Herb Grubel

[The Economy, February 28th, 1996]

Mr. Speaker, according to a survey by the conference board, Canadians are more pessimistic about their economic future than they have ever been except during recessions. A number of red book policies promised to restore economic prosperity and the confidence of Canadians.

I ask the Minister of Finance why and how did they fail to work?

[Finance, December 14th, 1995]

Mr. Speaker, I am pleased to rise today to offer the Reform Party's first comments on the preliminary report of the finance committee's prebudget hearings which was tabled today.

To come right to the point, Reform considers the report's budget recommendations to be too timid. The proposed deficit target of $17 billion or 2 per cent of GDP in 1997-98 is totally inadequate.

I remind Canadians that even two years from now the government plans to add $50 million per day to the debt, which by then will be over $600 billion. This amount is $2 million more per hour than it collects. Currently the government is spending $4 million more per hour than it brings in.

In addition, the absence of a definite date for complete deficit elimination is very undesirable, as is the failure to announce any plans for tax reform and reduction.

In the Reform Party's minority report we set out our alternative recommendations to the Minister of Finance: cut spending sufficiently to achieve a deficit of $12 billion or 1.5 per cent of GDP for fiscal year 1997-98.

It is important to recommend announcement of a budget in balance or in slight surplus in election year 1998-99. In addition, we suggest the minister offer Canadians hope by the promise that budget surpluses generated by economic growth in the following years will be used partly to reduce taxes and partly to lower the debt.

The proportion in which this is done will have to be decided, but a definite commitment to this kind of plan is necessary in order to prevent the successive pressure for using surpluses for further increases in spending.

We urge the minister to initiate plans for the introduction of a simplified tax featuring a single rate with a generous personal and spousal exemption, thereby restoring fairness, visibility and efficiency. This simplified taxation system would end the nightmare of the GST.

Before I present our reasons for opposing the government's recommendations and offering our own, I want to raise a point which troubles me greatly. If the past is any guide to the future, many speakers in the House will attack the fiscal plans of the Reform Party on the grounds they are slash and burn and show a disregard for the welfare of the most needy in society.

This attack is balderdash. Our program is not slash and burn. No one in the House has a monopoly on compassion. We propose our program precisely because we care and want to preserve Canada's support for the neediest. We defer with Liberals on the merit of cutting today versus cutting tomorrow and a number of other mainly technical issues of economic management.

I will discuss these issues and hope that Liberal members will similarly stay away from denouncing moral standards of others and proclaiming the superiority of their own. All Canadians will benefit if they do.

With this preliminary out of the way, let me now turn to discussion of Reform's position in favour of the more rapid elimination of the deficit. In developing this position, I draw heavily on ideas which were advanced by the IMF, several Canadian think tanks and a large number of business leaders, economists and private individuals in their presentations to the finance committee.

We recommend the elimination of the deficit by the end of the government's mandate because it reduces the risk that some threatening event will once again increase the deficit to the point at which the debt grows more rapidly than national income. As more and more Canadians realize, when this happens we find ourselves in the unsustainable situation in which we need to borrow ever increasing amounts to pay the interest on the ever growing debt. To use analogies that have become so popular, we would not be on a treadmill standing still. The treadmill would keep speeding up and making it more and difficult to keep up with it.

One threatening event pointed to by witnesses is the downturn in economic activity certain to take place before very long. Another threat stems from the traditional reluctance of governments to enact spending cuts in an election year. Concerns were expressed about the consequences of another Quebec crisis which could result in large increases in the interest on the government's debt and thus aggravating the deficit position again.

The second reason we recommend presenting a target for a balanced budget is it signals to capital markets the government's political courage and determination. As many witnesses noted, if the government did so, capital markets would reward Canada by eliminating the risk premium on the interest rate they now demand.

In a speech a couple of days ago, the Governor of the Bank of Canada in his technical capacity noted that one of the big problems Canada faces is the risk premium that puts the Canadian interest rate above the U.S. rate due to the deficit and a lack of a signal by the government to come to firm grips with the deficit.

If we went ahead and the result were a lower interest rate it would then stimulate housing and other interest sensitive demand. The increased economic growth and tax revenues would move Canada into a virtuous cycle for a change of smaller deficits, even lower interest rates and more opportunity for tax cuts and debt reduction. This is not fantasy; this is an idea supported by many witnesses who appeared before the finance committee.

The government's rolling or shifting target of slow deficit reduction offers the worst of both worlds. The cuts create unemployment and uncertainty, which make consumers reluctant to spend and slow economic growth. At the same time, capital markets are reluctant to reduce the risk premium on interest rates because the cuts are too small and there is no definite date for the elimination of the deficit. We heard that argument in the finance committee again and again.

The announced target of a $17 billion deficit in 1997-98 carries another risk. The careful analysis of the effects of economic growth, interest rates and spending cuts already announced suggest that with any luck and the proper treatment of the precautionary reserve this target is attainable with additional cuts of as little as $1 billion. It may be more, but it could conceivably be done by cutting an additional $1 billion. For the sake of all Canadians, I hope capital markets will not interpret this fact as evidence that the government has lost its nerve and more than two years before the election plans no more spending cuts to balance the budget. If they do, the risk premium on interest rates is sure to rise and the deficit will be even larger.

Third, we believe the complete elimination of the deficit by 1998-99 does not involve slash and burn. As the Minister of Finance found out during the referendum campaign with his reference to job losses of one million due to separation, hyperbole may be rhetorically satisfying but it has its risks. The IMF and numerous other analysts have noted that many billions of old age security and UI benefits go to Canadians who by all acceptable standards can do without them during this period of national emergency. This is a national emergency.

With a little political courage, reduced payments to high income earners would permit the complete elimination of the deficit without the need to cut into the support for Canadians with true needs and into other spending programs of the sort discussed by the finance minister in his report which yield high economic and social return.

We believe the Prime Minister's decision to rule out any and all cuts to these social programs, made on the eve of the referendum campaign for whatever political or ideological reason, very much harmed the broad interests of Canadians. I predict history will not be kind to him on this matter. It certainly has put the Minister of Finance in the position in which he will have to make some cuts in otherwise desirable government programs, and all Canadians will suffer.

In this context it is important to note that the Reform budget would not harm but might increase prosperity in employment. This is so because on the one hand the recommended spending cuts of 1.5 per cent of GDP are only one-half of the normal economic growth of the 3 per cent per year which was made famous by the red book. On the other hand, the lower interest rate and the restoration of confidence in the country's fiscal future which the governor of the Bank of Canada talked about would stimulate demand more than that lost through the cuts.

The fourth reason for presenting our program is that the delay of spending cuts results in the accumulation of more debt, which in turn necessitates higher interest payments and even more cuts in program spending in the future. This is illustrated dramatically by the realization that in this fiscal year total government spending has remained unchanged from last year at $120 billion in spite of cuts in program spending of $11 billion. The cuts were eaten up by higher interest.

More dramatically, if the government had made serious cuts in the first budget early in 1994, as Reform had recommended, it could now announce a surplus at the end of its mandate without having to make further cuts. The country's debt would now be much lower and the level of program spending would not have to be reduced as much as it will have to be done even now.

This means ultimately the Liberal approach to balancing the budget will necessitate lower spending on social and other programs than does the Reform approach. Note the irony of it all, Liberal backbenchers. Note that the minister would not have had to do what he did in his report, announce the need to renege on red book promises on the maintenance of social spending and other programs so loved by Liberals who believe the government is a source of everything good in this world.

Let me quote one sentence, a hidden way of reneging on the red book: "On these two central priorities, more jobs and more social programs, we would be less than candid today if we pretended that we are doing all we would like". Substitute "all we would like" for what they promised in the red book and we will see how in a sneaky way red book promises are being abandoned.

I have a comment on our proposed rate of spending cuts. Canadians are becoming cynical and discouraged. They have been hammered for years with talk about spending cuts. Every day they learn about more layoffs, reduced government services and higher taxes accompanied by reports that the deficit still adds millions to the debt every hour. No wonder they are worried and do not spend enough to create the economic boom we should have right now, so many years since the end of the recession.

All of our prosperity, all the job creation the Liberals are bragging about that took place since they took over were the result of a booming economy in the United States. All of our output growth was driven by exports. They were lucky.

People are not spending because they have no confidence. Canadians need confidence but they also need hope. They need to see light at the end of the tunnel. The failure to accommodate these aspirations of Canadians is perhaps the greatest shortcoming of the Liberal budget plan and one of the greatest strengths of the Reform alternative.

We offer a general reduction in the tax burden out of the revenue surplus which will be sure to materialize once the deficit monkey is off our backs. We are offering a lowering of the debt burden so that even more tax cuts can be enjoyed in future years.

We offer these tax cuts in the context of tax reform which would eliminate the abomination called the GST. We would offer hope for the young generation which will be burdened with this outrageous 75 per cent of GDP, $600 billion or more of debt probably by the time the government gets through with its timid cuts, a trillion dollar debt and the interest on it.

I recently attended a conference on the future of our social security programs and the problems caused by the baby boomers. By the year 2030, some actuaries are saying, just to deliver on the already existing promises for old age security benefits, on medicare and on CPP we will need to raise $50 billion. This $50 billion will have to be raised by a generation that has fewer people of working age than we have right now.

They will need an increase in their personal income taxes by 50 per cent.

The young generation should be on the barricade. We have to work on the social security program we are leaving as a mandate to future generations. Another thing we can work on right now is that extra legacy, almost a trillion dollars worth of debt, and if we combine the provincial and the federal debt, that figure is easily reached. It will at least be that much there is a recession, and then some of the other contingencies that witnesses have talked about will be realized.

It is one of the great hidden scandals that we in this House are borrowing and are forcing it on a yet unborn generation and young people who are too occupied with making a living. Our debt burden is the greatest in the history of this country and is one of the greatest in the history of the world. People who cannot vote are being asked to tax themselves so that we can live beyond our means.

No wonder we are getting rave reviews as being the greatest country in which to live. Any country can do that as long as it has

credit and is prepared to borrow from as yet unborn generations. Live and blow it, have a great life for everyone. Get yourself a glowing report in the United Nations. It is okay that it is done on borrowed money. Those young people do not have any vote yet. That approach is the ultimate in cynicism. I find it unbelievable this issue is not being raised. We have been promised a white book on pension reform. Nothing. They are too timid to even raise it. It is one of the greatest scandals we are going through at the moment.

It will take another 20 years when this crunch will begin to hit. Twenty years is nothing, nothing, yet it is not being discussed at all. When it comes to one portion of that unbelievably horrendous legacy we leave for our children, grandchildren and as yet unborn generations, we hear: "Oh, no, we cannot be too tough on Canadians who are making $50,000 a year on old age security benefits. We promised it to them".

We could ask Canadian pensioners who are making over $50,000 a year in today's dollars: "Do you know what kind of a burden your generation and the generation sitting in this House is passing on to your children and grandchildren? Do you not think we ought to share and get together to make sure it is not as big as this?" I believe if I spoke to audiences and pointed this out, they all would say: "Yes, I am prepared to take a little cut in my income". That is all it would take. The IMF and everybody who looks at these numbers points out that it would not take a great deal of sacrifice to do this.

What does the Prime Minister do? Probably without consulting anyone he commits his government never to do what everybody says is necessary. I hear Canadians saying that we should be doing it because it is not right to burden future generations, our children and grandchildren, with the amount we have.

In concluding my analysis of the government's prebudget recommendations, let me note that the views I expressed were shared by a large number of witnesses who appeared before the finance committee. They reflect the concern of those who argued for the preservation of our country's social security net. I am sure they are shared by a very large segment of our population. I am sorry, truly sorry, they are not shared by the Minister of Finance, cabinet and Liberal backbenchers. How good it would be for Canada if they did.

[The Economy, December 12th, 1995]

Mr. Speaker, the provincial finance ministers are complaining, with much justification, that the government has cut them more than it has cut

other federal spending. This is a typical Liberal approach to dealing with problems. Shift the burden, let someone else take the blame.

Will the minister cut other federal spending more, not just to restore harmony with his provincial counterparts but also to send the right signals to capital markets?

[The Economy, December 12th, 1995]

Mr. Speaker, recently the dollar went down and the interest rate went up substantially. This is not exactly a ringing endorsement of the finance minister's proud announcement that his deficit elimination plan is on track.

Will the minister admit that drifting targets are not enough, that overspending $4 million an hour is too much and that markets and future generations of Canadians want him to do better like, for example, the eight provinces whose finance ministers he will meet tonight?

[The Deficit, December 11th, 1995]

Mr. Speaker, the news is out that the government's 2 per cent of GDP deficit target for 1997-98 can be reached with further negligible cuts. The minister blinked and lost his courage to do what is right for Canada. Will the minister go back to the drawing board, lower his deficit target, cut spending more and offer Canadians what they want and what they so richly deserve: a hope for tax cuts before the end of the century?

[The Deficit, December 11th, 1995]

Mr. Speaker, tomorrow the Minister of Finance will meet with his 10 provincial counterparts, eight of whom have announced definite dates for wiping out their deficits. Will the minister listen to them and learn how to balance his budget, or will he bring them more bad news about downloading and his own inadequate interim targets?

[Employment Insurance Act, December 11th, 1995]

Mr. Speaker, I rise to speak against the Bloc motion being debated today. The reforms of Canada's unemployment insurance are not only overdue. In many ways they do not go far enough and are too complex. While the reforms will impose hardship on some Canadians, they will at the same time bring much larger economic and social benefits to society as a whole.

I make this judgment after much study. In my career as a professional economist I was deeply concerned with the economic and social effects of unemployment insurance. In the mid-1970s I published a number of studies and organized an international conference that examined the effect of the level of benefits and ease of access to UI on recorded unemployment rates in Canada.

A few years ago I published a study that argued the large gap between Canadian and U.S. unemployment rates, which first appeared in the early 1970s, was caused by the increased generosity of our system initiated by Canadian reforms at that time. Incidentally the co-author of this study was Dr. Josef Bonnici, a former student of mine who is presently the minister of finance for the Government of Malta.

In February 1996 I will participate in a major conference of social scientists which will re-examine the issue of Canada-U.S. differences in unemployment rates to be held in Ottawa. My work on the effects of unemployment insurance on unemployment was fundamental economic theory which in turn guided reproducible econometric measurement co-authored by several colleagues and experts in this field.

Our results were verified by the economic council. It is fair to say that today even the left leaning part of the chattering class of academics, journalists and other intellectuals has accepted the validity of the basic premise.

Assar Lindbeck, a famous Swedish economist who is a strong supporter of social democratic policies, recently published a paper in which he noted that social support programs like unemployment

insurance induce the creation of institutions and ethical norms which increase the demand for the support programs.

The chattering classes in the past tended to infer from my analysis that I recommended the abandonment of unemployment insurance. I never did. The policy issue has always been the correct level of UI benefits and ease of access which maximize overall social welfare. There is no doubt the more generous the system is, the higher is the welfare of those receiving the benefits. However, on the other hand, the higher the benefits, the higher the unemployment, the higher the premiums payable by workers, the higher the risk of dependency of habitual users, and a host of other economic and social costs.

For a long time the political culture in Canada has resulted in the denial that these costs exist or, if they exist, that they are largely relative to the benefits received by unemployed.

About 15 years ago I was asked to be a guest on "Cross Country Check-Up". The views expressed during that period on the subject were most extreme. However, most important, as Claude Forget told me after he found that his report on the issue was ignored by the political system, the case for a less generous system has no political constituency quite simply because the economic and social benefits are diffused and poorly understood.

Those suffering from the reduction of benefits are clearly identified and well organized. No political party in Canada could afford to make the system less generous. This was true until recently when the Canadian debt and deficit began to threaten the very existence of all social programs.

The shift in the perceived political payoff from doing nothing and making UI less generous has not come easy to people like the Minister of Human Resources Development who used to deny vehemently even the existence of insurance induced unemployment and other costs. The timid and convoluted reforms to which his ministry gave birth reflect the struggle he had in admitting that these undesirable effects not only exist but are very costly to society.

Let me return to the Bloc resolution being debated today. It is true, as it states, that UI reforms will make some Canadians worse off, especially those in seasonal industries. However, my long and intense study of the UI system has convinced me that these reforms at the same time bring substantial benefits to many other Canadians so that overall welfare has increased. This certainly has been the finding of a number of royal commissions which looked at the question.

A basic theorem in economics is that under conditions like these, where some gain and some lose from a given policy, the government should offer assistance to those who have been asked to carry the burden of adjustment. After all it was a government created system, not their own fault, which caused them to enter these seasonal industries in excessive numbers and at non-economic wages. At the same time the rest of society which benefits from the changes may be expected to pay for easing the costs of transition for those asked to bear them.

For this reason I take the opportunity to urge the government to stick to its reforms and possibly strengthen them while at the same time make more generous provisions to ease the pain of transition felt by those affected adversely and directly by the reforms.

[Bankruptcy And Insolvency Act, December 8th, 1995]

My colleague whispers into my ear that they have no shame. I personally think this is reflective of a more dynamic, risk taking society which has all kinds of benefits for creating wealth and generally raising the income of citizens. However, there are always excesses.

As is the case with so many well-intentioned laws, this law on bankruptcy has been shown to have a number of unintended consequences. This law is subject to increasing abuse, especially as the memory of the disgrace of debtor prisons and social ostracism are receding from the public conscience.

Bill C-323, the amendment to the bankruptcy act introduced by my Reform Party colleague from New Westminster-Burnaby, is aimed at curbing one of the unintended consequences of what otherwise is a well-intentioned good act. If accepted it would reduce the ability of individuals to escape responsibility for the payment of fines which have been imposed by civil courts in response to damages caused by violence, typically against women.

The intention of the existing legislation clearly was not to open bankruptcy as an avenue which could be used by violent offenders to escape the penalty which society through court actions has imposed on them. This private member's bill is consistent with public sentiment on this subject. I support it and urge members of this House to pass it.

The proposed legislation continues to protect innocent victims of bankruptcy from the historic, often unjust and socially undesirable consequences of excessive penalties. Making sure the perpetrators of violent acts against people are duly convicted in a court of law and required to pay a fine is not equivalent to bringing back debtor prisons. It is a necessary and in my view highly desirable act that would restore equity and would close a loophole in the existing law.

I have every confidence in the ability of those entrusted with carrying out the intent of this act to distinguish between cases where bankruptcy is designed to escape responsibility and where it is the result of genuine bad luck. The risk of mistakes in such decisions is worth the social benefit in terms of greater equity envisaged by the designer of this bill. I urge that his ideas receive the assent they deserve.

[Bankruptcy And Insolvency Act, December 8th, 1995]

Mr. Speaker, all laws passed by Parliament are designed to deal with inefficiencies and injustices created by free and voluntary interactions among people. Canada's Bankruptcy and Insolvency Act is no exception.

People dealing honestly and with the best of intentions borrow money from others in order to establish businesses or carry them over periods of temporary insolvency. In this world of uncertainty, occasionally the best made plans of borrowers go wrong. They are unable to meet the repayment schedules to which they have committed themselves.

Historically, creditors used to have powerful instruments of coercion to assure that debtors make every effort to repay their debts. The stories of debtor prisons are the stuff of Dickens' novels. They have done much to influence our thinking about the injustices involved in the old, harsh methods of dealing with debtors.

These attitudes are that debtors unable to pay their debts are in trouble for reasons beyond their control. They typically are poor and need to be protected from rich creditors. Moreover, it is not in the interests of society that individuals who have hit a streak of bad luck should be stigmatized for life and forever unable to get back into business or even just mainstream life. The conditions described in Dickens' novels were that the poor were stripped of everything. They were stigmatized. Indeed those were bad times and some changes were needed.

The existing Bankruptcy and Insolvency Act reflects social attitudes. It makes it possible for individuals to declare bankruptcy to escape the social and economic penalties that historically were imposed on debtors. In Canada and in most industrialized countries today, debtors can clean the slate, walk away from past mistakes

and start all over again by the simple act of asking courts to declare them bankrupt.

Canadians believe generally that these rules are desirable and create a better society. They also believe that bankruptcy itself and the stigma attached to having declared bankruptcy are sufficient deterrents to abuse of the privileges granted under the law.

I might note that there are significant differences between countries. I understand that in the United States, some successful businessmen who today are millionaires brag about the fact that they have been bankrupt at least two or three times. One of the significant cultural differences in the United States, Canada and Europe is the fact that we typically do not have these kinds of entrepreneurs that go around saying it was quite all right to have been bankrupt a couple of times.

[The Deficit, December 7th, 1995]

Mr. Speaker, if lower interest rates create jobs and lower deficits create jobs, why does the minister not follow his own logic and go all the way and eliminate the deficit?