profound and positive understanding of the budget challenge than the simplistic slash and trash approach of the Reform Party.

In fact, Canadians have identified priorities that are realistic and require a great deal of effort. They want a strategy for phase two, based on last year's budget, to get Canada out of this vicious circle of deficit and debt.

However, the vast majority of Canadians also want the budget measures to meet other essential criteria. They have made it clear that they agree with the principles set forth last fall by the Minister of Finance.

First of all, deficit reduction must be an essential part of a strategy to create jobs through economic growth. Second, fairness is paramount, to ensure that the most vulnerable in our society are not left behind. Third, deficit reduction measures must be based on reasoned choices and reflect clear-cut priorities. Fourth, we must use taxpayers' money wisely. And finally, budgetary actions should focus on reductions in expenditures, as opposed to raising revenues.

The Canadians I have heard from want a lean government but not a mean government. They want a budget that builds market confidence but not one that abandons basic social responsibility. This budget will meet that dynamic challenge.

There is no contradiction here. Our budget will, because we know it must, take the tough action needed to meet the deficit goals we set out last year. As the Prime Minister said in Quebec City last fall, the time to reduce deficits is when the economy is growing. Therefore, now is the time. The economy is growing which is good news for all Canadians.

Let me give members some examples. Canada's growth rate last year was 4.25 per cent, the highest in the G-7. The OECD predicts that Canada will continue to lead the industrial world for the next two years. In the past 12 months, real exports surged over 20 per cent and we continued to set all time records for our country.

A survey by the Conference Board found that 81 per cent of firms planned to maintain or boost investment over the next six months, another record high for our country. That investment means jobs. Since January 1994 the economy has created over 400,000 jobs. All of these are full-time jobs. The unemployment rate is down to single digits for the first time in four years.

This good news does not mean that Canadian economic renewal is permanently secured. We know that. The government knows that cohesive, co-ordinated action is needed on all fronts. We understand that the spearhead for this action agenda must be to restore a healthy fiscal climate.

We all know the price we have to pay today for having let deficits and the debt rise to new heights during the past decades. That price is higher taxes and interest rates, factors that slow down growth.

This government, however, believes that in order to meet the debt challenge successfully, we must first set realistic and credible targets. This means maintaining the deficit reduction momentum we have set in motion, in other words, bringing the deficit down to 3 per cent of GDP in three years. That is exactly what we intend to do, and as the Minister of Finance said, there are no excuses.

The last time we had a deficit level of 3 per cent was in 1974-75. Since then, the deficit has increased steadily and is now close to 6 per cent of GDP.

It should also be said that setting firm deficit reduction objectives is a considerable departure from past policy.

Canadians and markets lost confidence because they have suffered too many years of rosy, long term promises that became nothing but short term fertilizer.

Instead, we have set out realistic targets and will take the action to deliver bottom line results. Our success here will strengthen credibility for our long term objective, which is eliminating the deficit completely. This strategy is based on fundamental political and public reality.

We believe it is best to set short term targets, concrete milestones and hit them. With short term targets there is no excuse for delay, no acceptable grounds for not taking tough action to address the problem. When unrealistic long term goals are set, reasons can always be found to avoid tough action today and tomorrow and tomorrow after that.

That was the Tory record, the first cousins of today's Reformers, a legacy we refuse to accept. Let me remind the House that we did more than stake out a deficit goal last year. We backed that goal with real bottom line action.

The 1994 budget set out measures to deliver $20 billion in deficit reduction over three years. For every $1 of revenue action there were $5 of spending cuts. No budget in a decade moved so strongly to cut spending. The fact is we have always recognized the need for continued fiscal action. The 1995 budget process started the minute we introduced the 1994 plan.

That is why we combined immediate action with a sweeping series of program reviews of government operations, defence and social security reform. These have set concrete foundations for this year's budget and the tough decisions needed.

We all understand that we have a long way to go but I think we have made a strong start. I am certain that 1995 budget will show all Canadians and markets around the world that the fiscal commitments made by the government are the fiscal commitments kept by the government.

Before concluding my remarks let me comment directly on the so-called demand that today's motion cites for no net tax increases in the upcoming budget. Nobody likes higher taxes. Only a foolhardy politician would think otherwise. That is why cuts in government spending must and will be our priority in reducing the deficit. We proved that last year when we cut spending by $5 for every $1 in revenue measures.

Most Canadians know that to ever bring taxes down and more immediately to ease the pressure on interest rates and the dollar we have to get the debt under control. That can only start by meeting our deficit targets. Given this challenge, I cannot promise that the budget will not include revenue action. If we take it, the focus will be on improving the fairness of the tax system.

Let me challenge those who argue against any tax action. Do they really believe that the tax system right now is completely fair? Do they really believe that there are no loopholes or no unjustified preferences, especially given our fiscal situation? That type of Pollyanna politicking is not what Canadians demand or need at this time.

In concluding, I would like to point out that the motion before the House today refers basically to decisive spending cuts, a refusal to tolerate tax increases, initiatives to reduce the size of government, and all those measures that are part of an effective deficit reduction strategy. In other words, we have here the entire substance of what our government has said it would do. Unfortunately, the opposition in this House has shown once again it is better at spouting clichés than at making proposals of any substance.

We welcome the opportunity to debate tax issues before the budget, but we wish the opposition would bring some reality to the dilemma facing Canadians and hope that we hear more constructive propositions during this debate.

[Herb Grubel, Reform, Capilano—Howe Sound, BC]

Mr. Speaker, could you tell me how much time is allocated please?

[The Deputy Speaker]

It is 10 minutes for questions and comments. The member will appreciate that in error the government was not given a chance to ask questions or make comments about his speech. It was my error and I apologize to the House. It is 10 minutes basically for questions and comments.

[Herb Grubel, Reform, Capilano—Howe Sound, BC]

Mr. Speaker, I can understand that the hon. parliamentary secretary cannot reveal anything about the forthcoming budget and that he had to stay with generalities.

The basic principles he laid out, I believe 80 per cent of Reformers agree with. The system must be fair, the cuts must be discussed widely. All the principles he set out are so universally accepted that they are almost empty rhetoric.

I was talking about four issues which were raised before the finance committee where the member opposite sat and listened. An overwhelming proportion of witnesses said we must not do these kinds of things. The report that the finance committee came up with did not reflect these recommendations.

As I said in my speech, those recommendations are absolutely crucial to the way in which the investors of the world are likely to react to the forthcoming budget. I hope that the government

will not goof in the budget, that it will take the advice of the overwhelming number of witnesses on those four issues. The four issues are that a $25 billion deficit target in two years is insufficient given the length of the business cycle. It is absolutely dangerous during a period of boom when the economy is growing at 3 or 4 percentage points a year to do as little as necessary to get to $25 billion in two years. It will send the wrong signal.

Everyone who studies the budget realizes that the social programs are absorbing such a large proportion of the total that unless we take very tough steps on those, as has been recommended widely by the OECD and the Auditor General, the budget will not be credible.

I raise this matter because early in this session I asked the Minister of Human Resources Development when he presented his plan for social policy reform whether there would be any savings from the reform. He went into a rhetorical flourish and said they will not eliminate the deficit on the backs of poor people.

The world hears this message but the world also knows that we cannot get away without making such cuts. We will be judged very harshly, especially in light of the fact that we probably have the most generous social security net in the world and in the light of the fact that it is now increasingly recognized that it was a noble experiment. When we are generous we also create dependence and increase unemployment as unwanted side effects.

The world will look for a message on what the government thinks about the cause of our persistently high unemployment rate. For years, for decades, American and Canadian unemployment rates moved in unison. They diverged by very little until the middle seventies when Canada increased the generosity of her social programs. Since then the Americans, who are at the same level of economic prosperity as we are in the business cycle, have had unemployment rates below 6 per cent. We are at around 10 per cent. In Canada 4 per cent of the labour force is unemployed, yet there is no explanation for it. If the deficit could eliminate it, if large exports could eliminate it, if low interest rates could have eliminated it a few years ago, it would have happened. It is not just me who is saying this. The cause is somewhere else.

Unless the government addresses these issues investors will be very unhappy. The probability is that the need for reform and for tough measures on all these issues will not come after deliberate consideration in the House or in committee. It will be imposed by governments and international organizations we have to go to in order to get money to stabilize our exchange rate and interest rate.

It is not a happy picture. We do not enjoy talking about these things. I appreciate the hon. member cannot say more about it, but the generalities that we heard again today are not the way to go. I appreciate the opportunity to share these thoughts with the House and the people of Canada.

[David Walker, Liberal, Winnipeg North Centre, MB]

Mr. Speaker, it is difficult to know where to begin. It is obvious that the rough edges of his speech were left for the comments period and not for his actual speech. In his speech he kept himself on track and was quite reasonable, but when he stood on comments he began to get a bit sidetracked as to what the budget process was all about.

The committee very carefully listened to witnesses. We were very careful in our own presentation to reflect the interest of Canadians. We can talk about majorities and what the majority said, but we also have in this country a respect for the minority. Groups that appeared before us were very concerned about the programs that were being presented. They asked us to protect the programs.

The job of a government is not only to get on the high horse of a protest movement. It is also very much to bring into focus what a government should be doing in these very difficult times.

I would argue that the approach taken by the majority report was a reasonable approach. We asked the finance minister to go further than he was originally intending to go. Then in January there were increased interest rates and difficulty with the dollar. I believe it is now accepted that actions will have to be as dramatic as they can possibly be.

The opposition critic vacillates between two important points in this debate: between Canadians they are encouraging to fight against a tax increase and international markets that want to be reassured we have our house in order.

If we ask somebody in New York who is concerned about the Canadian budget whether there should be any tax increases, he would argue that we should do anything to get to our target. He would say: "If you are really concerned about what I think, do what you have to do. If it means tax increases, do it and get to your target". Then the Reformers go back to Calgary and say: "Tell them not to raise taxes". The whole strategy is made vulnerable because they are playing a double game and they know they are playing a double game. Somebody on the floor of the House of Commons should call them on that.

[Jim Abbott, Reform, Kootenay East, BC]

Mr. Speaker, I was wondering if the member has difficulty with his hearing. I was in Toronto last week on Wednesday night. There were well over 2,000 people jammed into the Sheraton Centre who gave a very clear message, and I am delivering it to the House: No tax increase.

I wonder if he could help us understand how it is Liberals do not understand that message when there are rally after rally,

grassroots organizations after grassroots organizations, buttons, petitions and everything else. The Liberals are not listening. Why?

[David Walker, Liberal, Winnipeg North Centre, MB]

Mr. Speaker, if my hearing is bad, perhaps his eyesight is also bad. Did he see the 5,000 people in Montreal who were worried about their futures?

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

Mr. Speaker, I find it hard to be part of a discussion where people call each other deaf and blind. I am grateful for the chance our colleagues in the Reform Party have given us to discuss the government's budget and, in particular, the appropriateness of keeping taxes and income taxes at their present level in the Minister of Finance's upcoming budget.

I will say right off that the Bloc Quebecois supports the Reform Party's statement that increasing taxes and income tax at the present time, as the Minister of Finance himself acknowledged when he appeared before the finance committee in October, would kill the Canadian economy. It would put a strangle hold on job creation opportunities in the short term and before Canada enters a new period of slowing down, following the economic slowdown in the United States.

Thus I say straight off that we support the Reform Party's proposal that the upcoming budget contain no general increase in income tax, as the Liberal majority on the finance committee suggested in December, and no additional taxes. Taxes and income tax also have an effect on the black market economy, the underground economy. The Minister of Finance himself estimated it represented between 10 and 15 per cent of Canada's GDP. This is a lot and it is the direct result of the excessively high level of taxes and income tax in Canada.

Having said this, we have not forgotten that the budgetary situation of the Canadian government is critical, that the budgetary situation of the governments, as well, in Canada is one of the worst among industrialized countries. The federal debt alone, at $558 billion, represents over 80 per cent of the GDP. This is almost a world record. If we add the provincial debts, the figure increases from 80 per cent of the GDP to 115 per cent of the GDP. A catastrophe.

Another catastrophe, in terms of Canadian public finances, is the high proportion of Canadian securities in the hands of foreigners-43 per cent. This means we have a lot less control over our economic destiny and, in addition the capacity our governments have to act in budgetary or other areas is jeopardized.

In regard to this long-standing situation-it has existed for some ten years-we knew we would find ourselves sooner or later in a catastrophic situation such as the present one. In spite of this, the Minister of Finance gave himself a break of nearly a year and a half. The Minister of Finance has done nothing since assuming his position. The Minister of Finance has done nothing but present a first budget which hurt the most vulnerable, a budget which cut $7.5 billion from unemployment insurance programs but, in the end, solved nothing because in financial circles, both in Canada and abroad, the measures were not viewed as truly serious measures to correct the budget situation in Canada.

In fact, in May 1994, a mere three months after the first budget was brought down by the Minister of Finance, the C.D. Howe Institute was already forecasting additional cuts beyond those mentioned in the minister's budget, additional cuts of $7 billion over two years to allow the Minister of Finance to achieve his goal of a federal deficit of $25 billion for 1996-97, that is 3 per cent of GDP.

In his economic statement of last October-just to give members an example of the seriousness or, to be more precise, the lack thereof, and laziness on the part of the Minister of Finance-the minister estimated that costs would have to be cut not by $7 billion, as the C.D. Howe Institute indicated, but by more than $9 billion. And since January, precisely because of the lack of serious intent on the part of the Minister of Finance, his inability to take truly corrective measures and immediate action, we are now facing necessary cuts estimated at between $12 and $16 billion over the next two years because of variable interest rates. Over a seven month period, forecasts were changed four times as pertains to required cuts or new revenues if the Canadian government is to meet its goal of reducing the deficit to 3 per cent of GDP as established by the Minister of Finance.

And people wonder why things are not going well. People wonder why they still do not know what the federal government is doing to correct the situation. This is what happens when nothing is done for a year and a half, when financial circles tell us for a year and a half, with increasing urgency, that nothing is being done to correct the situation: panic sets in. And at present, we are seeing total panic from the Liberal government. They do not really know where to go from here. They are making proposals left and right. They have been sending test balloons out over the last two or three months, but have failed to do what was needed for a year and a half.

I would even say that not only is the official opposition awaiting the Minister of Finance's next budget, but also the entire international community. Indeed, all foreign investors who hold Canadian debt securities are getting ready to pounce on the Minister of Finance.

The next budget needs to be a budget that clearly shows that a structural reform is taking place, that measures are being taken, not just haphazard measures but serious corrective measures. Not just superficial cuts, cuts concealing the true catastrophic state of our public finances, but real cuts, airtight fiscal mea-

sures that will not only permit the Minister of Finance to brag, and pat himself on the back for, reaching his goal of bringing the deficit down to three per cent of GDP in 1996-97, we will come back to this later, but real proof that the Minister of Finance has gotten public finances under control. This is what financial circles are expecting.

And let me tell you that if they are not convinced that this and the 1996-97 budgets contain serious corrective measures and take at least some strain off the public finances, since that is the heart of the problem, I would say that they are going to demand risk premiums, like they did in January and May 1994. In addition to the regular return they receive on Canadian debt securities, they will demand that an additional percentage be tacked on to compensate for the absolutely decrepit state of Canada's public finances and for the Minister of Finance's lack of action, other than his stand-up comedy act, to really correct the situation.

I would argue that people are a little tired of hearing the government and its representatives tell us every day that they will achieve their goal of reducing the deficit to 3 per cent of GDP.

I will make two comments on this. First, if they want to reduce the deficit to 3 per cent of GDP by continuing to slash social programs enthusiastically, they are on the wrong track. People are fed up with this government's hypocrisy. They are fed up with the red book telling them that they will be protected against underemployment or other social problems they may face and with a government that has been doing exactly the opposite in the past year.

The government has cut UI and stopped contributing to the UI fund. It is raising the spectre of additional cuts in transfers for social assistance, post-secondary education and even pensions. They have been talking about it on that side of the House for about six months. People are fed up with the Liberals' actions, which are not consistent with the reasons they were elected in October 1993.

Second, let me reiterate that even if the government managed to reduce the deficit to 3 per cent of GDP by 1996-97, it would not solve anything, and that is a little indecent. They tell us every day that they will reduce the deficit to 3 per cent of GDP and solve everything, but that will not solve anything. In 1996-97, we will still be saddled with a $25 billion deficit and, most importantly, with a debt approaching $625 billion. So they are not solving the problem. They are behaving like a government that only cares about being re-elected in three years.

From a structural point of view, they are not solving the federal debt problem at all. With a $625 billion debt, the problem will be just as serious in 1996-97 as it is today; the public finance crisis will be as serious as it is today. That is, in my opinion, Canada's biggest problem. There are other problems but that is the biggest one.

Despite the gravity of the problem, this government, which bragged during the election campaign of wanting to create as many jobs as possible, is doing, in my opinion, the opposite of what it should be doing as a result of its attitude toward public finance.

The debt is so big that going after domestic savings to periodically finance part of this debt pushes up interest rates. Interest rates are going up in this country. The Minister of Finance has lost his credibility with international investors, who are demanding higher yields, and this is also putting upward pressure on interest rates, which in turn affects our national interest rates.

If you happen to be an investor and want to invest money and create jobs, you will invest less and create fewer jobs because of high interest rates due to the pressure of the debt on the Canadian economy, the so-called crowding out effect, and it will not be any different in 1996-97. This jeopardizes our chances of experiencing a really strong economic recovery with substantial job creation.

When we consider how job creation has evolved during the past two and half years since the end of the recession, or at least its end in technical terms, it should come as no surprise that in Canada we are still about 800,000 jobs short of reaching the same labour force participation rate that existed before the first quarter of 1990 or before the recession began. And this is all because of the federal debt.

Even the Department of Finance has calculated that structural unemployment is at 8.5 per cent, in Canada, because of the size of the debt. Even with an economy that is doing well, even when the circumstances for job creation are ideal, the unemployment rate is around 8.5 per cent because of the size of the debt and the pressure of the debt on the economy, and the situation will not change until the structural problems besetting Canada's public finances have been solved.

That is the situation, and I do not think there is any reason for members on the other side to be proud of what the Minister of Finance has accomplished in one year. If I were the minister, I would be ashamed, and if I were the government, I would be even more so.

In any case, and I have a few minutes left, the official opposition wanted to make its own contribution last October when the Minister of Finance appeared before the committee, and we repeated our suggestions last December when the Liberal majority tabled its report on pre-budget consultations. We wanted to make a short-term contribution that would at least reduce the impact of the deficit and give the Minister of Finance

a chance to brag that he would hit his 3 per cent of GDP target. We wanted to submit recommendations as an alternative to the drastic cuts in social programs which the government has made and plans to continue.

We made ten recommendations, and I will mention the first eight, which are the most important ones. The first one, and I want the Secretary of State for Finance to listen very carefully, because although his minister realizes we made recommendations, he himself insists we never did, or maybe he cannot read and in that case, he should learn or at least find out about the recommendations enclosed with the report tabled by the Finance Committee last December.

The first recommendation we submitted to the Minister of Finance, to help him be on target with his deficit of 3 per cent of GDP in 1996-97, was that the federal government should withdraw altogether from areas under provincial jurisdiction. For Quebec alone, this means a savings of $2 to $3 billion a year by eliminating overlap, duplication and redundant administration.

The second recommendation we made to the Minister of Finance-and we are still waiting for him and his team to analyse these recommendations-is that we stop giving subsidies to business, which, last year, amounted to $3.3 billion and which are, more often than not, a form of patronage for friends of the Liberal Party of Canada rather than real support to business in meeting the challenges of globalization. Here then is $3 billion; a big savings in reaching the goal of reducing the federal deficit to 3 per cent of the GDP in 1996-97.

The third recommendation we made to the Minister of Finance, and we continue to stand by it, was to make a further cut of at least $1.6 billion in the national defence budget. This would have meant a 25 per cent cut in the defence budget over the past two years. This corresponds to the analysis we made during the electoral campaign. We held that, even with a 25 per cent budget cut, national defence could retain its past and present efficiency in a world of reduced international tensions.

The fourth recommendation, and we still make this recommendation to the federal government, which claims to want to avoid white elephants and wastage, is that, if it wants to maintain some credibility, it withdraw from the Hibernia project, which has already absorbed some $3 billion with no promise of producing any profits within the next twenty years. If this government wants to do something other than playing politics, if it wants to be taken seriously, it must withdraw from the Hibernia project.

The fifth recommendation, one we have been making for a long time-but I think the Liberal government lacks transparency-is for a complete review of the taxation system. Complete, from A to Z, including the 16 tax treaties signed between Canada and several countries which are, in fact, regarded as tax havens.

Businesses can claim operating losses abroad, repatriate these losses, though they are fictitious losses, and deduct them from their Canadian income to avoid paying taxes. That too is a major problem, and will become an even bigger one if allowed to continue.

We had also asked, in the context of this taxation review, that the privileges associated with family trusts be eliminated. Shortly before adjournment, we made a motion in the finance committee which was readily defeated by Liberals and Reformers. Why? Because it affected privileges enjoyed by their buddies, the wealthiest of Canadians, who avoid taxes year after year by paying no tax on capital gains or on personal fortunes valued at several hundred million if not several billion dollars. We cannot quote the precise figure because, although the Minister of Finance is ostensibly in favour of transparency, his department does not want to conduct the studies necessary to determine the true value of these tax loopholes.

The seventh recommendation would be to impose a true minimum tax on corporate profits. Not with the aim of adding to their tax burden, but because several thousand companies have paid no taxes in the last ten years. We must be sure, at least, that they are escaping taxes because of their specific production conditions and product-process cycles and not because they have hired tax experts to save money by not paying Canadian taxes.

The eighth recommendation is one of the most important. I was saving it for the end. The auditor general even made the same recommendation, in his last report, regarding the $6.6 billion that Canadians owe in unpaid income taxes. These are not amounts in dispute, but simply money owed to the federal government that has remained uncollected due to the government's lax approach and failure to allot the resources necessary to recover these amounts. The auditor general's own opinion is that 80 per cent of the amount owed, more than $5 billion, could be recovered if only enough resources were available for the task.

In conclusion, we too are not in favour of new general taxes, as was recommended in the Liberal majority reports from the finance committee, but at the same time, we recommend that the government find ways to improve, even in the slightest way, the state of Canada's public finances, at least on the short term, because we have very serious longer term problems.

[Barry Campbell, Liberal, St. Paul's, ON]

Mr. Speaker, on behalf of the Parliamentary Secretary to the Minister of Finance I have a few comments I would like to make to the member opposite-

[The Deputy Speaker]

The hon. member cannot make comments on behalf of another member. He has to speak on his own behalf, not on behalf of someone else.

[Barry Campbell, Liberal, St. Paul's, ON]

Mr. Speaker, I appreciate that correction. Canadians might have a little sympathy for the government after seeing this spectacle of members opposite saying no taxes, while the opposition was saying through the last speaker no cuts and maybe we should have tax increases.

What bothers me particularly about the last comments from the opposition critic are the internal consistencies in his very statement. Those members speak often about logic, yet I hear them say: "We recommended a whole host of cuts. On one hand, cut national defence spending but of course not in Quebec. Cut Hibernia but help out MIL Davie", which we heard much about in the months leading up to the Christmas recess.

There were other thoughts about family trusts. The comments on family trusts, as in the minority report they proposed, reflect a complete misunderstanding of the role of trusts in Canada and the importance of family trusts to family businesses, to small businesses, to families; completely misrepresenting the importance and reality of trusts. In the fullness of time, I have confidence the finance committee will issue a majority report that sets the record straight.

With respect to three per cent and the three per cent figure, on one hand we have members opposite saying that it is not enough. On the other hand we get criticized by the opposition critic for adjusting our outlook to take into account the real world, reality, and to make sure we get there.

When we meet that target it will be the first time in a long time that we have met a target in the right direction. It will go a great distance toward restoring the credibility that members opposite suggest is lacking in financial markets and go a great way toward restoring the confidence we should have in our ability to solve our problems.

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

Mr. Speaker, absolutely, I have a reply for my colleague, a reply to his three questions. Regarding inconsistency, because we are proposing cuts at the same time as we are asking for an increase in the national defence budget in Quebec, I would say that if there is any inconsistency, it is on the other side, not here. We have always been consistent with ourselves, with our option and, above all, with our analysis of the situation.

At the present time, 17.4 per cent of national defence spending takes place in Quebec. We represent very close to a quarter of the population, or, if you consider it in terms of taxes paid, we pay almost 23 per cent of the taxes collected by the federal government, but we receive only 17.4 per cent of the spending. This means that there are others receiving more than they should in terms of population or in terms of their contribution to the federal coffers.

What we have always said is that cuts should be across the board, but with an adjustment for Quebec. This is what happens in the case of agriculture, it is what happens in most areas. So, that dispenses with the first inconsistency.

The second point was family trusts. My colleague claims that I have no idea of the importance of family trusts, but neither does he. And do you know why? Because we repeatedly asked the Finance Committee, senior officials in the finance department, the finance minister, the revenue minister, and senior officials in the revenue department to provide us with an exhaustive evaluation of how much money is in family trusts and the resultant losses in tax revenue to the federal coffers. So he can stop talking about the importance of family trusts, because he is just as much in the dark about them as we are.

We have estimates and are at least trying to give some thought to the magnitude of tax losses resulting from trusts and from tax agreements. My colleague prefers to turn a blind eye to these fiscal inequalities. If we are going to talk about credibility, I would say that the Liberals should look in their own back yard. There has been no sign of credibility for a year and a half now.

[Ray Speaker, Reform, Lethbridge]

Mr. Speaker, I would like to pose two questions to the hon. member who has just spoken in response to the member for St. Paul's.

The first question is with regard to tax increases. The hon. member for Saint-Hyacinthe-Bagot indicated that the Bloc as a party did not want tax increases. Then he went on to say that maybe there are some places where new taxes can be applied.

Is the Bloc Quebecois saying there should be no net tax increases of any kind and that if there is a redistribution because of a change in tax policy, that if there is an increase in revenue in one area, it should be redistributed to other Canadians by way of a tax reduction? Is that the position of the Bloc Quebecois, no tax increases?

I say that in light of some of the other comments and the other observations that I have made in this assembly. When we look at the cafeteria of social programs, unemployment insurance, post-secondary education, old age assistance and also the tax credit with regard to those people over 65, the Bloc did not want to allow or make the change that was recommended in the 1994-95 budget.

If we maintain all of those programs at their current level, how are we going to deal with the deficit and possibly maintain the tax policy that the hon. member recommended to the House?

I would like the hon. member to comment on that first of all. Is his party in favour of no tax increases on a net basis?

Second, with regard to family trusts, I am a member of the finance committee and I have been waiting for some type of a presentation which indicates that there is a major error in family trusts. Is the hon. member asking the finance committee or the government to pass legislation or some mechanism by which it is able to deal with people's private income and private bank accounts to derive what is the composition of a family trust?

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

Mr. Speaker, in response to the first question on taxes, we do not want the Minister of Finance to raise taxes when he tables his next budget, or the one after that.

However-and I have the feeling my colleague is having trouble reading our recommendations, does not understand them or does not want to understand them-, there are inequities in Canada's current tax system. There are so many inequities, as I demonstrated a little before the House adjourned last December, business taxation in Canada has become so ludicrous that some businesses even sell their unused tax deductions to other businesses. There was a classified advertisement in the newspaper offering a tax loss for sale to businesses that could use it. If you do not find this ludicrous, there is a problem.

What we are saying is that there are loopholes to be closed, inequities to be corrected in our tax system. As a result, we have been recommending for a year and a half that the government undertake a comprehensive review of the tax system.

We already know about the loopholes. The auditor general has already pointed out some of them. He mentioned the 16 tax treaties, saying that there were problems with them because they were often concluded with countries considered to be tax havens, where Canadian businesses open fictitious subsidiaries, report fictitious losses, and manage not to pay what they owe Revenue Canada.

If you want to maintain these inequities, these loopholes, these inconsistencies, while asking Canadian men and women to tighten their belts another notch, there is a problem within the Reform Party although it is not the only problem.

As for family trusts, let me reiterate that the Minister of Finance held out his hand to us by saying that he would let a finance subcommittee look into the matter of family trusts, that it would be given carte blanche, that his officials would visit the committee and do whatever it would ask them to do. It was a monumental farce.

It was even, I would say-no, I will not say it because it would be unparliamentary-but it is a monumental farce. We had four months of regular hearings. We met with officials and experts. Imagine, the Liberal chair told the officials that they did not have to answer the questions. Enough is enough. There is a problem with respect to the relations between the government and senior officials. Senior officials can answer if they feel like it. They never responded to that.

How can we propose specific measures when you and I along with my Liberal colleagues do not know what is happening with family trusts nor how much money we are losing as a result of the tax treaties.

There is a lack of transparency, of understanding, and I think that it has become ridiculous.

[Jim Peterson, Liberal, Willowdale, ON]

Mr. Speaker, I am pleased to rise in the House today on this important issue. It is very important that Canadians have access to the facts and to the issues that face us. We are going to be forced in the next budget to make some of the most difficult budgetary decisions that have been made in this Parliament's history, probably the most difficult decisions that we have had to make outside wartime.

As Canadians know, the government inherited a national debt of $500 billion and an annual deficit that had gone up to over $45 billion. As much as we politicians wish we could spend money on people and help people, we can no longer continue at this rate.

If we do not get the deficits down and start to eventually reduce our national debt, we will continue to be even more hostage to the international capital markets whose investors are demanding higher and higher interest rates in order to fund our debt. It is a debt which is so enormous we can no longer fund it out of the pockets and the savings of Canadians alone.

If we do not get the deficit down we will no longer be able to have the economic climate in which we can get lower interest rates, have more investment and create more jobs. Unless we are able to meet the deficit targets that have been set, every one of our social programs will be in jeopardy. We will not much longer be able to go on spending way beyond our means and yet create the type of Canada that all of us want.

It is going to be a difficult task as we go about, over the next two years, of taking maybe $10 billion, $12 billion or even $14 billion in budgetary actions, that is spending and/or tax increases.

One of the things that we must continually bear in mind as we make these difficult decisions and choices is that when social programs are cut, programs designed to protect the most vulner-

able in our nation, it must be done with caution, with compassion and with care. For so many Canadians these programs are the only means to security, dignity and opportunity.

In making the difficult decisions that we are called on to make and that we shall make, let us not only remember those who are most in need, but let us also remember that the burden should, to the extent possible, be shared fairly by all Canadians.

We know and the finance committee in its report recognized that Canadians are just about at the ceiling of taxation. Personal income tax rates are very high. When they are combined with the taxes on commodities, the payroll taxes and municipal taxes, Canadians are saying: "We want less. We are prepared to do with less. We cannot afford vastly higher taxes in order to continue the lifestyle to which we have become used".

However, they are also saying to us that when these cuts are made, please be fair. We will be judged, first of all on whether we meet those deficit targets, and we had better meet them, but we will be judged on whether we have done it fairly.

When we cut social programs are we really asking the wealthy in our society to contribute? How are they bearing their fair share when all we are doing is cutting programs? We have $3.1 billion in business subsidies. We want to get rid of all of those as quickly as we can. However realistically our committee looked at these, we said that we probably could not cut more than 36 per cent of those subsidies over the next two years. That will contribute slightly over a billion dollars to deficit reduction. It is not going to be enough.

We may just have to suggest that the very well-off in our society contribute their share to the deficit reduction targets through a few added tax measures. This is why we suggested in our report that we could perhaps ask the large corporations, corporations with capital over $10 million who do not pay taxes because they have losses carried forward or they have capital cost allowances expenditures, to pay just a little bit more. Maybe we could ask Canadians who have huge winnings on lotteries to put 10 per cent or 15 per cent of the winnings toward the deficit reduction. Is it fair to say to wage earners that they will be taxed at 53 per cent or 54 per cent on their wages but that they can make a million dollars in a lottery and not pay any taxes at all?

We recognize our marginal tax rates over the past nine or ten years of Tory government have become less and less progressive. The wealthy in Canada are paying less tax proportionately than the poor and middle income Canadian have been asked to pay.

We suggested that low and middle income Canadians should have their surtax reduced by one percentage point. We think this would introduce an element of fairness. In the overall package that we called for, recognizing that budget cuts must be the prime factor, we said that for about every $9 billion in expenditure cuts we might need about $1 billion in tax increases over the next two years. I do not believe Canadians are going to be reluctant to accept some of the proposed measures, particularly when they are expressed in terms of the fairness we must go about practising when all Canadians are asked to contribute to helping us get out of the mess we are in.

The principle of fairness applies not only to the most disadvantaged of Canadians who need our programs in many cases. This does not mean that we should not reform our programs to help people get off welfare more quickly or to help them rely less on unemployment insurance. After all, we want Canadians want to be working and not be on the dole.

In setting these difficult courses we have to start with ourselves in Parliament. We cannot ask Canadians to make greater sacrifices than we are prepared to make ourselves. This is why the first item of business must be the pensions of members of Parliament before we ask other Canadians to make their sacrifices. This is why we have called in our report for major areas to be cut, namely the $20 billion out of $120 billion in program spending. This $20 billion applies to our government operations, how we conduct our business and how we conduct our affairs. We have said that over two years it should be cut by 12 per cent. In terms of parliamentarians in our own little niche, we have called for a cut of 15 per cent.

I have mentioned business subsidies. We believe we can get rid of most of them over time. There are outstanding commitments that we just cannot break. Therefore we concluded that we had to be practical. About the most we can hope to get rid of over the next two years is 36 per cent. I believe the total amount would be slightly over $1 billion.

We have to bring a new philosophy to how government deals with the private sector. If the only way a private sector enterprise can exist is through government handouts and government grants, it will not be long before we can no longer afford the grants and handouts. Not only that, it is not fair to legitimate operators who do not rely on the dole or do not rely on the deep pockets of government but compete with industries that get these breaks. Not only that. With the new trading regime, the GATT and the NAFTA, we have less and less ability to interfere in this way because subsidies will be subject to countervail.

We are in a new world. We are in a world that many Canadians would not have believed 10 years ago that we would be facing today. The levers of control we had as a national government are no longer there. Whether we like it or not we have to live with the new reality of global competitiveness, international capital flows and international investment.

This will impose upon us new challenges. However one of the challenges cannot be grants to business. That is why we suggested abolishing all outright grants to business. We cannot give business a leg up by way of a loan because our capital markets are not working adequately to supply all small businesses and entrepreneurs with the startup capital they need.

However, if we are to do it, let us do it only on a loan basis. We will lend the money but let us make sure that we have equity in the company. We do not want a one-way street for the public sector such that if the business goes under we lose it. We want to ensure that if the business profits from the investment we make by way of a loan there is an upside for us so that we have money to fund programs and to make them self-funding and self-liquidating.

There are other areas where we have called for cuts. One such area is subsidies. We have about $7.7 billion in subsidies for various crown corporations and others like that. Let us start weaning them from subsidies. Here we have called for a 10 per cent cut. The lowest cut we called for was within the overall package of social programs worth about $40 billion at which the human resources development committee was looking. Because many of these programs go to the most vulnerable in our society we called for cuts of 7 per cent over two years.

There is a number of areas in which the committee did not feel there could be cuts, such as Canada's native people, the Inuit and veterans, people who have a lot of catching up to do because our programs may not be working adequately to bring about the type of social justice they need.

We were also very concerned about the aging population. Many Canadians have not provided for their own retirement needs. Too few Canadians are taking advantage of the very generous tax breaks available to provide for their own retirement. The ideal would be as our population ages that fewer Canadians have to rely on government.

This is a major issue and none of us pretends to have the answer. That is why we suggested before changes were made to retirement provisions, pension plans and RRSPs that we had to take into consideration a number of principles. One is parity between public sector and private sector pensions. Another is the need of those who are self-employed and have to provide for their own retirement through registered retirement savings plans. They need to be able to build a pension fund comparable to those who have been in the private sector and have had long years of contributions to private pension plans.

We also have to look at our public responsibility. Right now we are spending about $15 billion in forgone tax revenues-we can call them tax expenditures or whatever we want-to encourage self-sufficiency during retirement. Before we change this regime we should do so in the context of how we help more and more Canadians provide for a secure and dignified retirement. We are becoming more and more an aging population.

The challenge before us is not an easy one. We have called for getting our deficit down over a two-year period from about $40 billion to about $25 billion. That is about 3 per cent of gross domestic product.

Why is that 3 per cent level important? It is important because with the current growth that is the level where our economy will be growing more quickly than our national debt. That will be the turning point. It will only be one turning point. We will have to go much further in subsequent years. We will have to start at some point paying down a huge national debt that will absorb one-quarter of our national expenditures this year. It takes one-third of every tax dollar paid to the federal government.

I hope we might be able to go slightly beyond the targets. Why? It is because we never know what the economic circumstances will be a few months down the road. We have seen the volatility of interest rates over the last three or four months that make the moderate projections in the papers tabled by the finance minister now seem passé. We are on to a new scenario. We do not know whether it will happen in the future but we must be prepared for it because our credibility depends on at least meeting those targets.

We need a cushion. It is fundamental to have a cushion for an additional reason. Let us admit that we might make mistakes when making cuts that we are not used to doing and we are probably not going to be extremely good at doing. We might unduly prejudice individuals we did not intend to hurt. We might cause pain where it is not deserved. I know we will bring to these people a Liberal spirit of generosity in attempting to undo any harm that was not intended.

Let us approach this tremendous challenge with the spirit of fairness and with the spirit that every Canadian must be called upon to contribute his or her fair share to getting our national resources and our financial picture in shape. Let us not achieve it on the backs of those who are most vulnerable in the country. Let us do it in a spirit of humility that we cannot be right 100 per cent of the time, that we will make mistakes and that we want to hear from Canadians as to where we have made those errors. If that is the case on reflection, let us freely admit that we have made a mistake and rectify it quickly.

By following these principles we can go into the next decades with a much healthier Canada and with a much stronger Canada. We will be able to pass on to succeeding generations what our mothers and fathers have given us: a strong and united Canada.

[Jim Abbott, Reform, Kootenay East, BC]

Madam Speaker, before I became involved in politics which was only 15 months

ago, I was wondering what was meant by the term code words in politics. I suggest code words are being used by the Liberals.

With due respect to the chairman of the finance committee, when he uses the word "fair" and the phrase "contribute their fair share" what he is really talking about is a further tax increase. Taxes are simply the confiscation of wealth.

It is absolutely outrageous that this government would be compounding the problems created by the Conservatives, particularly with the corporations, that when the corporations have a loss, a no profit year, the government would turn around and confiscate some of their working capital by virtue of the fact that it says they did not make a profit this year, therefore it is going to tax them. It is a simply confiscation of their ability to be able to fund their enterprise. It is absolutely outrageous.

The top 10 per cent of people earning over the $51,000 figure pay 50 per cent of the income taxes. How much fairer can we possibly get? The top 1 per cent who earn over $100,000 pay 15 per cent. How much fairer can we get? Is this not progressive enough?

The reality is that according to well documented and fully accepted statistics, the average tax take on Canadians at all levels of government at this point is 46 cents out of every dollar. How much fairer can we get? Is there any more room in taxation?

Considering that, let us get away from the $51,000 and the $100,000 ranges and talk about the average family income, a joint family income of $46,488. Consider that family spends $17,000 on food, clothing and shelter. However, with all levels of government as a result of past activity of the federal government down loading the taxation to other levels of government, that family with an after tax income of $46,488, $17,000 of which is spent on food, clothing and shelter, has a tax bill of $21,000, which is $4,000 more than it costs to cover food, clothing and shelter.

Does the chairman not believe that there is no more room, no net tax increase, that this is the only position this government can take?

[Jim Peterson, Liberal, Willowdale, ON]

Madam Speaker, I do not believe that for one minute.

There are some inconsistencies here. The hon. member has talked about down loading. That is the concept whereby when we make cuts in program spending or transfers to the provinces, are those services going to be performed at a lower level of government, either the provincial or municipal government?

In some cases those services will not be performed because there is no money available. As the member points out, provinces have increased their taxes in response to certain down loadings that have taken place. Is he saying that we should not be downloading this time? Why are they calling for cuts in transfers-

[Jim Abbott, Reform, Kootenay East, BC]

Provide tax room.

[Jim Peterson, Liberal, Willowdale, ON]

That is to me a great inconsistency. The member has also said that a large corporation with $10 million in capital that is running at a loss position should not have to pay taxes. I agree. However, if the corporation apart from loss carryovers and apart from capital cost allowances is actually experiencing a profitable year in terms of income but not in terms of taxable income, perhaps it could contribute a little more to our deficit reduction. I do not consider that unfair.

If the member is making the point that we are highly taxed, he is right. We cannot argue with this. Canadians realize this. However, this is the party that said no new taxes whatsoever. Then in the next breath it said it will tax the Governor General. In other words, there are no hard and fast absolute rules.

Let us look at each particular tax measure to see if we can afford it, if it would make us non-competitive, if it would have adverse consequences. Let us look at these things with an open mind.

I go back to the fundamental premise. I cannot guarantee that our entire tax system is fair today, that everybody is paying their fair share of taxes. We know that overall we are just about at the limit. We found over two years $1.1 billion in possible net tax increases that we thought might work. Two hundred million dollars out of the proceeds of lotteries; is it unfair that we should have a 10 or 15 per cent tax on $1 million won through a lottery?

[Jim Abbott, Reform, Kootenay East, BC]

Taxing a dream.

[Jim Peterson, Liberal, Willowdale, ON]

The hon. member says it is taxing a dream. We are also taking 15 per cent out of $1 million which was unearned as opposed to taking over 50 per cent out of the pocket of the person who has to toil all day long in order to earn that wage. Is that the concept of fairness?

I hope we do not approach this from an absolute statistic point of view. There may be certain cases in which only tax increases will give rise to that fairness but we face another problem, as the hon. members know. When we cut federal programs we do not often in the first year or in the second year obtain actual savings.

When we close down a military base and put people on the street do we actually save in expenditures when we have to provide for unemployment, severance, reconfiguring the land, getting rid of equipment and materials and things like this? We do not always have savings in the first two years.

I believe our deficit crisis is such that we have to meet our targets that we have set and we have to meet them within the time limit we set. Therefore expenditure cuts alone, while they will produce the savings we need over the longer term, may not work adequately in the first two years. This is why we may need

a little tax room on a temporary basis during the first one or two years in order to meet those targets.

I hope that Canadians will keep an open mind when they see the program, when they see the budget that comes down. I hope they will come to the conclusion that the single most important thing we must do is meet our deficit reduction targets.

The second most important priority is how we meet them. If we had to have minor tax adjustments in order to meet those targets, in order to be fair I believe that Canadians would say they do not like them, they may not like the cuts we have imposed but they will judge our overall budget package in terms of all of its aspects; who has been hurt through the cuts, who is hurt through the tax increases, minor as they may be, if there are any. We will be prepared to be judged on the basis of that entire package.