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Proceedings of the Standing Senate Committee on
National Finance

Issue 3 - Evidence - Meeting of December 13, 2007

OTTAWA, Thursday, December 13, 2007

The Standing Senate Committee on National Finance met this day at 9:11 a.m. to study the subject-matter of Bill C- 28, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2007, and to implement certain provisions of the economic statement tabled in Parliament on October 30, 2007.

Senator Joseph A. Day (Chair) in the chair.


The Chair: Good morning, everyone, and welcome to this meeting of the Standing Senate Committee on National Finance. My name is Joseph Day and I represent the province of New Brunswick in the Senate and I am the Chairman of this committee.


Welcome to this ninth meeting of the Standing Senate Committee on National Finance. The committee's field of interest is government spending and operations, including reviewing the activities of officers of Parliament and those various individuals and groups that help parliamentarians to hold the government to account. We hold the government to account through estimates of expenditures and funds made available to officers of Parliament to perform their functions and through budget implementation acts and other matters referred to the Senate committee.

Today, we examine the subject matter of Bill C-28, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2007, and to implement certain provisions of the economic statement tabled in Parliament on October 30, 2007. We are studying the subject matter in advance of the bill arriving in the Senate so that we will have a good understanding of the contents of the bill when it does arrive.

As is often the case with budget implementation acts, Bill C-28 is an extensive omnibus bill. Among other measures, it proposes to reduce personal and business income taxes; implement a further reduction in the GST; introduce a working income tax benefit, a registered disability savings plan, and savings plans for agricultural producers; and legislate the understanding between the federal government and the provinces of Nova Scotia and Newfoundland and Labrador with respect to their equalization payments in relation to the new equalization formula and the 2005 offshore accords.

The committee heard evidence on these and other matters contained in this bill already. We have previously completed extensive work on equalization and we are interested in learning about the changes to the equalization accords that have taken place in the last while.

I am pleased to welcome two guests as part of our panel this morning, both joining us via video conference due to the weather in Eastern Canada and also due to the shortness of the notice we were able to give. Dr. Paul Hobson, from Acadia University, is a professor in Acadia's Department of Economics. He has been on the faculty of Acadia since 1981. He is currently president of the Atlantic Canada Economics Association. Dr. Hobson has lectured and published widely on the subject of Canadian fiscal federalism, as well as on property taxation and issues in local public finance.

I also welcome Professor Wade Locke, from Memorial University in St. John's, Newfoundland. Dr. Locke teaches economics and specializes in the Newfoundland economy, resources, public finance, public policy, innovation indicators, productivity, economic impact assessment and cost-benefit analysis. He has undertaken research on the economics related to oil and gas activities in Newfoundland and Labrador and in Atlantic Canada; all of which are of significant interest to this group at this time.

Gentlemen, thank you both for joining us this morning. Do either of you wish to make introductory remarks before we go into a discussion?

Wade Locke, Professor, Memorial University of Newfoundland and Labrador: I thank the committee for inviting us to participate in your deliberations. I have nothing more than that.

Paul Hobson, Professor, Acadia University: I echo that. It is a pleasure to be with senators again on these important issues, and I look forward to a lively discussion.

The Chair: I will introduce senators prior to their questions so you will know with whom you are engaging in discussion. Can either or both of you give us a bit of a background on equalization developments, starting with the 2005 agreement between the provinces and moving forward to what has been happening in the last while with initiatives of the current government?

Mr. Hobson: Senator Day, if you want us to go back to 2005, I suppose that will give context. Two things were going on in 2005. Already, we had what has come to be known as the fixed framework for equalization in place. That framework was established under the Martin government. Then, there were the issues around the accord and the 2005 renewal of the accord agreements with Newfoundland and Labrador and with Nova Scotia. Those two things were in place at that time.

That fixed framework was never intended to be a permanent system. The O'Brien equalization panel was established, again under the Martin government. It reported over a year ago to the Harper government. Out of that report, in the 2007 Budget, came the proposal for a new equalization program.

That program was to be formula driven, as had been the case in the past. It proposed to include only 50 per cent of natural resource revenues in the calculation of what we now call pre-cap entitlements. The new program also included a cap on fiscal capacity, such that any equalization-receiving province could not have a fiscal capacity inclusive of equalization and accord payments and 100 per cent of resource revenues that exceeded that of the lowest non-receiving province which — at that time and for the foreseeable future — was Ontario.

That program involved changes to the 2005 accord. In particular, the trigger for accord entitlements was changed in the budget legislation. We all recall the furor over the accord in both Nova Scotia and Newfoundland and Labrador.

The fundamental problem is the way in which accord revenues are now linked to equalization payments through the cap process in equalization.

For Nova Scotia and for Newfoundland and Labrador, special provisions were made that would allow the two provinces to remain under a version of the fixed framework, and always with the option to opt into the new program at any time in the future. That provision was interpreted as honouring the accord agreement linking the 2005 accord with the equalization program in place at that time.

Finally, the 2005 accord agreement stipulated that accord payments would be calculated based on whatever equalization program was in place at the time, and that too has been the subject of some dispute. All of this dispute — at least at the political level — appears to have been resolved from Nova Scotia's perspective, and that political resolution is contained in the bill that we are studying today.

Mr. Locke: I would add that in addition to the O'Brien formula, the 2007 budget had the option of the zero-per-cent inclusion rule, so that either 50 per cent of resources or no resources were counted, whichever was higher for the provinces. The federal government would calculate that, and that was consistent with the commitment by the federal government to remove non-renewable natural resources but still include a cap.

In addition, the Nova Scotia agreement, which we are dealing with this morning, tends to provide additional funds to the Government of Nova Scotia, and they have opted in. In addition, as of two days ago, Newfoundland and Labrador has indicated they will opt into the new formula as well. It has nothing to do with the Nova Scotia provisions; it has to do with the amount of cash received.

If senators are interested, we will explain why Newfoundland chose that option, given that they are clearly better off under the fixed framework when all combined revenues are considered.

The Chair: We will be interested in hearing from each of you as to why you believe each province has done what it has done, so we can understand the ramifications of the bill we are looking at.

Thank you very much for that background and putting this issue into context. Our primary focus now is Bill C-28 and what is in the bill to understand that issue.

Senator Cowan: Welcome, and thank you for agreeing to participate again in this ongoing saga.

I want to ask your views on the numbers that have been posted on the Nova Scotia government website as to the effect of this agreement in the long term, over the next 15 or 20 years, for Nova Scotia. Nova Scotia has indicated that this deal will result in the province being some significant number of millions of dollars better off than they were either under the accord or under Budget 2007.

When we had briefings with the federal officials, they would not comment on the validity or accuracy of those numbers and said they were speculative, at least in the longer run. Have either of you had an opportunity to review the numbers that are posted on the Government of Nova Scotia website and, if so, do you have any comment on their accuracy or reliability?

Mr. Hobson: Maybe it would be helpful if I gave senators a quick briefing about the numbers laid out, and then Mr. Locke could jump in.

Senators may or may not have copies of these numbers before them. They can be obtained from the Nova Scotia finance department and from the home page of the Nova Scotia government. The province has released its estimates of equalization entitlements and offshore accord payments in every year through 2019-20 under a variety of scenarios.

The first scenario is their interpretation of the 2005 accord combined with the O'Brien formula. The way the O'Brien formula works, as I explained earlier, is there is a pre-cap equalization entitlement generated using 50 per cent of natural resource revenues. Then, a fiscal capacity cap is applied, and that provides a post-cap equalization payment. There is also a separate calculation of the offshore accord entitlement. As well, the Nova Scotia government's interpretation is that if the 2005 accord is to be honoured, any clawback of resource revenues through the operation of the fiscal capacity cap should be restored to the province, which is then included in the offshore accord payment calculation that you will see in part A of the tables.

You will see that their numbers then compare with the federal government's numbers from the 2007 budget document in terms of pre-cap equalization, the fiscal capacity, cap reduction and post-cap equalization entitlements.

The offshore accord payment numbers differ because Nova Scotia is reclaiming, as it were, any resource revenues that are clawed back through the operation of the cap. That calculation is part B of the table.

In part C, you will find a calculation based on the alternative equalization formula. This calculation refers to an extension of the fixed framework that was in place in 2005 when the accord was renewed, but it involves calculations of bases that are consistent with the fixed framework as it existed in 2005.

In Budget 2007, the extension of the fixed framework involved a variation on how those bases were calculated. By calculating the bases using the calculations from 2005, Nova Scotia will receive additional entitlements under the fixed framework relative to what was on offer in Budget 2007.

Those entitlements are what have enriched the agreement in a way that is satisfactory to the Nova Scotia government, as I understand their position. That is the structure of the table.

Mr. Locke: With respect to the numbers, it is clear that the fixed framework, as we call it, in the 2007 budget definitely gave Nova Scotia a higher amount of revenue. To go back and calculate the fixed framework the way it would have been prior to Budget 2007, the province would receive even more money from the fixed framework.

Therefore, the agreement for Nova Scotia allowed them not only to receive the extra money under the fixed framework but the extra money under a fixed framework that would have been calculated prior to Budget 2007, and that is an additional $500 million over the life of the project, according to their numbers.

With respect to the precision of the numbers of the federal Department of Finance, their numbers are consistent with the numbers we are generating. They are a little lower, but the department has more recent data on fiscal capacity, so that may explain that difference. However, the numbers are plausible and reasonable.

The Chair: We have the numbers before us with the A, B, C and D groupings that Professor Hobson took us through.

Can you explain the phrase ``cumulative best of'' because that is what Nova Scotia mentions. What does that expression mean in economic terms?

Mr. Hobson: When we last spoke to you, we made the point that in years following 2008-09, Nova Scotia would be better off under the extension of the fixed framework. That situation continues to be true with the provinces' revised calculations in that regard.

What is currently different from the situation with the 2007 Budget is that the province can opt into the new program and receive the benefit of that program for the year 2007-08, as it did by default for 2006-07, without giving up the benefit of the extension of the fixed framework.

The way this formula works is, although its equalization payment will be calculated based on the O'Brien formula contained in the 2007 budget, additional equalization payments can be made where the payment under the extension of the fixed framework would have exceeded the equalization payment calculated using the O'Brien formula.

In each year, a calculation is made of that difference. If the difference is positive, the province receives an additional equalization payment. The same option is offered to Newfoundland, by the way, in the language of Bill C-28.

That calculation will happen in every year through 2020. In that final year, the final reconciliation of these numbers should take place. The payment is on a cumulative go-forward basis. Every year a calculation is made, a positive difference comes in the form of an additional equalization payment to the province.

In the event that the calculation works against a province, its equalization payment would be reduced accordingly. Over time, the numbers suggest that the province will be significantly better off as a result of those additional equalization payments.

Mr. Locke: That is accurate. The federal government will carry along two sets of calculations, one for normal equalization and one for equalization that the province would have received had it been under the fixed framework as was calculated prior to the 2007 Budget.

They will compare on an annual basis the amount of equalization the province receives with the O'Brien formula and the amount of equalization the province would have received with the old fixed framework. If the old fixed framework is higher than the cumulative amount the province would have received from the current point to the point forward, the province receives a cheque equal to that difference. If the amount happens to be out, the province will receive more from O'Brien for that particular year, and there is an adjustment downwards in the amount the province receives in equalization.

The word ``cumulative'' means that each year, they will carry the province along, and they will add up what the province would have received under the old fixed framework and what it received under the new O'Brien formula. If each year is higher under the old fixed framework, then that amount is what the province will receive.

The Chair: Do I understand you correctly, Mr. Locke, that what will take place under Bill C-28 is a comparison of the cumulative amount that the province would have received under the old program versus O'Brien, and that difference is what the province might receive as a top-up, rather than looking on an annual basis between the two programs, the old fixed formula and the O'Brien formula, and then provide a top-up?

Mr. Locke: My understanding is that it is a cumulative basis. It is not the fixed framework in the 2007 Budget that is relevant; it is the fixed framework that occurred prior to the 2007 Budget when the province negotiated the 2005 accord. The frameworks are different. They are calculated differently, and there is more money involved for Nova Scotia.

Senator Murray: Thank you both for all the work you have done and are doing on this complex issue, and for your generosity in sharing your time and information with us, as you have so often done.

Senator Murray: Here is the problem with these numbers Senator Cowan was coming to, if I may say so. We have these tables put out by the Nova Scotia Department of Finance, and these tables indicate that Nova Scotia will receive less money than it would have under the expert panel approach and the 2005 Atlantic Accord. The province will be behind right through to about 2015-16. That is what Nova Scotia says.

Then they start catching up, and at the end of 2019-20, as a result of the catch-up in the previous five years, they will be ahead $228 million for the entire period, 2004-05 to 2019-20. That is what their figures show, do they not? You have the table, sir. I am looking at the same table you are, I think.

Mr. Locke: At the end of the Table D.

Senator Murray: If you look at the other tables, you will see that Nova Scotia, as the province acknowledges, would be behind where they would have been until 2015-16. Then there is catch-up and they come out ahead.

The problem is that while Nova Scotia puts out these projections in the out years, the federal Department of Finance resolutely refuses to project anything beyond 2008-09 or perhaps 2009-10. One understands why. I was critical of them at an informal briefing, telling them unless they were prepared to support or validate the numbers that Nova Scotia was putting forward that they were leaving Premier MacDonald and his government in an impossible position.

That will not make much impression on the officials. They do not project beyond a couple of years for reasons we understand. Even with the fixed formula, which I opposed at the time, there are many variables, and so the department is not willing to project in the out years.

How can Nova Scotia justify its position projecting all the way to 2019-20 when the federal government will not do so?

Mr. Locke: To evaluate what Nova Scotia was offered, you must consider the whole period up to 2019-20, and it is unfortunate that the federal officials have not been willing or able to provide the forecast or simulation of that period of time to allow some sense of comfort for the Nova Scotia government.

The Nova Scotia government takes a lot of things on faith, that things will transpire as they thought they might. If they do not, then the positive aspects of this particular deal offered to Nova Scotia might not be as great as the province now believes them to be.

The numbers they projected are not entirely inconsistent with what we would project. Our numbers might have been a little higher but not fundamentally different. We have bought into the process of simulating out this distance. We understand there are uncertainties and many things can change. The equalization system itself can change in the interim to change the perceived benefits.

Nova Scotia has gotten the extra money, if you want, from the old way the fixed framework was calculated, and that is what they are doing. They are receiving the extra money, and they are buying into this new framework on the expectation or promise of extra revenue in the future.

Senator Murray: That news is good for Nova Scotia. You are validating their numbers to some extent, and I take it that is your position, Mr. Hobson?

Mr. Hobson: That is correct. We see these kinds of exercises as simulation exercises. They are not detailed forecasts. Nova Scotia has tried to take into account a fair bit of detail about the fiscal situation in other provinces, especially Ontario, in generating these numbers, but we can view these only as simulations. The numbers tell us that this new deal could be a good deal financially for Nova Scotia, even relative to its initial position with regard to honouring the 2005 accord. We will not know the answer until 2019-20. Only then will the numbers be in, and by then we will all be old men.

Senator Murray: What you say offers comfort to those who wish Nova Scotia well, but as you say, we will not know. Finance Canada says that beyond a year or two, Nova Scotia's numbers are ``purely speculative.''

There is an entirely different issue I should raise with one or both of these witnesses if we have the time.

The Chair: As a follow up to Senator Murray's question, Professor Hobson or Professor Locke, do either of you believe that Nova Scotia or Newfoundland and Labrador would agree to enter this type of arrangement based solely on their own projections, and without having received any projections from the federal government?

Mr. Hobson: That question is a difficult one for a mere academic to answer. That is one that the Nova Scotia Department of Finance must answer.

Mr. Locke: I agree with Mr. Hobson. We are not in a position to answer that question.

I am sure they have had ongoing discussions, but I hope they have considered many different possibilities, this one being the best of a number, including consultation with the federal officials. The benefits of this agreement are contingent on the simulations that are run.

Senator Di Nino: You have partially answered my question. There is such uncertainty in these numbers because of all the variables. It is difficult. One can always prepare simulations based on certain factors, but all or any of those factors can change. Notwithstanding, we agree it is good news, and good for Nova Scotia. How reliable can the numbers be that we project 15 or 20 years hence when we truly do not have the factors needed to make accurate predictions?

Mr. Locke: Let me respond to Senator Di Nino. The precision of the estimates in five, ten, fifteen, twenty years' time, or even two years' time, are subject to a lot of uncertainties. We do not know what will happen in that time period. We do not know what will happen next year. If we asked about the price of oil five years ago, we would receive a different answer than if we asked today.

To make the decision that the Nova Scotia government is being asked to make, the province must make, it must consider the total time period involved. The province must put forward some kind of simulation to best guess what might transpire at this time, recognizing that the situation might change. If it changes, it might be to their detriment or further benefit. There is no way around preparing this simulation. If the federal government puts forward legislation to provide a better equalization system and a better system for Canada, and it is based upon a time frame, then implicitly or explicitly the federal government must have prepared the same kind of simulation for a period of time.

In Budget 2007, the implicit understanding of everyone being better off was not meant to be for only two years. Rather, everyone thought it meant better off in the longer term as well. In advising the Minister of Finance, someone must have determined what these things must look like in the longer term for Canada and for each of the provinces. Whether that information is made public is a separate matter. This simulation must be done and, unfortunately, it is the nature of this kind of exercise that things change.

Mr. Hobson: If I can add to that, Mr. Chair, it does not come as any surprise to us, given the calculations we presented to you in June, that an extension of the fixed framework going forward will offer more money in total than the O'Brien formula going forward. It will do offer more simply because of that 3.5 per cent annual growth built into the equalization part under the fixed framework. That 3.5 per cent is guaranteed in Bill C-28, so it does not surprise us that we see orders of magnitude such as those we are seeing. The real question comes down to whether those numbers at the end of the day by 2019-20 are better than Nova Scotia would have received under the O'Brien formula, if the accord had been fully respected. That is to say, have any clawbacks through the operation of the cap been restored to the province as additional accord payments?

Again, we will not know the answer until 2019-20 because only time will tell. It is no surprise that any extension of the fixed framework, at least with a 3.5 per cent annual growth rate, will benefit Nova Scotia on balance over time as it would benefit any province on balance over time.

Mr. Locke: That is accurate, yes.

The Chair: You mentioned the cap. Could you look at the figures we were looking at in option D. They show no cap involved.

My understanding is, with this arrangement, they are into the O'Brien formula with an adjustment on a cumulative basis to go back to make sure they are not suffering under that formula and a possible top-up by virtue of the fixed framework escalation. However, there is still a cap, I presume. Why is it showing no cap in the third column?

Mr. Hobson: I am not sure what this transitional approach referred to in section D is about. I understand parts A, B and C of the tables. This transitional approach has some kind of transition arrangement between the federal government and the province as we move to the new arrangement, but I do not fully understand table D. That table has not been discussed anywhere in the Nova Scotia government website that I know of.

Senator Murray: That is the agreement, is it not?

Mr. Locke: My interpretation of that table is that they are guaranteed to receive the money they would have received under the old fixed framework with no cap, so the accords would have worked as they would have worked when negotiated in 2005. While the equalization payments the province receives under the O'Brien formula will be capped, they will compare that with the equalization they would have received under the old fixed framework, and the difference will be given to the province. Effectively, there will be no cap because there is no cap on the old fixed framework, and whatever the difference is between the new equalization with the cap and the old fixed framework without the cap will be the payment that they will receive. Therefore, the cap will be ineffective in that case; or the amount of money will be topped up so the cap is irrelevant. It will simply determine the amount of money to be received as a top-up.

The Chair: That is my understanding as well. They are in the O'Brien formula but then they look at the cumulative fixed framework amount that would have been there and there may be a top-up if the 2005 fixed framework amount is higher than they would receive under that formula.

Mr. Locke: That is my understanding and that is why they do not show a cap.

The Chair: Surely, they would not receive more with this adjustment than they would receive under one program or the other. Yet, the figures they give us say the new alternative based on the October 10 agreement between Nova Scotia and the federal government shows they will receive more than they would under either of the two programs. How could that happen?

Mr. Locke: It happens because of the way in which the equalization is calculated under the 2005 program. It was calculated as an average of two things: the equalization determined by looking at the per capita fiscal capacity and the equalization based upon the average of the entitlements. The 2007 fixed framework was based only upon per capita fiscal entitlement, whereas prior to that, it was based on the average entitlements in the previous three years and the average fiscal capacity in the previous three years. If we go back to that system, Nova Scotia would receive more money than they would under the 2007 agreement. That is what makes it a sweetener for Nova Scotia. They had the option of taking the 2007 equalization fixed framework under the 2007 budget. In that case, they would have received more money, and Nova Scotia would have been under a different fiscal equalization system than the rest of Canada.

The federal government appears to have agreed to go back to the way things were when the 2005 accord was negotiated and cap the equalization in that way. If it is done in that way, then Nova Scotia will receive more money under the 2005 fixed framework than they would from the 2007 arrangement. The extra money they receive by doing it the old way is the extra sweetener for Nova Scotia to adopt the O'Brien formula. It is not a matter of the O'Brien formula or the 2007 arrangement; rather it is the O'Brien or a top-up on what occurred prior to 2007 under the 2005 fixed framework. I do not know if that is clear, senator.

The Chair: It is becoming clear. We have two formulas: one before the fixed framework and the O'Brien formula in 2007. Nova Scotia has the best of both worlds and it can be topped up at 3.5 per cent per year based on the fixed framework.

Mr. Locke: It is based on the old 2005 fixed framework. Yes, they have the best of both worlds.

The Chair: All the words appear in Bill C-28. In the first round after the budget, Nova Scotia and Newfoundland and Labrador were required to choose. They did not like that because they said that they could be better off at some time under the one that they do not choose because things might change. The new accord that Nova Scotia reached on October 10 — the new alternative agreement — has been offered to Newfoundland and Labrador. It appears in Bill C- 28 and gives them the option to bounce from one formula to the other or always being topped up based on a cumulative basis. Is that accurate?

Mr. Hobson: I would not call it bouncing from one to another. They are opting into the O'Brien formula. Then additional payments are made in comparing the two things. They are opting in; they are not bouncing from one to another. However, they have the equivalent benefit of being able to do so.

The Chair: It is not a bounce but they receive the benefit as if they were. They are able to look at each year.

Senator Ringuette: Providing us with your perspective is always welcome.

In regard to the four tables that we have in front of us, what we are looking at is ultimately table D, the transitional approach.

That should be the end result on the year-to-year basis.

Mr. Locke: That is our understanding, yes.

Senator Ringuette: Between 2004 and 2011-12, there is still a gap of $306 million, in comparison. At the end of the day, in the next four years, Nova Scotia will still lose $306 million in federal transfers.

Mr. Locke: That is our understanding, reading the tables you are reading as well.

Senator Cowan: I wanted to go back to the discussion we had in the spring about the difference between equalization agreements and economic development agreements.

The Atlantic accord was specifically described as an economic development agreement and not an equalization one. There is an equalization formula, which we understand is revised from time to time, and that is available to all provinces. Depending upon calculations of their fiscal capacity from time to time, provinces are either recipients or not of equalization under a formula as it exists from time to time. There is not one formula in place forever. It evolves, and provinces are either in or out, depending upon calculations of their fiscal capacity.

The Atlantic accord said that the offset payments under the accord would not be included in the calculation of the fiscal capacity of Nova Scotia or of Newfoundland and Labrador. The payments were economic development payments and not equalization payments.

I want to make sure that characterization and that treatment of what are now top-up payments is carried forward in these arrangements. Is it correct that the top-up payments that are received will be excluded from the calculation of the fiscal capacity of Nova Scotia over this time for purposes of determining the province's entitlement to equalization, under whatever formula is in place from time to time?

Mr. Locke: That is my understanding, yes, that the top-ups would not be part of the fiscal capacity. Nothing in the current legislation would tell you that it is part of it. The only way to calculate it is as if it is not, because it is calculated with the payments — with the equalization under the O'Brien formula and with the equalization under the fixed framework; the difference between the two is what the province receives.

If the province was part of the equalization fiscal capacity, the federal government would have a real problem on their hands because they would calculate it and then have to put the province back in. Then they would need to give the province another payment because by putting it back in, they lowered the amount it had, so the fixed framework would become higher still.

It could not work that way mechanically and I do not think it does work that way.

Senator Chaput: Coming back again to the numbers in part D, as my colleague Senator Ringuette said a while ago, and if I understood correctly, from 2004-5 to 2011-12, there is a loss. They lose $306 million, but they expect to catch up by 2020, when there will be a plus of $535 million.

Are those figures net? Are they based on annual growth? If so, what is the percentage? Is it 3 per cent? Would other variables cause uncertainty in those numbers, which could make them worse than they look here?

Mr. Locke: The 3.5-per-cent growth rate in this particular bill and in the previous bill that we discussed is there. That 3.5-per-cent growth in equalization bases or entitlements under the fixed framework is there, but lots of things can change that.

For example, if Ontario grows dramatically or does poorly, it can change this outcome. If the price of oil falls through the floor, it can change this outcome. Many things can happen to change the outcome in both directions.

Senator Chaput: There is no guarantee.

Mr. Locke: There is no guarantee.

Senator Murray: I think it needs to be said here again for the record that the 3.5 per cent is not a 3.5-per-cent increase for Nova Scotia. It is a 3.5-per-cent increase in the pool, in the size of the fund. It is Nova Scotia's share of what a 3.5-per-cent increase in the size of the fund would be, taking into account the entitlements of all the other provinces if that formula was in effect.

Mr. Locke: That is correct.

Senator Murray: I have a question that has nothing to do with the Atlantic accord or equalization, but it is about the bill.

In this omnibus budget implementation bill, there is a provision to set up a P3 office. You know what P3 is — it is public-private partnerships — and the government has set aside $1.25 billion for a P3 fund to be applied to federal infrastructure.

I asked the officials yesterday if they had prepared an analysis of how these P3 partnerships had worked — whether they were successful or not in other jurisdictions in the provinces, in particular.

Perhaps it was a superficial impression from reading the media but I think Nova Scotia was one of the provinces that tried this type of partnership with, at best, mixed success. Do either of you know anything about this issue? Have you followed it?

Mr. Locke: It is my understanding as well that these things sometimes work reasonably well and sometimes they do not work at all. We need to go on a case-by-case basis.

It is like the privatization of a Crown corporation. Sometimes, it is successful and sometimes not. It depends on the specifics involved. It is neither positive nor negative but rather a matter of what the benefits and costs are of going one way or the other.

Senator Murray: Are there lessons to be learned from what has transpired in other jurisdictions? Do you know about the Nova Scotia case, Professor Hobson?

Mr. Hobson: In the Nova Scotia case in the late 1980s, in the period of severe budget cuts, the Nova Scotia government experimented with public-private partnerships, in particular in terms of constructing new schools. The feeling was that the program was overly expensive from the province's point of view. At the same time, the province has reviewed the previous P3 arrangements and, in its recent Speech from the Throne, has committed to entering into further P3 arrangements. Obviously, the province is of the view that this type of partnership can work in a beneficial way in terms of developing core infrastructure.

Senator Di Nino: I will follow up on this P3 idea that Senator Murray has introduced. As I understand it, the concept behind public-private partnerships is to leverage and multiply the amount of money that the government would have for a specific project with a combination of partnerships with other levels of government and, primarily, with the private sector. Let me take the example of $3.5 billion in infrastructure that this government has set aside over the next few years. If one were to engage with other levels of government as well as private enterprise, that amount could reach as much as $100 million for those projects. Do I understand that correctly?

Second, like any other endeavour, we would need to put in place certain controls or administrative rules to ensure that the funds are not only used for the intended purpose but used appropriately. That is good business sense. Nothing ever succeeds 100 per cent, but overall, my understanding is that, across the country for those that have tried these partnerships, they have been successful. Provincial governments have been able to multiply the federal government's investment by two or three times to give the public that much greater benefit.

Am I correct in that assumption?

Mr. Locke: We are not experts on P3. One needs to take into account all kinds of factors. It is true they can leverage more funds, but the issue is around who has the greater ability to borrow at lower costs, and how that translates into ongoing operating costs and fees for the public. The issue is complicated and we need to take it into account on a case- by-case basis. Some scenarios work better than others. We have toll roads in Nova Scotia that seem to work reasonably well. Toll roads in Toronto do not seem to work as well. It is not in our expertise.

Senator Di Nino: I appreciate that.

Chair, my other question goes back to the accord. Newfoundland and Labrador recently opted in, although for a period of time. I wonder if one or both of these gentlemen would comment on that situation. However, when the announcement was made by, I believe, the Finance Minister of Newfoundland and Labrador, it was about a rather healthy surplus in the province's budget, which hopefully Newfoundland and Labrador will continue to increase. What impact would that situation have on the equalization formula if the surpluses of any province are greater than the province has today or, in effect, if the province goes from a negative to a positive?

Mr. Locke: Newfoundland has entered into the O'Brien formula voluntarily. It has nothing to do with this particular bill available to them. We projected that previously and that has not changed. This situation is important for the senators to understand.

Newfoundland received a $2 billion payment upfront when they came into the accord in 2005. Any payment under the 2005 accord will be credited against that $2 billion payment and it will not show up as cash; it will be credited against the $2 billion. It is not cash to the province but rather a credit against the $2 billion previously received. Currently, we have run down about $600 million of that through payments under the 2005 accord. That is about $300 million for that particular year. If we remove the $300 million as non-cash from our estimate, the amount of cash the province can receive under the fixed framework was in the range of $666 million. If we add the $305 million, we will have the $971 million that we talked about for that particular year under the fixed framework. The province has the option of going with the O'Brien formula and the zero-per-cent option for royalties to be counted. If the province goes with that formula, then it will receive, according to the federal budget, $732 million in cash or equalization for that particular year.

The amount of cash they will receive is $732 million, which is less than the amount of the 1985 Atlantic Accord, the 2005 Atlantic Accord and equalization payments that they would receive in 2007-08. It will be less by $230 million or so.

However, once I take out the $305 that will be credited against the $2 billion, Newfoundland will be better off with the zero-per-cent option under Budget 2007 because they will have more cash. They will have, in effect, $66 million more cash by opting into the new system even though the $2 billion upfront payment will not be reduced by going with the zero-per-cent option.

Therefore, Newfoundland simply added the numbers to see which number gave the higher cash amount they could pave roads with. The $300 million credits under the 2005 accord will not hire new bureaucrats, will not buy more paper, will not pay for new computers, will not pay for any better health care or education, so the government decided it will take the extra cash, simply because there is no chance for the province running out the $2 billion upfront payment between now and when they are off equalization.

There is no chance of running it out and they expect to be off equalization next year, so they opted for more cash. Yes, they had a budget surplus in excess of $888 million. That surplus is driven primarily by high oil prices. The fundamentals that gave them that surplus are expected to proceed and continue for a long period of time.

The Chair: Professor Hobson, do have anything to add from the Nova Scotia point of view? Does that upfront money that Nova Scotia received in relation to the offshore agreement impact on Nova Scotia's decision?

Mr. Hobson: Not as far as I understand it. I am not sure where we are in terms of credits against that amount, but that money does not seem to have been an issue in their particular decision.

Mr. Locke: Nova Scotia is in a situation where it is extremely unlikely that they will be off equalization over the time period for which the accord and extended accord will occur. They will, over time, pay off the upfront payment and still have something left over, so it is in the province's interest to do what they are doing. It happens to be in the interest of Newfoundland and Labrador to say, since the province cannot pay it off before we run out of equalization, we will take as hard cash whatever in the short-term is in our interest. It speaks to the distortions created in the equalization system as result of all these machinations.

The Chair: We can all appreciate that from your discussion.

Senator Ringuette: Gentlemen, I remember when we were exchanging points of view in June, much concern was expressed in regard to another kind of transfer, and that is the transfer for post-secondary education and social programs.

In that regard, Senator Murray repeated that this budget removes from these transfers what is called the ``associated equalization,'' for every province, except Alberta and Ontario. The removal is not in this particular budget but starts next year, and it would create extreme difficulties. For example, New Brunswick, in the next 10 years, loses $1.2 billion from these two transfers. For a small province like New Brunswick, that loss is chaos. From my perspective, it increases the disparities between the haves and the have-nots, and increases the disparities between some provinces that are a little better off than the ones in Atlantic Canada.

From your point of view, do you know whether there has been some discussion on this issue between Nova Scotia and the federal government? It is 24 months into a new government, or an old government that has not yet met within a forum of the Prime Minister of Canada and the provincial premiers.

Do you know whether there has been any discussion between Nova Scotia and Newfoundland about these two other crucial transfers to the provinces?

Mr. Hobson: I am not aware, senator, of any such discussions. Of course, none of this issue is raised in the context of Bill C-28. We discussed the issue back in June. You are absolutely right that moving to equal per capita cash widens gaps in overall fiscal capacity among provinces. There are issues there, but I am not aware of discussions between the Government of Nova Scotia and Ottawa, although such discussions may well have been taking place.

Mr. Locke: Nor am I aware of any in Newfoundland.

Senator Ringuette: I am concerned because in June, at least, on three different occasions, officials from the Department of Finance said, in response to questions that I asked, that there was no analysis of the cost of education and social service in the provinces, and that there was no need to measure fiscal capacity.

I am reading their words off my notes, and health care provisions probably will be affected in the near future.

I know that issue is not part of Bill C-28, but it is a major portion of what we need to look into regarding transfers to the provinces.

Mr. Locke: It is a serious issue that will become more serious over time. We are not aware of what kinds of dialogues are taking place between the different levels of government, but it does not make the issue less serious. It will become more important, and people will appreciate its significance as time goes on. We have been absorbed with equalization, and this issue is an equally important part of it.

The Chair: You know our interest in this particular area as well, although it is not part of Bill C-28, as has been pointed out by Senator Ringuette.

Senator Ringuette: I hoped that in accepting this new deal, there was an unwritten agreement for the provinces to look at these future unequal, inadequate and unfair transfers.

Mr. Hobson: Again, senator, we do not know what discussions have been carried out in that regard. There was an explicit recognition in Budget 2007 that there should be new equalization outside of equalization. That statement was in the O'Brien report, so it is part of what is driving this legislation.

All we can offer is that we have prepared numerical analysis on this issue. In due course, there will be a paper. Once we have that paper, we will be glad to share it with the committee.

The Chair: Thank you for that background information. That is interesting.

I mentioned Saskatchewan earlier. Saskatchewan, under a previous administration — they have changed their government now — started a lawsuit against the federal government in relation to equalization, particularly with respect to natural resource inclusion in the calculations. Are you aware as to the current status of that lawsuit?

Mr. Locke: No, I am not.

Mr. Hobson: No, I am not aware of the status of that matter.

The Chair: Premier MacDonald of Nova Scotia was before us about the same time you were last with our committee, when we were dealing with the implementation of the March budget of this year. Premier MacDonald said the following:

At the end of the day, all we want is what was signed in 2005. This is the Atlantic Accord. Instead, the federal government unilaterally ripped it up on March 19 when they introduced their budget. We want the Accord. That is my position.

Now, he has signed on as of October 10. Can each of you say that the rights of the provinces, Nova Scotia and Newfoundland and Labrador, have been restored by the provisions of this bill and the agreement that was reached with Nova Scotia on October 10 of this year?

Mr. Hobson: Yes, obviously, what has been agreed to here is different from Nova Scotia's interpretation of the 2005 accord as represented in part A of the table that you have been looking at. Obviously, under the new arrangement, through the O'Brien formula, there is some clawback of equalization payments, of offshore revenues in particular, through the cap. They have not achieved the 2005 accord. The principle of the accord is not respected in this new arrangement, but financially, the numbers suggest that the province is better off than even if the principle of the accord had been respected. That seems to be their position as to why they have accepted this proposal.

Mr. Locke: I agree with Dr. Hobson that, with respect to Nova Scotia, the province receives more money. The accord still does not work the way it is supposed to, but Nova Scotia receives more money, and they receive more than they would have if the 2007 fixed framework had stayed in place, so I guess that proposal is a good thing. It is a compromise. It allows the federal government to say that all provinces are now under the same equalization system, which they would not have been able to do if Nova Scotia had taken the fixed framework in the budget. That choice would have created problems for the federal government.

For Newfoundland and Labrador, I do not think that is the case. I do not think Newfoundland and Labrador would sign on to this particular legislation. There is nothing in it for them. The only thing for them is a little extra cash they will see this year and maybe next year. No, this system does not address the issues for Newfoundland and Labrador, and it does not address the fact that the accord is not working the way it was intended to work. However, Newfoundland will be off equalization in a year or two and it will be a moot point.

The Chair: However, what Newfoundland and Labrador has announced in the last two or three days can only happen if Bill C-28 is passed. Is that correct?

Mr. Locke: No, that is not correct.

The Chair: How can they have the deal that they believe they now have under the budget if this bill is not passed?

Mr. Locke: To my understanding, they had the option in the budget to opt for the O'Brien formula, and the federal government would calculate which of the O'Brien options, 50 per cent or zero per cent, was in their interest, or they could specify which number they wanted. That option was passed in the last budget round. They are saying, ``We will pick this number, $732 million, please,'' and that option has nothing to do with this bill. It has to do with what was available before and what they receive in cash versus what they receive in credits against the $2 billion. This bill does not influence what they do now.

Senator Di Nino: I believe this bill provides the legislative framework to implement this option. I think if you check, that is correct.

As well, Premier MacDonald also recently made a statement to the effect that the deal was signed to Nova Scotia's benefit, so I think he is happy with it.

The Chair: Yes, Senator Di Nino's first comment, however, is contrary to what Dr. Locke has said. They do not need Bill C-28 to opt for what they are opting for under O'Brien. Is that correct?

Mr. Locke: We are talking about Newfoundland and Labrador. Newfoundland does not need this bill to opt for O'Brien. They had the option. When the Budget Implementation Act, 2007 was passed, they could have chosen to opt into the O'Brien formula, which they are now doing, and they are picking a number available to them, the $723 million that was available to them for equalization payments even though $732 million is a smaller number than the $971million that is in the budget. The $971 million consisted of equalization, the 2005 accord payment and the 1985 accord payment. The province said, ``Given the options available to us, although none are attractive, we will take this one.''

The Chair: Does anything flow from those questions?

Senator Di Nino: I have notes suggesting that Bill C-28 provides the legislative framework. I may be wrong. We should check that.

The Chair: I believe that Professor Hobson has indicated that Bill C-28, the bill we are looking at, is necessary for Nova Scotia to have the arrangement they want.

Mr. Hobson: The language of Bill C-28 is inclusive of Newfoundland and Labrador, but the province's decision is not based on the same deal that Nova Scotia bought into.

The Chair: I think we now have consensus on that issue. We understand what you said.

If there are no further questions, honourable senators, I thank our two witnesses, Dr. Locke from Memorial University and Dr. Hobson from Acadia University. We are interested in continuing our contact with you. This committee has an interest in the per capita transfer under the Canada Health Transfer and the Canada Social Transfer. We undoubtedly will be in touch with you in due course in that regard. We appreciate your attending by teleconference to discuss this important piece of budget implementation legislation, Bill C-28. Thank you very much, and compliments of the season to you.

I am pleased to welcome for this session and this panel, two new witnesses. First, Bob Friesen, President of the Canadian Federation of Agriculture, is here to speak with us about the farm income protection aspect of the legislation. Part of that information is under tab 11 of our materials.

Founded in 1935, the Canadian Federation of Agriculture provides Canada's farmers with a single voice in Ottawa. The Canadian Federation of Agriculture is the country's largest farmers' organization. Its members include provincial organizations, general farm organizations, and national and interprovincial commodity organizations from each province.

Our second witness is Rob Rainer. He is Executive Director of the National Anti-Poverty Organization. He will speak to us about the working income tax benefit in the legislation. That information can be found in part 3 of our materials.

The National Anti-Poverty Organization is a non-profit, non-partisan organization working for the eradication of poverty in Canada.

Good morning, gentlemen, and thank you both for joining us. Before we have introductory statements, Senator Ringuette has an intervention.

Senator Ringuette: Yes, I have a point of order. I am wondering if my colleagues received the same information that I received from the clerk this morning in regard to my question yesterday to the officials of the Department of Finance.

The Chair: We received the material. It is being reproduced and it will be distributed to all honourable senators as you speak.

Senator Ringuette: In regard to this issue, would it be possible for this committee to request the presence of the officials of the Department of Finance to look into this unfair issue of removing the tax liability from a certain group of people and not from another group of people, namely, senior citizens and the income trust situation.

Mr. Chair, will we receive the officials of the Department of Finance again.

The Chair: I have not read the material yet. As I indicated, it has been received only recently. Income trusts are not in this bill, as I understand it, unless you can refer me to a particular place in this bill. No question, this issue is important, but it should be taken into consideration for future discussion by this committee. This material will help us determine who the proper witnesses will be.

Senator Ringuette: I agree with that.

The Chair: The steering committee will take that information into consideration.

Mr. Rainer and Mr. Friesen, do either or both of you have introductory remarks?

Bob Friesen, President, Canadian Federation of Agriculture: Yes, I want to touch on some of the things that were announced in the budget.

First, thank you for the introduction. Yes, our organization has been around since 1935. It was there to speak on behalf of farmers and to empower farmers. Although many of my colleagues tell me I look old, I assure you I have not been around since 1935.

Thank you for this opportunity. The clerk apologized for the short notice. Let me assure you that we do not mind short notice or long notice. We like to speak for agriculture whenever we have the opportunity.

Let me start by reading a quote from our press release after the budget this spring: ``I think this budget indicates a good understanding and a real step forward in addressing some of the issues,'' That view is, of course, with regard to agriculture.

We are always keenly interested in pre-budget consultation, talking about some of the needs in agriculture. As you know, agriculture is an extremely important industry with regard to the Canadian economy, almost 9 per cent of the gross domestic product and 14 per cent of employment. You may also know that agriculture has its challenges. Sometimes, some sectors do well. Other times, some sectors do not do so well.

Specifically, with regard to the budget, we were happy that the capital gains exemption was increased. We had been looking for that exemption for some time. Especially given the environment in agriculture today, farmers need all the opportunity they possibly can have to pass on their farms to new entrants or to their children in the best way possible.

You may know that the average age of farmers continues to increase in Canada. The number of farmers under the age of 35 has decreased from 21 per cent of the farm population some years ago to less than 10 per cent. That is our future. The fact that the capital gains exemption was increased facilitates farmers being able to afford to cash in on their equity better, to have some assurance that there is stability, as well as providing a better opportunity to pass on the farm to their children or to new entrants.

In that budget, there was also an allocation of $600 million to what we now call the Agroinvest tier. We had asked the minister for that. We asked if we could perform an analysis to determine the merit of changing the top tier in the Canadian Agricultural Income Stabilization, CAIS, to a more predictable, stable tier. When Minister of Agriculture and Agri-Food, Chuck Strahl, made the announcement, he said to me: ``You kept asking for an analysis on it. The more often I talk to farmers, the more often they asked me to please implement that change.''

The positive thing about that announcement was that when they announced the change to that top tier, they announced it together with $600 million in seed money or kick-start money.

We have a diversified agricultural industry, and unfortunately, when we make a change in policy, although it may be positive in the short term for one sector, it may have a negative impact in the short term for another sector.

We are convinced and confident that this change is a good for everyone in the long term. It could not have happened at a better time for the grain and oilseed sector, and that is positive, but it could not have happened at a worse time for the livestock sector. We are not saying it is not a good idea. We are saying, let us make provisions so the livestock sector, because of the excruciating crisis it is in, is given a choice as to whether it wants the old top tier or the new top tier, for at least 2007-08. Hopefully, by that time the crisis will be over and all of agriculture will be able to benefit from that more predictable, stable top tier.

At the same time, the government announced $400 million in the context of a cost- of-production approach to mitigating some of the challenges in agriculture. If I remember correctly, it was $400 million immediately and a further $100 million per year for five years. Although it does not flow within a cost-of-production formula, it clearly recognizes that farmers' challenges do not come only from a low price for their product but also as a result of escalating input costs. We felt it was a good understanding of how to address the challenges in agriculture from different perspectives.

I also want to acknowledge and recognize the opportunity and the potential that we feel we have within the whole area of biofuels or bioenergy. Again, I believe success eventually will be contingent on having a competitive policy with the biofuel industry in the U.S, as well as in Brazil. We know we are far behind the U.S. The U.S. is far behind Brazil. However, we think this step is a positive one in the right direction to create another opportunity for the primary producers as well as for downstream industry. It is also an opportunity to use that potential to help profitability and to create a more positive environment in agriculture.

Having said that, I want to flag several issues within the context of the October economic statement and upcoming budget. One is the livestock crisis. This situation has become a crisis now of unprecedented proportions. It is not only about farmers. It is about input suppliers, our processing sector and our rural infrastructure. I am a turkey and hog producer from Manitoba, and this crisis is also about the health of our small communities in that if a sector of the primary production industry suffers, it also has negative ramifications for small communities, small-town businesses, et cetera, so we need to address that issue.

I spoke to Minister Gerry Ritz about the tobacco industry last week. It is another industry where we need to find solutions and make the problem go away.

I want to talk about two positive things, Mr. Chair, and then I will finish. We will look for a small amount of money for two initiatives, small if you think of all the money that is invested in agriculture from both levels of government.

One is a grown-in-Canada initiative in which we ask for money for a positive marketing strategy for the Canadian consumer in branding Canada in Canada. We have done a fair bit of market research. We know what the Canadian consumers' feelings are with regard to Canadian production and how they want to support agriculture. I am willing to answer any questions on that subject later.

Another exciting initiative is strengthening or empowering farmers in the marketplace, where we try to do as many things as possible to make the environment more profitable in agriculture. We call it a co-op investment plan and we look to Quebec for that model. We feel that a $20 million tax concession across Canada for Canadian farmers will result in hundreds of millions of dollars of direct capital investment into co-ops — and co-ops are used to empower farmers — and further investment of hundreds of millions of dollars by those co-ops in rural areas. We are always talking about rural development and improving rural areas, and we think that initiative is a positive one as well.

Thank you very much, Mr. Chair. I am willing to answer any questions on those issues.

Rob Rainer, Executive Director, National Anti-Poverty Organization (NAPO): Thank you for the opportunity to speak with the committee today.

I was invited at short notice and we are happy to speak on the subject of the working income tax benefit, which is a specific initiative introduced by the government in the last budget as a way to help low-income Canadians. In my opening remarks, I want to draw a picture of the Canada we have today and to frame this specific issue in that context.

For those of you familiar with Ottawa, you know that one of our shelter signs has the wording, ``Serving the homeless since 1906.'' That description is a telling one of what we have not been able to achieve in this country in over 100 years. I hope we do not see that sign 100 years from now, still ``Serving the homeless since 1906'' for 200 years. We need to question why Canada has not made stronger progress on addressing an issue of fundamental human rights, the right to income security.

It is true that the incidence of poverty in Canada has diminished in recent years. By incidence of poverty, I mean the percentage of people living at or below the poverty lines in Canada. We do not have formal poverty lines and there is a question about why we do not have formal poverty lines established, but we have figures provided annually by Statistics Canada. We know that the percentage of people living at or below those poverty lines, and they are rigid, has dropped, but the depth of poverty experienced by people in poverty is very much there. Powerful metrics of that are the number of food banks in Canada, which continue to rise year by year. There are 673 of them, after the first one was founded in Edmonton in 1981.

We also have an estimated 150,000 to 300,000 absolutely homeless people living in shelters and on the streets. We encounter them here in Ottawa, of course, close to Parliament Hill, and in all the major urban centres across the country.

All this poverty takes place within an ongoing growth economy, a massively growing economy. Canada now has the ninth largest economy in the world.

Deep questions need to be asked. Why does poverty remain pervasive despite all the efforts since 1906 and before? Despite all these efforts, we still have the problem of poverty in this country, in a massively growing economy and a wealthy country.

Parallel to the issue of poverty is the growing issue of income insecurity. Again, I think it is important to keep this issue in context. There is a growing gap in incomes and wealth. Data from the Canadian Labour Congress and the Canadian Centre for Policy Alternatives, CCPA, show that the highest paid chief executive officers in the country earn in 13 hours what a minimum wage worker earns in an entire year. That discrepancy is tremendous.

Powerful information from the CCPA on what they call the growing gap shows the ongoing spread in incomes and wealth between the highest earning and the lowest earning Canadians. I have some figures, which I cannot distribute because they are not published yet, but they illustrate this incredible spread. If we divide the country into deciles, that is 10-per-cent increments of the population, in 1984 the lowest decile had a median wealth of minus $2,100. By 2005, 21 years later, their wealth had decreased even further to minus $9,600. The top 10 per cent of Canadians in terms of wealth in 1984 had a median wealth of $535,000. That figure had almost doubled by 2005 to nearly $1.2 million.

We have this incredible growing gap. The bottom three deciles are sliding in terms of their wealth accumulation. They are losing wealth. The middle three to four deciles are more or less stagnant. Only the top two or three deciles see an increase, but particularly the top 10 per cent. This gap is becoming a defining issue for this country. If we pride ourselves on equality, equity and opportunity for all, we need to address this growing gap issue as well as the poverty issue.

I wanted to frame that issue because the working income tax benefit was pretty much the only new initiative that the current government announced in the last budget to try to address some of the concerns that low-income Canadians have. As I go into more detail, it becomes clear that the measure is inadequate. It is barely a baby step and it also sidetracks to some extent other things we need to do to improve on income security.

The Chair: Thank you both for your comments.

First, Mr. Friesen, from the agricultural side of things and knowing New Brunswick, many farmers are also woodlot owners. You know that the state of the forest industry is serious. You indicated the livestock industry is in a bit of a downturn and the forest industry is also in a serious downturn at the present time.

How do you see that downturn in the forestry industry impacting on those farmers? I suspect in other areas as well as New Brunswick, farmers are also woodlot owners and also involved in the forest industry.

Mr. Friesen: That is a good point, and I was speaking to a woodlot owner a couple of weeks ago in Nova Scotia. Woodlot owners in Quebec have expressed concern as well.

That issue, though, has not come up around our table and so our member organization from New Brunswick has not pushed that issue around our table, nor has Quebec, where it is brought up from time to time. However, given the discussion I had a couple of weeks ago, it is something that I believe we need to look into.

The Chair: I hope you will, because many farmers depend on the woodlot to supplement their farming of livestock or grain. These activities go hand in hand and if one suffers so terribly, then the entire operation suffers.

Mr. Friesen: That point is an excellent one. One thing that is always preached when one sector does not do well, and one thing that people find easy to say is, ``Well, you need to diversify.'' The gentleman I talked to in Nova Scotia had a large farrow-to-finish hog operation, and had recently depopulated it entirely because of the crisis in livestock. As a woodlot owner, he was depending for future income on his woodlot. Diversification does not help unless all the sectors are strong.

Thank you for that point and we will look into that issue.

The Chair: The other question I have is for Mr. Rainer, with respect to the working income tax benefit. We appreciate the background and the context that you laid out for us; the growing prosperity in Canada and the segment of Canada that is being left behind.

I think we are all mindful of this welfare wall and that those on social assistance cannot get off assistance because of the various benefits they have on social assistance and they cannot get back into the workforce. Any initiative that helps in that transition is worth exploring.

Is it your view that this particular initiative will make a significant difference? It is a working income tax benefit. As I understand it, it will provide a refundable tax credit equal to 20 per cent of each dollar of earned income in excess of $3,000, to a maximum benefit of $500. For someone who says they cannot go off welfare because medical and hospitalization is covered on welfare, and then they are told there is a program where they can have a maximum benefit of $500, will that benefit make a difference?

Mr. Rainer: No, it will not. One of the points in our written submission is that the level of the benefit is way too low. In point three of my written submission, I have indicated that the low-income cut-off for a two-parent, two-child family in Ottawa in 2005 was $38,610. The average two-parent low-income family needed an additional $11,100 to reach that line in 2005. That need is the depth-of-poverty issue. In this sense, the working income tax benefit will scarcely make a dent in addressing that depth-of-poverty challenge.

The level of the benefit obviously could move upwards. The Caledon Institute of Social Policy has suggested that it be doubled effectively. In an influential report that came out last year, the task force on modernizing income security for working-age adults, which was largely focused on the Ontario scene but factored in the federal contribution to how we can modernize income security, proposed a $2,400 benefit. If we start at $500, we are considerably below where other analysts have already said this benefit needs to be.

In the U.S., the maximum benefit paid out is U.S.$4,400, and there appears to be some evidence that the benefit has made a difference in removing children from a state of poverty in the U.S.

However, this measure is a controversial one, and one essential point we make here in the written submission, point two, is that if the incentive is to move people off welfare, why do we not pay a minimum wage that allows people, if they work full time for that wage, to reach the low-income cut-off?

This point relates to a principle that Harry Arthurs articulated in his federal labour standards review from last year. I am not sure what has happened with that report — it is a big, thick document — but he was asked to look into federal labour standards for the 21st century. His central principle was that the government should accept the principle:

. . . that no Canadian worker should work full-time for a year and still live in poverty. This principle should be translated into practice over a phase-in period of several years, during which the federal minimum wage should be raised until it meets the low-income cut-off (LICO) index. Thereafter, it should be adjusted at fixed intervals according to an agreed formula. This is an issue of fundamental decency that no modern, prosperous country like Canada can ignore. Fortunately, a minimum wage can be established with few, if any, negative consequences on employment in the federal sector.

We argue that this principle should apply to other sectors, too, such as the provincial sector, the private sector and so forth. We have seen an increase in minimum wages in many jurisdictions over the past couple of years. Governments seem to be more sensitive to this issue, but universally, across the board, minimum wages are still well below where they need to be.

If that principle that Mr. Arthurs articulated was to be upheld, it would have meant that in 2006, the minimum wage across the country needed to be in the range of $9.35 an hour to $13.60 per hour for someone working 30 hours per week for 52 weeks, and then factor in the cost-of-living differences between rural areas and larger cities. As it is today, minimum wage rates in Canada range from a low of $7.25 an hour in New Brunswick to $8.50 an hour in Nunavut.

The Saskatchewan government recently announced it intends to move its minimum wage up to, and essentially abide by, this Arthurs principle. Those people who work full time for a year at the minimum should be able to meet their basic needs.

If we want people to move into the workforce, it has to be an attractive place to go, so we can accomplish that either through income supplements such as the working income tax benefit, which puts a burden on taxpayers, or we can put the burden on wages paid by employers.

I think again, perhaps a bit of an ideological thing at play here is that when we look at this growing gap and where wealth is concentrated, those who own businesses and have capital in general are seeing an increase in their share of the pie, so to speak. Therefore, it seems fairer to us to ask those entities to pay workers a minimum wage that allows them to meet their basic needs. That issue is one of the fundamental issues at play.

Other analysts have commented that, in addition to looking at minimum wages, we need to look at reform of the employment insurance system, reform of welfare programs and so forth. To the extent that we invest in the working income tax benefit, that initiative takes the pressure off doing some of these other things.

It has been argued that if we have a robust working income tax benefit, employers may say, That benefit is out there to help supplement your earnings. We do not need to pay you a minimum wage that allows you to reach the low- income cut-off.

I know that was a long, roundabout way of answering your question, but that is the general context.

The Chair: It is an interesting balance between the public purse through the taxpayers supporting an initiative and the employer. It is interesting.

Senator Nancy Ruth: My heart agrees with a lot in your paper. Minimum wage is a provincial issue, is it not?

Mr. Rainer: There is a federal minimum wage for federal workers.

Senator Nancy Ruth: However, many people you are talking about are provincial.

Mr. Rainer: It is primarily a provincial and territorial program, yes.

Senator Nancy Ruth: The kind of social architecture you propose would be nice, but it has not happened.

Would you rather not have any working income tax benefit if it is not at the amount you want, or is a first step better than no step?

Mr. Rainer: Our initial response was that this benefit was a step in the right direction because, in practical terms, it would result in some money for some people. For those struggling in a situation of poverty, any money coming in is helpful. As we look at the initiative further and think about the larger context, it is troubling if more of an emphasis is put on income supplements, as opposed to addressing other fundamentals of income security.

It is a balance, a phasing and a transition. Perhaps the government needs to find the right balance. In the federal budget, this benefit was pretty much the only major new initiative announced that was targeted at addressing the concerns and problems that low-income people experience. The initial cost was $555 million in 2008-09. It could be argued, why not plough that money into daycare.

Senator Nancy Ruth: My understanding of the figures is there is an additional $555 million in 2008-09, making the total, $1.245 billion.

Mr. Rainer: Okay, the government must make these choices. We know that child care support is critical to helping struggling families move into the workforce. If they do not have quality, affordable child care, it will thwart their ability to take a job. It is critical to invest in daycare, and perhaps these dollars would be better spent in that area. At the same time, through legislation, employers could be required to continue to ramp up the minimum wage.

Senator Nancy Ruth: These are not dollars being spent, though.

The Chair: It is a credit.

Senator Nancy Ruth: Yes, it is a credit. I understand it is a loss to the treasury but it is not like giving the provinces another $250 million or increasing the child tax credit to $200 a child rather than $100. That credit is a different kind of money.

Mr. Rainer: Yes.

Senator Nancy Ruth: I am not sure they are comparable. It is not that they both should not happen.

As I understand it, even $100 per child costs over $2 billion a year to pay it out. It is an extraordinary amount of money. One either pays down the debt or not. One makes choices. However, I am glad to hear at least you think it was a step in the right direction, though it is not what you want.

Mr. Rainer: It is guarded. In the first point of our presentation, we say it is hard for us to be strongly enthusiastic about this. Our preference certainly is to see minimum wages brought up to abide by that principle, which we could articulate almost as a human rights principle. Would any one of us want our independent children, aged 20 or 21, to work full time for a wage that did not allow them to meet their basic needs? That is what the low-income cut-off refers to. It refers to food, shelter and clothing.

If they are $10,000 below the low-income cut-off, you can imagine the trade-offs people are making. They turn off power and do not buy food. They pay the rent and not buy food, or buy poor food. Food banks often do not have the best quality food, if that is where they must turn.

Would any of us want our offspring to live in that state if they are working? We have a huge percentage of people who are working. We had 2.1 million low-wage workers earning less than $10 an hour in 2006. We know that 37 per cent of all the jobs in the country are part-time, temporary, contract or self-employed. This number is a growing. There are many changes in the dynamics of the workforce.

There is a tremendous amount of insecurity around work itself and around security of earnings, and this credit will not go far to address that insecurity.

Senator Nancy Ruth: Was the recommendation of your organization $12 an hour for minimum wage?

Mr. Rainer: In many groups, initially, we came out with $10 an hour, which generally would bring people close to meeting their basic needs, if they are a lone individual. Other organizations have proposed slightly more than that.

The B.C. Federation of Labour for the Lower Mainland area is looking at $11 an hour, for example. Even at that rate, if they try to support themselves on that wage as an independent adult, they will find it tough, but it is a lot better than $7.25 or $8 an hour.

Senator Murray: The federal government has budgeted for this tax expenditure of half a billion dollars, and Senator Nancy Ruth says another half billion dollars in the next year. What will it tell you when we know what the take-up has been on that credit? Will you be able to perform an analysis? Will the Department of Finance or someone be able to perform an analysis that will indicate what the social benefit of this measure has been?

Mr. Rainer: I am not sure. Our organization would not be able to create the analysis, and I am not sure whether the government plans to gather that data and look at its possible impacts. Intuitively, the level of the benefit is so low that it would be difficult to say conclusively within a year or two that it has made a substantial difference in the lives of people. That difference could be eroded by a significant power increase, as we know New Brunswick recently experienced.

Senator Murray: Is it so low, Mr. Rainer, that it is liable to be ineffective?

Mr. Rainer: I think it will be ineffective.

Senator Murray: That there will not be much of a take-up.

Mr. Rainer: I think it will be ineffective. It is logical to make that determination. Again, this depth-of-poverty issue is so profound. How do we close that gap in a family that is $10,000 below the low-income cut-off? This credit obviously takes us only 5 per cent of the way there.

It is a start. It needs to be coupled with other measures framed around income security, and perhaps that is what is missing. The federal government has not come up with an articulated strategy to address income security, particularly for low-income Canadians. We also know there is a big body of people in the middle feeling uneasy about their economic prospects. We know this from public polling that the Canadian Centre for Policy Alternatives has commissioned through Environics, and so forth.

Leaving that issue aside for now, for low-income Canadians there needs to be an overarching strategy to address income security. This is one component. Perhaps it is best targeted to workers in part-time and temporary jobs who are not in full-time steady work, but in uncertain employment. Perhaps it is best targeted to that demographic group, but it needs to be coupled with other things and articulated within a more comprehensive strategy.

Senator Murray: I wish we had the officials here or had the opportunity to ask them what kind of analysis they performed in advance as to the likely take-up of a measure like this one. Perhaps they do not know. We can bring them back in a year or so, flag the issue and try to find out whether it is having anywhere near the desired effect. Live and learn.

The present government, at one point, decided to put several of its child care eggs in the basket of subsidies of one kind or another to encourage employers to provide daycare and big tax credits, but that did not work. The government withdrew it and have redrawn it, I think, in the present bill.

You have put forward an alternative, and that is to raise the minimum wage, which would not cost the federal government much, if anything. I take it that your view is that our raising the minimum wage in the federal sector will be some kind of pacesetter, and that the provinces would respond positively to our good example. I presume you have some evidence for that, do you?

Mr. Rainer: If the federal government was to accept the recommendations from Harry Arthurs, the principles he articulated, and then put them in play by moving the federal minimum wage to meet those principles, that would set the bar for the rest of the country.

Senator Murray: Our colleague, Senator Grafstein, has a motion or a resolution before the Senate on this matter. He was dismayed by the fact that Ontario did not move fast enough or did not increase its minimum wage sufficiently. He hoped that we, the federal sector or the federal Parliament, would move on that issue.

Mr. Friesen, how many of the income support or other support programs for agriculture are federal-provincial in nature?

Mr. Friesen: They all are. Agriculture is a joint jurisdiction, so with the Agricultural Policy Framework now, it takes agreement from seven of the provinces and at least 50 per cent of the production in Canada to make any policy change in that jurisdiction.

Senator Murray: Are the support programs shared-cost programs?

Mr. Friesen: That is correct.

Senator Murray: Are they typically 50-50, 80-20, 70-30, or 60-40?

Mr. Friesen: They are typically 60-40.

Senator Murray: Is that 60 per cent federal and 40 per cent provincial?

Mr. Friesen: That is right. One thing happens in some of the provinces that have more money than other provinces, say for example, Alberta and Quebec. In Quebec, I believe the provincial government puts in $1.60 for every 60 cents they receive from the federal government. In Alberta, over the past years, I think it has been typically 60 cents for every 60 cents. Then, a province like Saskatchewan, which is next to Alberta, puts in only 40 cents for every 60 cents they receive from the federal government.

That is one of the reasons we are asking for what we call an agri-flex component. That is something that has not been done yet. We are asking for a separate funding envelope that will flow money into provinces and allow provinces, if they contribute their 40 cents, to develop a provincial-specific component for business risk management that will address a provincial-specific problem that is not addressed by one national program.

Senator Murray: For the record, and especially for my education, would you also explain the livestock crisis? What is driving it? Is it cost? Is it low prices? Is it oversupply?

Mr. Friesen: Several things all came together. I know some people have called it the perfect storm. I will talk specifically about the hog industry, and most of this information applies to the cattle industry as well.

The hog industry was built on, or at least all the growth in the last years has come from, a 65-cent dollar. When the dollar started going up, my staff calculated that, for every cent that our dollar strengthens vis-à-vis the U.S. dollar, in the agri-food industry we lose $230 million of export value to the U.S. That loss has been a tremendous challenge.

The other factor now is that the grain and oilseed farmers are finally receiving what they deserve, but that has doubled the feed cost for livestock. In the hog industry, the low price has been further exacerbated by the fact that in the U.S., they have had record slaughter numbers over the last few weeks. Of course, that increase drives up the inventory.

Senator Ringuette: I have a question for Mr. Rainer, but first, I will make a few comments.

In regard to the increase for minimum wage, which I totally agree with, that increase is the only way to have direct impact on people living in poverty. For those economists that say for every X dollars of minimum wage increase, or X per cent of minimum wage increase, we lose X number of jobs, that premise is false. It is not a direct supply-and- demand scenario.

Good managers will employ the right amount of human resources to have the maximum output. There is no backing away from that reality. Therefore, the premise of saying, if we increase the minimum wage, employers will hire fewer people, is false. I totally agree with what you are saying.

My question is about the issue of poverty and the increase in disparity from low income to high income, in regards to the transfers to the provinces for social programs and post-secondary education. The cuts to eight provinces out of 10 in the next 10 years will exacerbate dramatically the ability of citizens to access social programs and post-secondary education. That component is needed component for them to make a decent wage in the workplace.

It is as if someone, somewhere, does not get the picture out there. I am not pointing a finger at party politics of one government or the other. I am afraid that maybe it is because information provided to the politicians of whatever stripe, through the bureaucracy, is not realistic. Therefore, they come out with these programs that bring such an incremental change and they are almost worthless in the reality of the situation.

Have you looked into the impact of the reduction in social programs and post-secondary transfers to those eight provinces? How will the reduction further exacerbate the current situation?

Have you met with bureaucrats that are in situations of power to diffuse information and to provide the right programs and the right incentives?

Mr. Rainer: With respect to your first question, we have not prepared that analysis. Our organization would not be the best place to undertake that research. I could recommend a group such as the Canadian Centre for Policy Alternatives or the Caledon Institute, which are more research oriented and would be better placed to undertake that kind of research.

Senator Ringuette: In regards to my second question — it all ties together — last June we were told at least three times by the bureaucrats at the Department of Finance that with regard to those two transfers that there was no need to measure fiscal capacity, and there was no need to prepare any analysis of the cost of these programs.

These people are not touched. Most of those people you are speaking of would be in the top 10 percentile. Reality is far from them, and they are the people providing information to governments.

Mr. Rainer: That is a good point. It is true that the people involved in the construction of these proposed policies and programs themselves may find it difficult to identify with the issue that they are apparently trying to address. To a large extent, we have become a country that no longer has a shared identity. This issue of the growing gap needs to be understood within that framework. Can we identify and empathize with fellow Canadians who are in different circumstances than our own?

I sometimes say we have become a country that tolerates throw-away people, step-around people and step-over people. In major cities, we see people lying on the street, destitute with no assets of any description, and we walk around and over them. We ignore them and they are our fellow human beings. They are also our fellow Canadians. Is this the Canada that people fought for in the First and Second World War? I do not think so. We have fundamental challenges there.

The whole conceptualization of how we build a stronger social infrastructure is lacking. Not enough of that work is done within almost any government level.

I want to give credit, if I can, to the Government of Newfoundland and Labrador. Many of us working in the area of poverty eradication feel that this provincial government has set an example for other jurisdictions in that they have taken a comprehensive approach to looking at how they will address poverty. They have a vision of moving from the province with the most people living in poverty by percentage of the population to the province with the least amount of people living in poverty by 2014, and they have a comprehensive strategy to reach that goal. We lack that vision at the federal level as well as in most other jurisdictions.

Comprehensive, conceptual thinking is needed about how to address these issues. A lot of the problem comes down to income security and other forms of social supports; how we will fund and distribute and, if you will, share the wealth. We are becoming a society with an increasing unwillingness to share the wealth that is generated, and these problems are the results.

We can be altruistic about this issue, but we can also be self-interested, because the cost of poverty is massive to our society. An academic paper earlier this year in the United States estimated the cost of child poverty alone to be U.S.$500 billion per year. The researchers looked at health care impacts, criminal justice impacts and lost productivity impacts.

That number is enormous. If we extrapolate that number to Canada with roughly 10 per cent of the U.S. population, we can say right off the top, the cost of child poverty to Canadian society is approximately $50 billion a year. I have heard that people in health policy or the finance department are extremely worried about how the cost of the health care will impact the rest of the government's ability to fund different things.

If poverty is a major impact on the health care system, then clearly there is some self-interest in addressing poverty from that point of view. The bottom line is we need more comprehensive, conceptual thinking followed by larger, more meaningful, targeted, intelligent investments in the social infrastructure of the country.

Senator Ringuette: You did not mention the level of poverty of our senior citizens, a group of citizens that will grow as a percentage of the total Canadian population in the next decade.

Thank you very much. I have a question for Mr. Friesen. In my contribution to the Standing Senate Committee on Agriculture and Forestry there was an issue of co-ops. You mentioned co-ops. A term, ``new wave co-ops,'' was introduced. I recall such a co-op being put together in P.E.I. in regards to beef. My information is that this particular co-op is fiscally endangered right now. It is a question of do or die, and the federal government has not yet come forth to help with money from any program.

Can you provide me with information on this issue?

Mr. Friesen: If I may make a comment on something you said in your previous intervention with Mr. Rainer, I could not resist commenting on this item.

There are those in Ottawa who may be out of touch with reality. I believe the one good thing is that we have a lot of MPs that are in touch with agriculture, in my case. We have an excellent senior management team at the Sir John Carling Building now, including the deputy and her team. I believe they understand the issues and their hearts are in the right place.

When it comes to the people dealing with the economics of the dollar change, it took six months after farmers were already talking about the negative impact of the strengthening dollar for others to come around. Farmers were talking about it in coffee shops, and it took six months before an economist in Ottawa would say, it appeared as if the strengthening dollar would hurt us more than we first thought. I could not resist talking about that. As I say, the people in the agricultural and fisheries councils, AFCs, have their hearts in the right place, and I believe they have an understanding.

With regard to co-ops, I think you were talking about new generation co-ops. I was in P.E.I. addressing the livestock crisis about a week and a half ago. Yes, I believe they are looking for some sort of assistance because that processing plant is in trouble. I am not exactly sure where that issue stands. They expressed optimism that Minister Ritz was working on it, and I have not had an opportunity to talk to the minister about the matter.

As far as the co-op investment plan is concerned that I was talking about, it typically works this way in Manitoba where I farm. If I am a member of a co-op, I perhaps paid a $10 membership to become a member. I may receive patronage dividends depending on if the co-op is an input supplier how much volume I purchase, or if it is a marketing co-op, how much I have sold through the co-op. Typically, I cannot go to the co-op and say: ``I would like to strengthen this business; I will invest $10,000.'' There is no provision for investment return on that $10,000.

In Quebec, $6 million of tax concessions for investing in co-ops has resulted in between $20 and $30 million of direct capital investment into co-ops, and a further $100 million of those co-ops investing in rural areas. As you stated, if we create an environment with an incentive for investment in co-ops, that environment will strengthen the co-op and empower farmers in the marketplace through co-ops, and to some extent address the issue of our aging population. Co- ops can attract investment capital the way the companies that they compete against do, and we think an environment can be created where farmers will be more empowered.

Senator Ringuette: I have one more question. With regard to the capital gains tax and the increase from $500,000 to $750,000, in certain situations, I see this measure as a good one. However, I have concerns about smaller farms that have a great deal of potential in the global market in respect of target products and target marketing.

Someone might look at this increase in tax credit and decide to sell the investment concern, to a bigger farmer, for example, and then, down the road, we will see only bigger and bigger farmers. Have you looked into such a repercussion that could eliminate the smaller farm? If we end up with bigger and more expensive farms, we also remove the ability of younger farmers to purchase farms and to venture into farming in Canada.

Mr. Friesen: On that last point, I mentioned earlier that the tax credit might facilitate the transfer of the farm either to the children or to new entrants. If a farmer has a higher capital gains exemption, it could result in being able to sell the farm for a lower price because not as much goes to taxes.

As far as the increase in farms or the consolidation of farms is concerned, it is my understanding that the capital gains exemption applies only to land or a quota. In the case of land, $750,000 in land is not considered a large farm in many parts of Canada, so the capital gains exemption increase will not necessarily be an incentive to expand the farm. The expansion of the farm has been done because of the low margins experienced on a per unit basis, so farmers must increase the number of units they produce to make more profit to be able to live.

While farmers cannot pencil a profit, they might have equity in the farm. While their profitability has been low, we say, at least allow farmers to come up with a little more of their equity when they decide to transfer the farm or sell it. Incidentally, and this may segue a little bit, Canadian farmers are coming out of their worst five years of net income in the history of agriculture in Canada. U.S. farmers are coming out of the best four years of net income in their history. With respect to the hog industry, hog producers in the U.S. had record profits last year. The issue is not only the level of subsidies they receive but also the strategic way in which they flow that money. While we built our hog industry on a 65-cent dollar, and on globalized markets and hopefully, profitable market access, the U.S. built their industry on cross-subsidization because of the subsidies they paid to the grain and oilseed sector. Those subsidies resulted in much better margins for livestock in the U.S. The industry also built on what we could consider protectionism because every time we turn around, the U.S. is challenging our cattle or hog industry. We continue to compete against that challenge.

Senator Ringuette: The government had a winning strategy in respect of protectionism in the forest industry, but we lost that edge. We could have used it eventually for other commodities.

Mr. Friesen: Interestingly, I am a turkey producer and a hog producer. Supply management has often been labelled ``protectionist.'' As a turkey producer, I give up 5 per cent of Canada's consumption in market access for other countries to export turkeys into Canada.

As a hog producer, I export .5 per cent into the European Union. Even if the EU would give pork the same market access that supply management in Canada offers to other countries, we would have a huge, profitable market access market in the EU. That is another challenge we are up against in the hog industry — market access with regard to low tariff rate quotas, TRQs, high tariffs that we compete against and sanitary and phytosanitary measures. Countries are willing to negotiate free trade and then they come up with all kinds of innovative ways to impede market access through sanitary and phytosanitary measures.

The Chair: They are non-tariff barriers.

Mr. Friesen: That is correct.

Senator Di Nino: I begin by disagreeing with my colleague, Senator Ringuette. In my view, she incorrectly painted a picture of a bunch of men and women in the bureaucracy as uncaring, ignorant people. I do not agree with that. These issues are public policy issues and political choices. We should not slam the men and women who work with us, because that is unfair.

The Chair: I am sure she did not mean to do that.

Senator Di Nino: Read the comments.

Mr. Rainer, I doubt that anyone in this room or in Ottawa, for that matter, would disagree with your principle. This matter comes down to political choices. Successive governments of all stripes, including provincial governments, have this challenge ahead of them. It does not seem that anyone has found a solution to the problem, which I think is truly sad.

The task is daunting to try to address this problem. You are right that it needs a comprehensive conceptual examination so that there can be a country-wide attempt to address the issue. It cannot be done by one province or by the federal government alone. We have Ontario, with a different political party at the helm than the federal government, which is different than the previous government, but that is not the issue. It is a fair comment on your part but I wanted to assure you that the issue needs to be addressed for all the good reasons that you mentioned, plus many other reasons.

In talking about Bill C-28, the working income tax benefit, and I agree with you, is a small step in the right direction. It also adds another reduction in the GST, which is probably the only tax reduction that impacts on everyone, however small that may be. Every single Canadian who consumes will receive a benefit.

Three other things in this bill would impact on the issue of poverty. One is the increase in the basic personal exemption, which is retroactive to 2007. That increase is of particular benefit to the working poor, which is the group of Canadians I have the most sympathy with. There is also the reduction of the personal tax rate to 15 per cent. I think Senator Murray mentioned a provision in this bill to encourage employers to create child care spaces for their employees, which, again, could help a little.

I know they do not solve the problem, but a number of steps are impacted by this particular issue that is before us today, which is the Bill C-28 budget implementation. Would you like to comment on those other items, as well as the working income tax benefit. Three or four other components to this bill should add value to the cause that you so eloquently espouse.

Mr. Rainer: The best way I can respond is by making the point that fundamentally, governments must decide if the emphasis will be on reducing the tax burden — as it has been called — with the hope that reduction will somehow improve our social and economic prospects, or maintaining and possibly increasing the level of taxation with the idea that this measure will strengthen the social and economic structure of the country.

I refer you to an interesting report on this subject. It comes from the Canadian Centre for Policy Alternatives, written by tax law specialists out of Toronto. They looked at the social and economic performance of higher-taxed developed countries and lower-taxed countries — the higher-taxed country, particularly the Nordic ones and the lower-taxed one, particularly the U.S., Canada and the U.K. On the majority of social and economic indicators, they found that the higher-taxed countries outperformed the lower-taxed countries.

That finding seems to point to evidence that countries, nations and societies that are prepared to invest more in their taxation system and distribute a greater amount of the wealth within that society, will have a stronger performance in general, both socially and economically.

I think we are in an era where the idea is to reduce taxes constantly. The phrase, ``tax relief,'' has crept into the lexicon as if taxation is a burden on our shoulders. In fact, taxation is an investment in infrastructure — grey infrastructure or hard infrastructure — sewage plants and roads — or social infrastructure or other forms of infrastructure.

A fundamental choice is to be made there. You mentioned the GST cut, and we are now looking at a second percentage point. With each percentage point, we remove about $6 billion in federal revenue that could be allocated to invest in a social area or other areas such as the environment.

In our view, the government is steadily decreasing its fiscal capacity to address these issues. A $6 billion amount would largely support a universal child care program. It would go a long way to addressing the mounting crisis in affordable housing. When governments make those kinds of choices, they have an impact.

I am not an expert on taxation and the GST in particular, but I have read the criticism, which seems to indicate that it is not an effective tax cut. It promotes consumption but not savings. It encourages people to buy more with more money in their pocket. It is dubious whether that measure will benefit low-income Canadians.

You are correct that some other measures in the budget, in theory, could help a low-income household. However, overall, I think the approach taken presently will lead to an increase in the growing disparity in incomes and wealth. It will lead to an increase in poverty, not a decrease. We will see a continued growth in the number of food banks and the homeless until we better align our mix of policies and programs.

Senator Di Nino: How many people will be taken off the tax roll by that one measure alone of increasing the personal exemption?

Mr. Rainer: I do not have that figure.

Senator Di Nino: Those people would be low-income Canadians, or the working poor. The number would be literally thousands, if not tens of thousands or more.

Mr. Rainer: I do not have the precise figure. It may have been mentioned in the budget. I am not sure.

Senator Di Nino: I was looking for the number as you were talking but I wanted to pay attention to what you were saying. Those things all would help.

We are not talking about policy here. That is a different issue. I have a fundamental difference of opinion that consumption is not good for the economy. Consumption is what it is all about. The economy is controlled by the consumer. When the consumer buys this product, jobs and all those things are available. That is a fundamental difference in public policy.

The Chair: Can we let them comment on that point if they wish to?

Mr. Rainer: When you first began speaking, you indicated this problem is a difficult one. Yes, the problem is difficult, but in some ways, the right to income security is not well established in our society. The Canadian Charter of Rights and Freedoms speaks to security of the person, but what does that security mean? Does that mean physical security? I have the right not to be assaulted on the street; yes, that is well defined but do citizens also have the right to a measure of income security?

The most vulnerable — children and those who cannot fend for themselves — do they have a fundamental right to income security and, if so, how do we defend that right? I think that is where we need to go in this country. We need to establish that right better and then the mix of policies, legislation and programs to uphold that right should materialize.

We cannot fall back on the excuse that this problem is difficult and many governments have tried to solve it. We should not fall back on the excuse that it is the fault of the low-income citizen, which is the view, unfortunately, of many people who believe that poverty is the result of human failings.

Senator Di Nino: We will not solve this issue with Bill C-28. I do not have a problem with your philosophy. The objective is the same although we have a difference of opinion as to how we reach it.

Senator Chaput: My question is to Mr. Friesen. It relates to the programs in agriculture. Existing programs relating to agriculture have been replaced by what is called business risk management programs. How have farmers responded to those programs? Do they feel these programs are easily accessible and were they consulted before replacing the existing ones with new ones? I guess I have three questions in one here.

Mr. Friesen: First, it would be wrong to say that the old programs were replaced. The way we have approached it is that we are adding components or changing components of the program we had before.

For example, the top tier of the CAIS program — I do not know how much detail I should go into but basically, the CAIS program is broken up into two tiers. Income drop of the first 15 per cent is covered 50 per cent by the producer and 50 per cent by governments. The next tier of 15 per cent is covered 70 per cent by governments and 30 per cent by producers; and the last tier of 70 per cent is covered 80 per cent by governments and 20 per cent by producers.

We said, why not make the top tier more stable and predictable? That change was made as a result of farmers wanting that change made. There was no question about it.

As I said earlier, there is always one sector that may be harmed by a policy change. While it is good for everyone in the long term, in the short term some producers are in the situation where it is not good for them at the moment. We say livestock producers should have a choice for this year and next year whether they want the old component or the new one.

We have been working in partnership with governments. Our member organizations work with the provincial governments and we work with the federal government. I believe that partnership is working better than it has for a long time. We are working in partnership to add new components to improve the entire suite of programs. We are also changing some components. A lot of improvements have been made. Negative margin coverage is better and inventory calculation is better. Additionally, we are looking at addressing disasters such as bovine spongiform encephalopathy, BSE, and they agreed it to at the last federal, provincial and territorial meeting on an AgriRecovery program.

Again, we are looking for the AgriFlex component. With that, provinces can develop province-specific programs to address needs not addressed by a national program. At the same time, those province-specific companion programs will also achieve the national objectives that we have in place. One national objective is equity for all farmers across Canada.

The Chair: Mr. Friesen, before I go to a second round, can you tell us what makes the new program in Bill C-28 better?

My understanding is that, in effect, it is the income stabilization program for farmers that existed previously except that one of the two categories will now be under the management investment control of the farmer rather than the government. Is that what makes the program better?

Mr. Friesen: There are three things. Say, for example, the grain and oilseed sector has had a long period of low prices and escalating input costs. A reference margin is the margin the current year is compared with to determine whether they trigger the program. Their reference margin was low. If that sector's reference margin is almost zero, it does not matter how bad their current year is. They will trigger the program based on what their reference margin is in comparison to their current year. Given that the reference margin was low, they triggered little money.

Now that the price is going up this year, these grain and oilseed producers have a huge hole from the losses in previous years. Due to the rising price, they would not be able to trigger the program at all for several years until their reference margin comes back up and their current year is worse than their rebuilt reference margin. It will be years before a grain farmer will trigger the program.

With AgriInvest, a government contribution will be based on a producer's Allowable Net Sales, ANS, margin. In this program, even though they would not have triggered the old CAIS top-tier, they will receive a government contribution every year if they match it.

It is more like the old Net Income Stabilization Account whereby every year a farmer contributes to an account and the government matches that contribution. They can build up that account even though otherwise they might not have triggered the top tier of CAIS.

It is also good because farmers can use it as needed. If they need to shore up their cash flow, they will be able to withdraw it. If they do not need it, they can keep it there.

It also mitigates the effect of the Whole Farm Insurance Program. The whole farm program is essentially an average. For instance, if I do poorly with my wheat production but well with my hog production, they average out and I do not trigger the program.

In the top tier, they will be able to obtain a government contribution regardless of what happens to their diversified production.

The Chair: I have one other question and it is triggered by Mr. Rainer's suggestion of increasing the hourly rates.

Have there been any studies on what effect increasing the hourly rate may have on the cost of living? If the cost of living is impacted upward by virtue of increasing the hourly rate, does that impact put more people under the poverty line than previously were under it? Also, does an increased hourly rate have an impact on producers and the number of people that will be employed? If the hourly rate goes up, Mr. Friesen will tell you that his producers with all their other input costs increase. I am speaking of electricity, the dollar problem, et cetera. Then we add an increased hourly rate for the employee. Will that result in a number of employees losing work?

Mr. Rainer: To your first question, I am not in a position to answer that in terms of analysis performed.

Again, the CCPA has conducted a lot of research on the effects of minimum wage increases on employment. I encourage you to review some of that documentation. Earlier this year, their report, which looked at experience with minimum wage increases in a number of jurisdictions — not only Canada, indicated that the effects on minimum wage increases on the employment work force overall are virtually negligible. There is some impact on the youngest workers in terms of their being hired, but nothing to be overly concerned about.

The Chair: What is the situation with the cost of living? Have there been any studies there?

Mr. Rainer: I am not aware of any. However, the percentage of workers earning the minimum wage is not that high. I think it is 4 per cent of the work force. Intuitively, it would be hard to imagine that increasing their wage would have a dramatic increase on cost of living for society as a whole.

Mr. Friesen can speak to the agricultural question. I am interested in knowing to what the extent automation in that sector affects the hiring of human beings to do the work that was common in years gone by. I know that automation is gaining a hold in agriculture.

Mr. Friesen: We absolutely do not begrudge anybody making a higher minimum wage. The biggest challenge is in the horticulture sector because its largest input cost is labour.

Even with the foreign worker program, if minimum wage goes up, they must pay their foreign workers the minimum wage as well.

We do not begrudge them an increase in wages. The challenge here is competition from overseas. If they have a minimum wage of ten dollars an hour, the horticulture industry competes against products from China, where wages are pennies an hour. That is the challenge there.

Other than that, we would not argue against an increase in wages. Maybe there is a different way to combat that problem. We have suggestions for a companion program for the horticulture industry that might help mitigate that problem.

I mentioned earlier the Grown In Canada initiative. In a positive way, we market to the Canadian consumer why Canadian products should be clearly defined at the retail level and the Canadian consumer can choose to buy a Canadian product and brand our Canadian production in Canada that way. That branding could also strengthen the demand for our own horticulture products on the shelf.

I spoke at a food safety panel a year ago. A gentleman from one of our major grocery retailers in Canada said to the farmers in the room, ``We will never again buy from a farmer who does not have an on-farm food safety program.'' In the same breath, he said, ``We import 80 per cent of what we sell and we would like to change that number.''

Senator Murray: I have a comment and then a couple of specific questions for Mr. Rainer.

I was a member of a government that campaigned hard for free trade, open markets, deregulation and all the rest of it. I do not regret for a minute that those things were implemented. However, we need to face the fact that what people lump together as globalization and technology have created enormous wealth but that wealth has not been distributed in an equitable way.

If we do not address this question imaginatively and comprehensively, the danger is that the consensus that developed in favour of these policies will vanish. The political issue will be that, in addition to all the other cleavages we have in this country — geographical, ethnic, linguistic, et cetera — we will add class. We do not need this issue.

People do not mind the rich becoming richer as long as the general perception is that everyone's situation is improving — that we are all in this together and we are all moving ahead. However, we are not.

I am glad to see federal investments in infrastructure. We are almost in a type of 1950s Galbraith analysis of the affluent society with physical infrastructure crumbling. At the same time, we have this enormous wealth that has been generated by globalization, technology, open markets and all the rest of it.

Some answers to the problem may lie in some of the prescriptions you have here. There are also others, but this matter must to be tackled. Behind the big budget surpluses and the evidence of a still-growing economy, odd things are happening. We are losing head offices and the more we lose them, the greater the danger that we will lose capable people in the country who can contribute to the growth and prosperity of our country.

A lot of problems will not be tackled by the traditional solutions, either on the right or the left, but they must be tackled.

Mr. Rainer, in your written brief, you say one of your criticisms of the working income tax benefit is that it does not begin to kick in until the first $3,000 of income is earned. You question was, why do we not do what was done in the U.S., where the incentive starts with the first dollar of earned income and is a greater value than what is proposed here, up to about U.S.$4400 for a family of two or more children. You may wish to elaborate.

My final question is, what changes do you have in mind to the Employment Insurance program?

Mr. Rainer: I appreciate Senator Murray pointing out the concern we have about the working income tax benefit not kicking in until $3,000 have been earned. It seems counter-intuitive when the objective of this program is to encourage people to transition away from social assistance into work. Why not make the incentive right from the first dollar earned, as they have done in the U.S.?

I am not sure why that was established by the designers of this program. Maybe that question could still be asked, but it seems logical to me to begin with the first dollar earned.

Regarding Employment Insurance, EI, I am not well versed on that issue. There have been changes over time including reduced eligibility and reduced benefits available. EI, as one of Canada's pillars of support, has been eroded.

Senator Murray: Starting several years ago, more money has been put into training programs and even income supplement programs that used to be direct financial benefits to the unemployed.

Mr. Rainer: I agree with you that how we have looked at addressing these issues in the past may not be as viable, or no longer viable, today. Fresh thinking, such as looking at the experience of other jurisdictions and how they have dealt with these issues, could be useful. Canada should have a national strategy to tackle poverty. The National Council of Welfare, which is an advisory body to the Minister of Human Resources and Social Development, has looked at what other countries like the U.K, New Zealand and Ireland have done in recent years in their countries. The council established fundamentals of what needs to happen to make progress on this issue. I know that is outside the scope of this legislation on the working income tax benefit, but the solutions exists. I do not think this problem is as intractable as others. We need a greater sense of determination to deal with it.

The Chair: We appreciate each of you being here and helping us to understand these two aspects of Bill C-28.

The committee continued in camera.

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