The Committee met at 7:10 p.m. in the House of Assembly.

Pursuant to Standing Order 87, Jim Walsh, MHA for Conception Bay East & Bell Island, substitutes for Ralph Wiseman, MHA for Topsail.

CHAIR (Mr. Hodder): Order, please!

The Chair will be here shortly. In the meantime, we will proceed.

I think the Chair is now coming; therefore we can begin for the second time.

CHAIR (Mr. Joyce): Order, please!

MR. H. HODDER: Mr. Chairman, I move that the minutes -

CHAIR: Just a note on the April 5 minutes, that Wally Andersen was present for that meeting.

MR. H. HODDER: Mr. Chairman, I move, with the addition of the hon. Member for Torngat Mountains, Wally Andersen, (inaudible) that the minutes for April 5 and April 6 be adopted.

On motion, minutes adopted as circulated.

CHAIR: Thank you very much.

What we will do to open up is, I would like for everybody to state their name so we will have on the record who is present.

MR. WALSH: Jim Walsh, MHA for Conception Bay East & Bell Island.

MR. ANDERSEN: Wally Andersen, MHA for Torngat Mountains.

MR. LUSH: Tom Lush, MHA for Terra Nova.

MR. J. BYRNE: Jack Byrne, MHA for Cape St. Francis.

MR. H. HODDER: Harvey Hodder, MHA for Waterford Valley.

MR. JOYCE: Eddie Joyce, MHA for Bay of Islands.

CHAIR: Minister, would you like to introduce yourself and your staff please?

MR. MATTHEWS: Lloyd Matthews, Minister of Finance, MHA for St. John's North.

MR. BENNETT: John Bennett, Assistant Deputy Minister, Debt Management & Pensions.

MR. PADDON: Terry Paddon, Assistant Deputy Minister, Taxation & Fiscal Policy.

MS RING: Mary Ring, Acting Manager, Financial Administration, Executive Council.

CHAIR: The only request is that whoever is answering a question, or speaks, that they identify themselves for the record.

We will have opening remarks from the minister.

MR. MATTHEWS: Thank you very much, Mr. Chairman.

I appreciate the opportunity to appear tonight, on behalf of the Department of Finance, to discuss the Estimates of the department. It is my first opportunity to do so as Finance Minister; however it is not, at this point, a completely new experience, having done it in at least three other government departments over the last six years.

The observation that I have made to myself since I have been in the Department of Finance is that it is a department somewhat different from other line departments of government in that it is a department that is a rather overarching department, sort of a part of a central agency of government, to the extent that it has different responsibilities than a line department. In an operational sense, it has been a new and interesting experience for myself.

In the last three or four months since I have been in the department we have concentrated, obviously, most of our efforts - and for the first three months much of my time - in both getting familiar with the areas of responsibility that the department has as part of government. I am getting to know the good staff who are there, and participating in the Budget preparation that is now an exercise behind us for this year, having presented the Budget on March 22, and now in the House discussing the Budget, debating the Budget, defending the Budget, and certainly, on behalf of government, along with all of my colleagues in the House and beyond, promoting the Budget as being what we believe to be a very forward-looking, a very creative, a very appropriate Budget in terms of addressing the needs of the Province within our fiscal capabilities.

The department has three or four major areas of responsibility that have been referred to, to some extent tonight, by the assistant deputies who are with me - the deputy, of course, being out of town tonight and not being able to be here - the debt management, administration side of the operation being under the ADM, John Bennett; Taxation and Fiscal Policy under the direction of ADM, Terry Paddon; and the other area of responsibility that was outlined in the general administrative side from our colleague on the end.

There is another division of the department that is not represented singularly here tonight by a deputy minister and assistant deputy minister, and that is the economics and statistical branch of our department. That is an area that responds in large measure not only to our own direct needs - within the department, that is - but to other departments of government in terms of preparing information, in terms of doing economic analysis, statistical analysis, projections and various pieces of work on behalf of various departments and agencies of government that call upon our services from time to time.

As the minister, I found the department to be an interesting place in that the stakeholders are significantly different than all of the other line departments I have had. In a line department, I found that the primary stakeholders that you deal with as a minister are in many ways external stakeholders to government, the boards, the hospital boards, the municipal councils and those sorts of agencies, whereas the stakeholders in the Department of Finance are in large measure the other departments of government that tie into the department and to its activities as it functions as part of the central agency of government.

I don't think I need to take much more time and elaborate on the various areas that come under the department's responsibility. If you have been doing the Department of Finance before, as a member of Government Services Committee, you are already familiar with the various aspects of the Department of Finance, so rather than me taking the time of the Committee tonight to talk about the various areas and each of their responsibilities, I would rather give the time to the members of the Committee to ask any question of any area of the Budget that you have in front of you. Between myself and the officials who are with me, I hope we can satisfy any questions or any queries you might have regarding the Budget, the Estimates, and hopefully be as informative as we can be in terms of adding anything new that might be of value by way of information with respect to the line items in the Budget and the Estimates under the various subheads in the department.

I think that is all I need to say, Mr. Chairman. I think now it is as appropriate a time as any to ask you to move the rest of the activities of the evening forward by having the Committee members engage in their usual practice of commending the government - I am sure that is what your practice has been - for such a sound, fiscal, responsible Budget that we have just brought in. I know words of a laudatory nature won't come easily to you, but I know that there are words that you are groping for in terms of wanting to be gratuitous towards the government as a result of our good management of the Province's affairs. So it is over to all of you to see what you have to say.

Thank you very much.

CHAIR: Thank you, Mr. Minister.

Mr. Byrne.

MR. J. BYRNE: Thank you.

Maybe when the minister is finished up in politics he should become a standup comedian or something.

MR. MATTHEWS: It is an option.

MR. J. BYRNE: It is an option.

I have a few general questions before I get into the Estimates themselves about the financial situation of the Province and the view that the government is putting forward. I have a few notes here so I am going to refer to them just to get your comments on them if I could.

The government often claims to be leading the country in economic growth as measured by the GDP. We are the only province to show a net loss of population. We lost 40,000 people in the past few years, which is 7 per cent of our population. With the loss of population, what impact do you see that having on your budgets within the next few years?

MR. MATTHEWS: The impact that it would have had on our budgets, I think, has already occurred in previous budgets.

MR. J. BYRNE: If that continues, though.

MR. MATTHEWS: I know there, over a two year period, adjustments to our equalization transfer is possible. Essentially - and don't take this in a political sense - we have always been conservative in projecting our revenues and estimating our expenses. The net result of the very sound and conservative fiscal approach that the officials have taken over the years in helping other ministers and myself prepare budgets has always, it seems, over the last few years given us a better position at the end of the year than we had budgeted for.

That is in part because we have been doing things in a prudent manner in terms of our revenue and expense projection, but I think it is also a sign of our improved economy. I think the good news for us, in terms of the population issue, is that in the last quarter - is it? - I believe for the first time in some time we have seen a net gain in population. Not a lot of people. I think I heard today, without having seen the figure, somewhere around 500 people represent the net gain we have had in our population figures. Having budgeted prudently in the past and up till now, I think we are going to have more good news than we had even projected ourselves at the end of this fiscal year and beyond.

MR. J. BYRNE: The government, your government or whatever, or the government you are a part of -

MR. MATTHEWS: Your government. We look after everybody. We govern for all the Province.

MR. J. BYRNE: That could be argued, I can guarantee you that.

You are always promoting the fact about the job creation in the Province but in actual fact we are falling behind the rest of Canada in job creation. In 1989 there was a gap of 8.3 percentage points between the unemployment rate in this Province and the unemployment rate in the whole of Canada, and that has widened today to 10.2 percentage points in the first month of this year. What do you think of that?

MR. MATTHEWS: I think that whoever researches your questions and comments is doing a fairly good job on your account.

MR. J. BYRNE: That is not accurate, you are saying?

MR. MATTHEWS: The comment I would make is that our numbers have come down but they have not come down as quickly as the overall national rate has improved. Therefore, there is a gap between the real unemployment rate in Canada today versus our unemployment rate. I think that is the comparison you are making historically. We are heading in the right direction. We have gained about three points over the last two to three years in terms of reducing our unemployment numbers.

MR. J. BYRNE: The gap has widened.

MR. MATTHEWS: The good news is that a part of the reason for the gap widening I guess -

MR. J. BYRNE: So you agree with those figures?

MR. MATTHEWS: - is that there are more people in the job market. I don't argue with your figures but I would not want to validate them without having seen them.

MR. J. BYRNE: Is that right? You can take it for granted they are right.

Also, we are falling behind the rest of Canada in export trade. In 1989 exports accounted for 30 per cent of the GDP and we were the leading export province in the nation relative to the GDP. By 1998 we were at 34 per cent of the GDP but all other provinces had gained much more. Three provinces had vaulted ahead of us. Ontario's export trade went from 28 per cent to 52 per cent and so on. What impact is this going to have, do you think, on upcoming budgets? This is all leading somewhere, by the way.

MR. MATTHEWS: All I would say is that our exports have increased substantially as well over the last five years that this government has been in office.

MR. J. BYRNE: But not keeping up with the rest of the country.

MR. MATTHEWS: You make that assertion. I haven't seen those numbers in the context that you are presenting them. As I say, I would be loathe to validate the numbers of somebody else without having seen them, but I can tell you that we have been sufficiently pleased with and proud of, I would offer, our own improvement in terms of our GDP growth, that we have been making no hesitation in putting numbers forward in our Budget speeches and in other places.

I guess the acid test, really, in terms of how we are performing as a Province in economic growth is seen by the two upgrades we have had in our credit ratings over the past two years and the positive adjustment in commentary that we received by a third bond rating agency just last week. While the rating did not change, the outlook changed to positive from average. So, we are heading in the right direction and it is a question of whether or not we are getting there as fast as we would like to. The answer to that is no, but are we getting there at a fairly good rate of speed? Yes, we are making good progress.

MR. J. BYRNE: Thank you.

Child poverty has declined in every other province since 1996 but has increased from 18 per cent in 1989 to 23 per cent a couple of years ago. What is the Province doing about this? Are they planning on putting any more money in to help alleviate that problem?

MR. MATTHEWS: I think we have, as you would acknowledge, made a number of strategic investments in the area of social programs. This year alone, by way of example, we have doubled our investment in the provincial School Lunch Program, I believe it is, for the Department of Education, in terms of the endowment that they are working with. We have engaged in the Social Strategic Plan that has a number of initiatives in it for children. We allowed people with children, particularly on lower incomes, to benefit incrementally more from the positive adjustments to the Child Tax Credit over the last couple of years than most provinces but not clawing back as much as others and reinvesting it in certain areas, as other provinces have.

In the big picture, I think you would agree that we are doing some very good strategic investments in our social planning through the departments of government that have responsibility in those areas, primarily the Department of Human Resources and Employment and the Department of Health and Community Services as well as the Department of Education.

MR. J. BYRNE: Thank you.

In the Budget 2002-2001, you are saying that you are going to have basically deficits of $35 million - $34.7 million I think it was, or whatever - and had the Budget included a reasonable estimate of over expenditure by the government's twelve health care boards, ten school boards, forty-two Crown agencies, as the Auditor General pointed out in previous times, the deficit actually would have been $165 million. What comments would you have to that?

MR. MATTHEWS: That is a figure that is substantially less than it would have been had we not made some end-of-year investments back into areas such as health care. This year we put $16.5 million, I think, from the flexibility that we had at the end of the year to address health board deficits. I am not sure if it was two or three years ago, we cleaned up all of the outstanding deficits of the school boards. Last year as well, of course, we put I think it was an additional $16.5 million some time during the year into the Department of Health's budget to address health care deficits.

In total, the health care boards came to us about mid-year last year and told us that they would have probably an accumulated deficit amongst all of them, the eight of them I believe it is, of somewhere between $60 million and $80 million as a result of our re-investments in health care to help them with their debt as well as in other areas. Their accumulated debt now seems to be in the $20 million range. We believe that is quite manageable by the boards over the next couple of years and we are working with them, with a special team that was announced in the Budget, to: (a) Ensure that they are maximizing on their efficiencies and planning and spending prudently with the budgets that we have given them, as increased in this year's Budget.

MR. J. BYRNE: It really doesn't answer my question but I will move on.

The revenue estimated this year includes $162 million in one-time payments; $110 million from the Sinking Fund; $10 million one-time drawdown from Newfoundland and Labrador Housing; and $42 million one-time draw from the future federal grants with respect to the health care. Actually, I thought there was more than that because the liquor board and Hydro also have some there. What are your comments on that? Next year, this kind of money won't be there. There is $162 million there now that will not be there next year because of one-time drawdowns.

MR. MATTHEWS: Over the last couple of fiscal years, and at the end of this year again, we have had more source revenues on our own than we had budgeted for and we have been able to control our expenses. We have had positive adjustments from transfer payments from Ottawa. These things together have given us some flexibility at the end of each year, allowing us to push forward dividends that we would otherwise have taken into our budget. What you are saying is accurate in that we are pushing revenue into next year that we could have taken into account last year, let's say, now, and we are putting them into this year's revenue projections. We believe that the three-year fiscal plan we have for the Province - which is not outlined, of course, in the Budget; this is a one-year Budget - projects that we will be able to maintain our budget whole on the basis of dividends that we are moving forward and anticipate asking of the various Crown Corporations in future.

If you are asking me, do I see deficits as being the order of the day beyond this budgetary year, the answer from the department's prospective is clearly, no. We are not planning on going into deficit financing to meet our program expenditure obligations. We believe that, with the revenue streams we are projecting from Ottawa, from our own source revenues and from dividends from Crown Corporations, we will be able to largely keep our budget whole well into the future. That is our plan.

MR. J. BYRNE: You are saying this $162 million that is revenue this year, you will have those revenues next year?

MR. MATTHEWS: I am saying that we will have sufficient revenues in the next three years as we forecast within the department, within our fiscal plan, to meet our budgetary expenditures. Whether or not our total revenue picture will be made up of exactly the same revenue items and exactly the same percentage portion as reflected in this year's Budget, I wouldn't allege that. I would say that our fiscal framework indicates we will keep our budget whole over the next three years based on what we project will be our expenditures and based on what we project will be our revenues.

MR. J. BYRNE: This $10 million from Newfoundland and Labrador Housing for this year, will Newfoundland and Labrador Housing have to borrow that money to pay the government to help balance the (inaudible)?

MR. MATTHEWS: The dividends that we are asking of Newfoundland and Labrador Housing and asking of the Liquor Corporation - it is really asking of them to return some equity to the Province to help us with our budgetary requirements as the major and as the only shareholder in those corporations. We have, over the years, invested a lot of money in the Newfoundland and Labrador Housing Corporation from previous budgets and from other source revenues, some of which they generate within their own operation, and the net impact on the Housing Corporation will not be negative, nor will it be on the Liquor Corporation.

I was interested to read a press release today from the Liquor Corporation outlining the basis of their product price increases that you raised in the House as a question last week, suggesting it was a new form of taxation because we had asked them to give us a dividend of $5 million or $10 million next year. The fact of the matter is that product pricing was not impacted by the dividends we are asking of them but by other factors external to that.

MR. J. BYRNE: Prices went up, though.

MR. MATTHEWS: Some went down according to the press release that I saw.

MR. J. BYRNE: Yes, over 600 products went up.

MR. MATTHEWS: I'm sorry?

MR. J. BYRNE: Over 600 products went up, increased.

MR. MATTHEWS: Yes, some went down.

MR. J. BYRNE: It wasn't too many of them.

With respect to Newfoundland Hydro, $9 million dollars in extra guarantee and $76 million from dividends to go to your Budget this year. Will Newfoundland Hydro have to borrow any of that money?

MR. MATTHEWS: Within their own operations?

MR. J. BYRNE: Because if they have to give you guys $85 million, (inaudible) $9 million in guarantees and $76 million in direct cash, I would imagine. I would just like to know where they are coming up with $76 million to give to the Province to help balance the Budget without having to borrow.

MR. MATTHEWS: There is an accumulation there of a previous year's dividends that they had allowed for and that they have in fact provided for in their own budget, and we have not taken it. Now if you are asking me whether they operate on some kind of a line of credit over at the Hydro Corporation, I can't tell you what their cash requirements are and how they meet them on a day-to-day basis. All I can tell you is that they have factored into their budgets all of the dividends that we have asked of them. Even though we have not received them they are carrying them as an accrued liability on their balance sheets. At what time they are required to pass them over to us because we want them it won't cause them any difficulty. They may have to go out and increase their borrowings at the bank, if in fact they are borrowing at the bank, or they may have to dip into their cash reserves if they have any cash reserves, at what point they have to pay them out, but these dividends are all built into their fiscal plan. They have allowed for them, and obviously they are not having a negative impact upon their operations. If they were, then they would be in a position of having to ask for rate increases beyond what they have, which has been very little over the past three years. They have not been rendered in a circumstance of having to do that.

MR. J. BYRNE: So $76 million of that $85 million is an extra expenditure for Newfoundland Hydro this year. If they are going to be running that Crown corporation as they have done in the past, and maintained the books that they had in the past, they are going to have to pass that rate on to someone.

MR. MATTHEWS: They would have already passed it on because they have already -

MR. J. BYRNE: That is only coming this year, though. That is only projected for this year isn't it?

MR. MATTHEWS: There is $121 million in total that we are estimating from Hydro. There are regular dividends of $14 million. There is a recall of an additional $37 million available to us there. There are special dividends of $60 million which they have provided for and then we are, of course, picking up some dividends that comes from CF(L)Co as a pass through, through the Hydro Corporation, totaling $10 million, $5 million of which has to do with the guaranteed winter availability contract that we had some positive adjustments to last year when we started negotiating with Hydro Quebec on the Lower Churchill.

The $121 million had been provided for in Hydro's budget and it has not negatively impacted their operation. They have not had to look for extraordinary product increases on the power that they produce and sell as a result of these dividends, no.

MR. J. BYRNE: Thank you.

This is the last year, I think, for the HST transitional grant. I think it was a three year thing, $350 million to the Province. No, since 1997 actually. What impact will not receiving that money have on the budget next year?

MR. MATTHEWS: Not receiving the transitional grant?

MR. J. BYRNE: The HST transitional grants, $350 million.

MR. MATTHEWS: The phase in period or the period on which we took fixed revenue I think ends this July. Deputy?

MR. PADDON: Transitional assistance was paid to us over a four year period and brought into our budget. It was $127 million for the first two years, then it went down to $63 million and it is $31 million this year. (Inaudible) phased down over the last three years.

MR. J. BYRNE: That $31 million will not be there for the next budget?

MR. PADDON: This is the last year for (inaudible).

MR. MATTHEWS: Yes, this is the last year of that. Now there will be possible adjustments - positive or negative, we are not sure which - as a result of the HST agreement on a fixed revenue stream concluded. We will know before this time next year to what extent we will get more or less out of the HST arrangement we have entered into. You are right, the transitional monies decreased over the four year arrangement that we went into and we have factored all that into our next three year fiscal framework. We think we will still be in a position, with the other revenues that we are projecting, to maintain our budget hold. We have extraordinary increases in some sources of revenue that were beyond what we projected.

MR. J. BYRNE: You are going to need them.

MR. MATTHEWS: Yes.

MR. J. BYRNE: Big time.

MR. MATTHEWS: You know some of the areas that I am referring to, I think. I don't want to raise it, but you probably would anyhow. I think we were way up over our projections on corporate income tax last year, $30 million more than we had projected. I think it is a sign that our economy is in the right direction. We received more money from the lotteries, the Atlantic Lotto Corporation, as a result of extra activity in that corporation. We make projections on budget revenues. We are not always spot on, but many times we underestimate, and thankfully with an improving economy we have better performance than we had projected. I can give you the list of them here, but I don't think you want me to take the time to do that because you probably have this in front of you. I'm not sure. I don't think you have this but there are significant differences in some of our revenues year over year. We see further improvements this year and beyond, quite frankly.

CHAIR: Mr. Byrne, can we let someone else get up?

MR. J. BYRNE: Sure, no problem.

CHAIR: We will come back to you. We won't leave until you are finished.

Mr. Walsh?

MR. WALSH: No thank you, carry on.

CHAIR: Mr. Andersen.

MR. ANDERSEN: I just wanted to refer to the comment made by the Member for Cape St. Francis when he said to the minister that maybe after his political career was over that he could be a standup comedian. I'm not sure if that was an invitation to join his party or an invitation to join his firm, but I am sure that will be answered in due course.

Other than that I have no questions right now, Mr. Chairman.

CHAIR: Mr. Lush.

MR. LUSH: Thank you, Mr. Chairman.

I don't know if I want to ask a question or give a speech. I feel a speech coming on.

Now and again I dream, supposing I were in a position of authority, how would I respond to people's concerns about putting more money into health and more money into education, particularly. You know when I look at the diagram of the Province's expenditures in the Budget, on page xiii, right in the beginning of the Estimates, for those people following, which talks about where we spend our money - I'm just rounding off the figures - 28 per cent on health, that is just about $1 billion; education is 20 per cent, $700 million; and then our third is financial expenses. If you wanted to take money out of education I don't know what flexibility you have there. Nobody would want to take money from education. I'm sure many educators would say that 20 per cent of the gross expenditures of this Province is little enough to be spending on education, so I don't see any flexibility there to take any money from there to put into health.

The next one we have no choice on that one. That one is paying our bills. We have to pay that one, $600 million, which is 14 per cent. Then we get into our next highest one, social services, which is $500 million. There would be a lot of people who would say: We can't take anything from that, people on social services now are not getting very much money. I look at all of this and I say: What would I do? How can we satisfy those people who want more money for health? A billion dollars is what we are now spending. How can we satisfy those people who want more money for education? I look at the other diagram on the other page which says where the money comes from.

I used to know a politician very well, back several years ago, who, when he - I am giving away part of the identity; I may give it all away in the next fifteen words - when he was praising Confederation, what a great movement that was, and talking about what a great government we had, the Federal Government of Canada, giving 50 per cent of all the expenditures in this Province. He would look around and say: Out of all of those people here sitting down, all of you MHAs, your salary is paid 50 per cent by the federal government. The officials, the bureaucrats, 50 per cent of your salary is being paid by the federal government.

I look now and I see it is down to 42 per cent. My question is: What has that meant to us in dollars and cents, to be coming from 50 per cent back ten or twelve years ago to when the cutbacks really started? What has that meant to our budget in terms of what have we lost, in terms of health money and education money in the last eight or ten years? What kind of an effort has that been for the Province, to take up the slack of that loss in federal expenditures, because we are spending more money in health so we have had to take up the slack of the federal government not participating what they participated to come up with, our money, and go beyond all of these areas of health, education and social services?

My question, I guess, is: How much money have we lost? Secondly: What are we going to do? Because there is no question that our health services need to be improved, but when we look at that formula, where are we going to get the money? Where are we going to take it from to improve our health services? Are we going to take it from education? Are we going to take it from social services? The answer obviously is that we cannot because all of these areas are looking for more money. Education is looking for more. Social services is looking for more. The answer obviously has to be to get back those federal monies that we have lost. That is the speech I felt coming on.

I will finish there, Minister, and leave you to comment.

MR. MATTHEWS: You were doing well in moving towards articulating a question right up until the end, at which point you made a statement. I assume from that, that the end of your speech was the conclusion of anything you wanted to hear with respect to the issue; but if you have a question I would be glad to answer it.

MR. LUSH: The question I wanted got lost in the middle there somewhere. The question was: How much money have we lost in federal monies in the last eight or ten years? What have we lost? Does anyone have a figure on it? Has it been $700 million? A billion? What have we lost in the last six or seven years?

MR. MATTHEWS: In the last six or seven years, I don't have a figure off the top of my head. Maybe one of the officials might have a figure if you are looking for a big figure.

MR. LUSH: Yes.

MR. MATTHEWS: I think maybe Terry you could provide a big figure, but what we have lost is hundreds of millions of dollars, probably into the billions of dollars, Terry?

MR. PADDON: Yes.

MR. MATTHEWS: Surprise all of us by giving us a figure that will blow us away but also challenge us to run back to Ottawa and seek redress to this serious issue that the member has outlined.

MR. PADDON: I will see what I can do now, Minister.

The biggest change in federal transfers has come through the adjustments that were made to the CHST back in the mid-1990s. Off the top of my head, as a rough estimate, we have probably lost on an annual basis to the CHST between $100 million and $150 million annually - just a rough justice. So, over five years, you can see anywhere between a half a billion dollars and three-quarters of a billion dollars. Of course, now, money has been put back into the CHST through some increase in cash last year plus the supplements that went in last year and this year. They are reflected now totally in our current year's budget. There is obviously no guarantee of what we will see or what we will get in the next year. That is obviously a question that is open for negotiation and discussion in the coming year.

MR. MATTHEWS: Thank you, Terry.

I think it is fair to say, on the account of the federal government, though, in the area of equalization we have not, in that particular line item, been reduced year over year to the extent that we have for the CHST. We have actually gained, I guess, under equalization because the Canadian economy has been performing better and because equalization goes out to seven provinces based on the economic performance of five provinces that go into the base of making up the positive floor for equalization. On equalization we have held our own and probably done better year over year than we would have been, say, four or five years ago.

I guess the thing that has happened within government, as we all know, is that government has had, provincially - this government and previous governments through the 1990s - have had to seriously adjust our priorities in terms of program expenditures. We have gotten out of areas of spending money in places such as direct grants and loans assistance to industries. We have reduced substantially that type of expenditure, which has meant we have had some money or some flexibility to put money into our social programs, particularly health.

The reality is that, as you say, after we pay our interest on our debt and look after our social sector, we have less than 20 per cent of our total budget for all of the other areas of government responsibility. It means that our flexibility to do things in the area of municipal capital works or highways expenditure, these areas have had to be adjusted. It is no secret that Municipal Operating Grants have gone down from, I do not know what the highest peak was, but certainly it was in the $40 million plus - at one point in the $60 million range.

MR. J. BYRNE: It used to be up to $69 million.

MR. MATTHEWS: Sixty-nine million dollars was the highest we have ever gone. Our Municipal Operating Grants now are at $21 million plus. These are areas where we have had to make decisions and adjustments and challenge our municipalities, for instance, to come to the table with more money on their own account.

That is not all bad, I might say, because as people have to pay a reasonable price for some services that they get, I think it gives them a greater appreciation for those services and puts a greater onus and responsibility on elected councils, as an example, to do what is right by their citizens in terms of taxation rates, et cetera.

As long as big brother Ottawa is there piling the money into us, we have greater flexibility. As long as we have that flexibility, we have been passing it along to municipalities and other agencies; but when we had to make cuts and make changes to maintain our social programs, we made, I think, the right public policy decisions. Hence, we have not only been able to maintain our social programs at increasingly higher levels of funding but we have also been able to essentially bring in, over the last four or five years, on average, a balanced budget.

You have been part of a very, very good, efficient and responsible Liberal Administration, Mr. Lush, all of those years, pre-dating me by many years, without making you in any sense appear to be prehistoric.

MR. LUSH: Excellent answer.

CHAIR: Mr. Hodder.

MR. H. HODDER: Thank you very much, Mr. Chairman.

I have to add to what has been said. In addition to the changes in transfer payments, of course, we have also had dramatic changes in other funds from the federal government that would be important to Newfoundlanders and Labradorians, namely the EI benefits and other programs, which in effect, of course, have taken away significant spending powers from ordinary people. We have lost probably an equal amount of money in that particular program as well, so that consequently not only the government does not have as much money to spend but ordinary Newfoundlanders and Labradorians do not have as much money to spend either.

I will read a statement from the Auditor General's report. I am reading from the summary document. It talks about the framework of accountability. Now, last year we talked of this and the government at the time introduced a piece of legislation that was designed to hold some of its public bodies, namely hospital boards, school boards and regional health and community centres, more accountable for their operations. However, our legislation on accountability is significantly deficient.

That bill, say, expired and has not been reintroduced. I am wondering about something, in view of the fact that the Auditor General has said for example, on page 2 of the summary of her report, that: "My review of the Hansard of the House of Assembly has disclosed that of the $1.905 billion paid to 63 Crown entities for government operating grants for the 1997-98 year, the House of Assembly received reports on only 5 entities which had received" - a mere, in this particular case, fraction of the total - "$163.5 million."

In other words, we do not have a very structured framework of accountability. It does not compare with other provinces. I was wondering what your comments on that might be in terms of you being the financial administrator for the Province, and how you feel your government should be and can be more accountable and more consistent with practices in other jurisdictions.

MR. MATTHEWS: My short answer is this that in terms of expenditure controls within government that is the singular responsibility of the Treasury Board.

MR. HODDER: Yes.

MR. MATTHEWS: So the question would be more appropriately put to the President of Treasury Board and her officials. As a matter of fact, I think the accountability framework was legislation introduced by the President of Treasury Board of the time.

MR. HODDER: Last year's bill was introduced, I do believe, by the Minister of Finance.

MR. MATTHEWS: When he was President of the Treasury Board.

MR. HODDER: Maybe in carrying both roles.

MR. MATTHEWS: I think so, yes.

The short answer is that the responsibility, in terms of monitoring and controlling and approving changes in expenditure line items, rests with the Treasury Board functions. Having said that, obviously we have concerns about accountability through the various Crown corporations, hospital and school boards that exist. If we did not have concerns we would not have introduced some measures. While the legislation you are referring to did not pass as introduced, some measures were taken outside of the necessity of legislation to enhance the accountability features and onuses that we have put upon the various boards and agencies of the Province.

We do a fair degree of monitoring. We have put a special team in place to deal with the hospital boards in the next short period of time in an effort to get their expenditures validated as being at the absolute appropriate level if in fact they are, or to find efficiencies if any exist. I think it can be said of our school boards that they have acted and operated very responsibly since education reform has taken place. Their requirement to live within their budgets has been taken seriously by them and they are not running deficits of any significant amounts.

We will continue to do close monitoring of all of the expenditures of government through these departments or through these boards and agencies, and if we think more is necessary to be done in terms of making them more accountable we will do so. I would think that you would agree, as well as, I think, most of the people in the Province, that the health care boards and our school boards, including our university and College of the North Atlantic, those major recipients of government money, are managing in their areas of responsibility very well. Where there has been overruns in their budget it is because they have had expenses by virtue of pressure to deliver services that as government we were not satisfied to allow them to resist. The outcome has been that we have accepted the fact that some level of extraordinary overruns have been appropriate. That is why we have been funding them as they have been occurring.

We have not funded them necessarily within the year that they have had these overruns but we have done it as we have had the ability to do so. That is why the hospital boards now have a total deficit of, amongst all of them, probably between $20 million to $30 million maximum as opposed to $60 million to $80 million that they would have had by their own projections had we not been able to respond with some extraordinary funding to them.

On the issue of whether or not they are providing an appropriate level of yearly reporting by virtue of formal reports, if there is an issue there that is of a more serious nature than I am aware of through the AG's report than I would be interested to hear about it. The Auditor General does have the responsibility, being an officer not of this government but of the full House to ensure that these reports are forthcoming and that action is taken on her account, or recommended to government to be taken by us on her account to ensure that these reporting mechanisms are honoured and respected.

MR. HODDER: The Auditor General also makes note that in 1998-1999 there were $136.1 million that was obtained by way of special warrants. It is her opinion, on page 6 of the summary of her report, "... that $95 million of the $136.1 million... did not meet the requirements of the Financial Administration Act in that they were not urgently required and therefore should not have been issued." She further says in the same paragraph: "If these special warrants had not been issued, and in my opinion they should not have been, Government would have reported a cash surplus of $105.1 million compared to the $10.1 million that was actually reported."

Why do we not follow the precise guidelines of the Financial Administration Act? Why is this kind of comment pretty regular in terms of the Auditor General? There was a similar comment last year that a high percentage - I think last year it was 80-something per cent - which she said did not meet the requirements of the Financial Administration Act.

MR. MATTHEWS: By virtue of the Auditor General's definition of urgent, she is probably accurate in her commentary. However, we have a responsibility to be prudent, as well as other considerations, in providing governance to the Province. In our judgment as government, while the expenditures in her judgment may not have been urgent, for our purposes and for purposes of providing good governance and sustaining much appreciated social programs, such as health, we deemed the expenditures that we have made by special warrants at the end of each year to be very prudent expenditures. We will continue to do so, to the extent that we believe they are the right things to do for the greater good of the people of the Province. Obviously there is nothing illegal or non-transparent. As a matter of fact, we make it a point in our budgets, certainly last year and this year, at the outset of our budget presentations, to very clearly point out, ourselves, what we are doing by way of extraordinary year end expenditures through special warrants given the flexibility that we have had fortunately available to us.

I think the evidence of the prudence of these types of expenditures for us is more than validated by the public affirmation that these expenditures are the right things to be doing, and they appear to have a high level of support, as best we can judge. Certainly the Budget this year, with all of these extra expenditures at year end by virtue of special warrants, was applauded as opposed to questioned by all of the stakeholders that speak to the Budget when it comes down. We make no apologies for the special warrant activities at year end, given our pressures and our needs and our ability to respond in a fiscally responsible manner.

MR. H. HODDER: Thank you. I have a couple of other questions and then I will be finished for the evening.

On the issue of accounts and loans receivable, I am wondering if you would be equally proud of this statement. She says, "...Government's systems for recording, reporting and controlling accounts receivable do not always provide timely and accurate information to users....Our review of Government departments indicates that a significant portion of their accounts receivable are in arrears and that their cash management program, which includes the collection of these accounts, is not adequate."

In other words, government does not know at any one point in time how much money is owed and why all of this is not totally the responsibility of the Department of Finance. It should be the responsibility of finance to make sure that all other line departments have systems in place that, shall we say, further the objectives of good financial management.

What is your comment on this particular matter? Certainly it does show a concern.

MR. MATTHEWS: I do not disagree with the Auditor General's comments, that where systems are lacking they should be enhanced and beefed up, and where systems are in place they should be followed more closely and probably better collection activity could be going on. I do not disagree with her at all. Nor do I disagree with your probable assertion that there are areas where we have been less than 100 per cent on top of the situation in terms of affecting receivables against loans that we have made or against security that has had to be realized on in terms of the taxpayers' dollars being protected.

I would simply acknowledge that we still have a ways to go. I say that not so much on behalf, as you have said, the Department of Finance because a lot of these comments were made with respect to activities in various line departments and not directly as a result of activities happening in the Department of Finance. At the end of the day, I guess, finance is optically deemed to be responsible for all of the finances of the Province; and, to the extent that exists, we take responsibility in finance for doing all we can to make sure that every other department of government does its best to collect revenues that they are responsible to collect - either revenues or a collection of arrears of loans or whatever - because, to the extent that the public Treasury is enhanced with revenue collections, tax collections, repayment of loans collections, those sorts of things, it makes our job in finance easier to manage the fiscal affairs of the Province.

I accept the Auditor General's commentary and I look forward to her making similar comments in the future if, in fact, she finds situations where those comments are appropriate and warranted, because it means she is doing her job and it means that we are less than perfect, being creatures of the earth and imperfect beings that we are. We will try and do better next year.

MR. H. HODDER: You are really being philosophical there.

You have been sitting next to the current Minister of Health and Community Services for some weeks now, and I think he is into a bit of a race. We are not quite sure which one of you can go the longest and say nothing. I am very good on this side of the House, but....

I want to go to the government's sinking fund. It will be my last question. As of the March 31, 1999, the Province had accumulated $1.02 billion in sinking funds which was used to retire $5.6 billion in debenture debt. Of the $1.02 billion, $571 million are mandatory, while $449 million are voluntary. The Province maintains these voluntary sinking funds even though there is no legal requirement to do it. Government has not conducted any cost-benefit analysis or other analysis to determine whether it is making the optimal use of its cash resources by maintaining $449 million in voluntary sinking funds. Then the Auditor General says: This raises the issue of whether this is the most efficient use of cash, given the Province's borrowing requirements.

We are not saying here that we should not be using these sinking funds, because we know that if we don't need them to retire the debt then this year's Budget shows $116 million which we are going to transfer over, which is fine. In fact, there was legislation passed last spring for that. However, when she says that, of the$1.02 billion in sinking funds, $571 million are mandatory and $449 million are voluntary, on what basis do we make that decision? Is it that we feel that not using our own money is to our advantage or must be to an advantage for us to still access the money through the marketplace? What is the rationale for that particular arrangement?

MR. MATTHEWS: John Bennett, the assistant deputy minister responsible for that area, will comment on that; but, in a general sense, we made decisions in terms of taking into revenue in any given year portions of the non-mandatory sinking funds on the basis of our fiscal requirements. I suppose we could take it all in any one year - as an example, this year - and have a very extraordinary spending program. We don't think that would be prudent when we don't need to do that, because we believe that we are maintaining spending in the various areas of social activity and program delivery at an appropriate level. Once we are satisfied that our expenditures are at the right level in our areas of service responsibility, we look at our revenues and rather than borrow money on the market we have chosen to take certain amounts into our budget from our sinking funds. That is, in a very general sense, how we have rationalized how much we are taking in.

John, if you want to add to that certainly I would appreciate it.

MR. BENNETT: I guess normally the public issues of any duration, twenty-five or thirty year loans, especially in the U.S. and in the Canadian public markets, the assurance of a sinking fund, which means an allocation is put together each year, put into a special fund for (inaudible) retirement, has been a good selling feature in this Province, but not as big as the Province of, for example, Ontario, which is almost into the market on a regular basis. Every ten days or something they float a Treasury bill issue, a special warrant or a particular debt issue. We don't have quite the liquidity in Newfoundland securities, which means we don't have the abilities to trade them to the same extent or frequency as the larger provinces, so this is a feature.

In certain instances, basically with what was considered to be Government of Canada debt - when the work loans, for instance, of the past were a prime example - the Canada Pension Plan, up until quite recently, was always considered by a lot of people as being part of the Government of Canada debt, which is isn't, clearly. We have seen that evidenced in the last three or four years. In those situations, that is a voluntary sinking fund. Everybody had the right to borrow in accordance with a formula that they had designed from the Canada Pension Plan. In those cases we were the only Province in Canada, I think, that actually set up a sinking fund. Quite recently, with the changes in the Canada Pension Plan, we can roll that debt over for a further twenty-year period, so the sinking funds that we had there for the maturity of the debt are not necessary. We can roll the debt over and start the process again, if we see sit. They are the voluntary ones we are basically talking about.

MR. MATTHEWS: In a perfect world, I suppose, we would like to have full provision made for full retirement of our debt through sinking fund activities; but the reality is, as the Auditor General pointed out, it is not the best use of our money. That is why we are moving some of our sinking fund monies into current year revenues to meet our budgetary requirements as opposed to either deficit financing or reducing our expenditures on programs.

We set the appropriate level of expenditure on programs and then we match our revenues against it and, where we needed to take some sinking fund monies in, we have done that. We are quite open and quite prepared to defend that, as sort of suggested by the Auditor General we should be doing it in any event

MR. H. HODDER: I think the point we are making is that - in fact, I tend to agree that when the sinking funds are there, and there is excess money, that you have a choice. You can either leave it there and I guess potentially invest it, or you can access it to do ordinary things that you want to do, which is what the government has chosen to do. I think that is logical.

I think, though, what the Auditor General is talking about is that there has not been any real cost-benefit analysis done to show whether or not what you are doing now is the best thing to do or whether some other approach might be the best strategy. It is not to say that what you are doing now is wrong but that it has not been tested by a proper financial analysis. You may disagree with that, too, but I am merely quoting her, as the Auditor General for the Province, saying that that test and that study has not been completed.

MR. MATTHEWS: John or Terry may be able to comment on it but my judgment is that we are taking into revenues sinking funds money that is costing us less than borrowing a like amount. In other words, we are earning less on what we have by way of investment in those funds than we would pay if we borrowed those monies on the open market. Obviously if that was not the case then it would not be cost-effective to be using our sinking fund money. I think that is the rationale that causes us to be comfortable with using sinking fund monies as opposed to borrowing money for operations. John, that is what we do, isn't it?

MR. BENNETT: Yes.

MR. MATTHEWS: If there is a study that we should be doing that we have not done, for a higher level of comfort between now and next year, probably we can undertake to get that done so that Harvey will know it is coming and will not lose any sleep this year, wondering whether or not our prudence is at the highest level.

MR. H. HODDER: Harvey is primarily interested in making sure that the taxpayers' of this Province and their monies is well accounted for, follows proper procedures, and that it is all done in the wisest manner possible. Therefore, when the Auditor General points out certain things and says that a cost-benefit analysis has not been done, I think it is incumbent upon all servants of this House to ask why it has not been done, and that is the question. Whether or not Harvey loses sleep or not is immaterial.

MR. MATTHEWS: It is a good question and it is an important question. John is there an issue outstanding with respect to a cost-benefit analysis that we have committed ourselves to, or that we feel we should have undertaken and have not? Or have we, in fact, done sufficient due diligence that we are comfortable with defending...?

MR. BENNETT: Yes, if I can -

MR. MATTHEWS: Yes, on taking sinking funds in.

MR. BENNETT: I can probably be an excellent bureaucrat at this stage and say we can defend it either way. The truth of the situation is that the contributions made to a sinking fund, if you just added up the contributions, would not be sufficient to retire the debt. You are only contributing about one-third of your debt repayment in contributions. The other two-thirds will be garnered from accumulated earnings on those investments over the life of the issue.

While the Auditor General has taken a particular stance with the voluntary ones, we certainly agree with it. In those issues that require sinking funds, it is a selling tool. You can really argue both ways because what you have to do at the beginning of the piece is turn around and say: What type of contribution at this assumed interest rate - we will give you this particular large amount to retire the debt at the particular end of the issue, versus saying: Well, we won't worry about the interest rate now. What we will do is, at the time that the issue becomes due, we will go out, if we have to, and borrow the full amount again.

In the case of these sinking funds we have time to rebuild them, if we decide to go that way, because the issues related to these sinking funds have been re-opened for a further twenty-year period. It is not a case of us looking around now and saying: Something comes due tomorrow morning but we are going to take the sinking fund today and then go out in the markets and make sure we will borrow it. We have a time to rebuild, using the existing strategy, so we are not always in favour of what the Auditor General said.

We have done, by the way, studies but certainly have not gone to Cabinet in my years and formulated the strategy and said: Cabinet, this is a strategy we should do with regard to voluntary sinking funds. That has not been done. She is absolutely right there.

MR. H. HODDER: Thank you very much.

MR. MATTHEWS: Thank you, John.

CHAIR: Mr. Byrne.

MR. J. BYRNE: Thank you, Mr. Chairman.

Back to the special warrants. It is my view that the government really is using and abusing their authority with respect to the special warrants, and I will tell you why. In the Auditor General's review here it says, "There were 14 special warrants totally $136.1 million issued in the 1998-99 fiscal year..." Of course, we can use these special warrants to either have a surplus or a deficit. "...of which $123.8 million were issued in March 1999." So, in the last month of the year it seems more than passing strange that $124 million out of $136 million would have been issued in the last month of the year. I do not know what views you have on that, or what comments you have, but obviously they are being utilized in a way that they were not really meant to be utilized. I think that is the statement of the Auditor General also.

MR. MATTHEWS: I agree with -

MR. J. BYRNE: I know you answered that somewhat with respect to Harvey, but....

MR. MATTHEWS: I know that is 1998-1999, which is not the fiscal year just passed.

MR. J. BYRNE: I know.

MR. MATTHEWS: It is the year that would have been discussed by the previous minister when he was here this time last year, but the principle that you are referring to is spot on. They are used in March month because that is the end of the year. We know with pretty clear certainty what fiscal flexibility we have, and that is the point at which we make choices about whether or not we are going to spend some of that flexibility or whether or not we are going to apply it to debt reduction and have a surplus that otherwise was not budgeted for. My comment is that we are using but we are definitely not abusing, within our political responsibility and within sound fiscal management principles, the use of special warrants.

The Auditor General raises the point that special warrants are being used probably more extensively in recent years because we have been managing fiscally better and have had more flexibility at the end of the year than they had been historically, because historically significant amounts of positive flexibility were not always the circumstance. Many times the budget came in with bigger deficits than was being projected and, of course, that did not cause special warrants to be used. On the contrary, it meant that our debt load was increasing beyond what was being projected.

We will continue to use special warrants if we think it is the right thing to do year over year but, having said all of that, we are conscious of the basic concept that gave rise to a government's ability to use special warrants. We are cognizant of the fact that abuse is not something that we would countenance or the public would appreciate, but proper usage of the tool is something that the public does accept and we have no difficulty in announcing when we do it, outlining them in our budgets and defending them before the House in the context of the Auditor General's comments, whether they are made or not.

MR. J. BYRNE: Would you agree with respect to special warrants that the definition that is supposed to be used or utilized would be an urgent situation? I believe there was one, from memory now, that was in municipal affairs that was issued some time in March and was not utilized up until September some time. You are looking at five or six months, so how urgent was it in the first place to have to utilize (inaudible)?

MR. MATTHEWS: I missed that point.

MR. J. BYRNE: As an example, municipal affairs -

MR. MATTHEWS: Yes.

MR. J. BYRNE: - a special warrant was issued, I think it was in March, before the year end, and was not utilized in municipal affairs until some time in September or October. Why would that not have been in the regular budget?

MR. MATTHEWS: The usage of the term urgent, for me, has not only to be considered in the context of the usage for which you use special warrants but it has to be viewed in the context of the time frame available to you to use them. The last week of the year, the last week in March month when we make certain decisions, renders the use of the warrants urgent; because if we do not use them before the end of the year we lose the flexibility of accessing that money and it causes a different financial picture at the end of the year than would otherwise have been.

MR. J. BYRNE: Exactly. You could end up having a surplus instead of a deficit.

MR. MATTHEWS: Urgent, while you would think it might only apply to the usage, the purpose for which the money is allocated, urgency also, I think, has to be considered in the context of the time frame within which you have the ability to use them for certain expenditures.

MR. J. BYRNE: Really what you are saying, then, is that you agree with me that the special warrants, towards the end of the year, if you have that kind of flexibility, instead of ending up with a deficit at the end of the year you could have easily had a $100 million surplus.

MR. MATTHEWS: Yes, but -

MR. J. BYRNE: But you would not want people to see that, especially when people are looking for raises, like nurses and civil servants and what have you. We would not want to see a surplus, would we?

MR. MATTHEWS: I think they would probably appreciate seeing surpluses if we had them available to us, but our first responsibility is to meet the program demands that we have as government, and I think primarily of health and education. Where we have had ongoing pressure on us, particularly from health, to fund deficits that have been run outside of what has been budgeted for, it is pretty obvious and it has been pretty obvious to us that we had one or two choices: to either have surpluses at the end of a given year and reduce our debt and then go out, having to borrow money - having reduced the debt, go out and re-borrow to pay off some hospital debt - or to use our flexibility to do it straight up. We have chosen the special warrants route and I do not think there is anything - nobody believes for a minute that anything inappropriate is happening. It is a question of ability, fiscal flexibility, and making prudent judgments about how to spend it. The only way to spend it, because these extraordinary expenditures have not been voted in the previous year's budget on a line item basis, is to access it in terms of expenditure by virtue of executing special warrants. We are quite comfortable with how we are using special warrants. If we had any tinge of non-comfort then we would express that, but we do not quite frankly. We are using them advisedly.

MR. J. BYRNE: With respect to the Roads for Rail Agreement, over the past decade there has been some - what? - 90 per cent of the money spent on roads in the Province that has come from the Roads for Rail Agreement and I believe that is due to expire some time within the next year or two.

MR. MATTHEWS: In the year 2003.

MR. J. BYRNE: In the year 2003.

MR. MATTHEWS: With a mop-up year in 2004.

MR. J. BYRNE: So you have another few years yet with that.

MR. MATTHEWS: We have three years left.

MR. J. BYRNE: Because I was concerned how that would impact upon - what would we be doing when that runs out with respect to (inaudible).

MR. MATTHEWS: In three year's time?

MR. J. BYRNE: Well, it will be our problem them so there in no need to answer that.

MR. MATTHEWS: Your problem?

MR. J. BYRNE: Yes.

MR. MATTHEWS: Jack, I wish you well in your wishful thinking.

MR. J. BYRNE: Thank you.

Government has already spent $350 million payment in 1997-1998 from the federal government for taking over the Coast of Labrador, the ferry system in Labrador, $350 million. What are your plans to deal with that when that money runs out?

MR. MATTHEWS: The Labrador Transportation Initiative is what you are talking about?

MR. J. BYRNE: Yes.

MR. MATTHEWS: There is $347 million, I believe, that came from Ottawa on that. The concept broadly behind the usage of that was to spend X number of dollars to create new roads in Labrador and leave a residue or a balance in that account that would forever more be able to service or to, by way of interest earnings, service the future marine requirements on the Coast of Labrador where no roads would probably ever reasonably connect all the communities. Your colleague for Torngat Mountains would understand this better than any of us.

I think there will be $192 million left in that account at the end of the current announced Trans-Labrador Highway expenditures. That amount will be more than sufficient, by all projections, to in perpetuity provide for the marine services on a reduced basis that will be required for the foreseeable future. That fund will sustain the Labrador marine services.

MR. J. BYRNE: You did basically the same thing on the South Coast, didn't you, with the ferry system down there? Did you take $50 million or $100 million and spend it outright? Now you do not have -

MR. MATTHEWS: We took it into revenue the year we received it and used it, you are right. The responsibility then falls to government year over year to find revenues in its annual budgets to operate the ferry services on the South Coast. These are much smaller operations, of course, than the marine Coast of Labrador service, but you are right.

The Labrador Transportation Initiative was required to have been set aside and managed on a basis that would, in perpetuity, provide an earnings throw-off to run the marine services in Labrador.

We looked at that fund and we have seen - because we have had most of the expenditure occur now on the Trans-Labrador Highway. This year, we determined that we could access some money from that fund beyond what we had originally planned to do some road work on the Coast of Labrador. It is within the mandate of the fund to do that, and some road work was announced in the Budget this year that would be funded out of that Labrador Transportation Initiative to build roads in communities on the North Coast of Labrador, and very appropriately so.

MR. J. BYRNE: With respect to the $100 million government took from Term 29 - the $8 million a year forever - that money now has been spent, so that $8 million that we would be receiving in future years will not be received. How are you going to address that concern?

MR. MATTHEWS: We cashed in, to some degree, our Term 29 money. We took it (inaudible) three or four years ago. We will find money from our own source revenues to offset that.

I think the important thing for all of us to acknowledge is that even though we have less money coming into the Province by virtue of UI payments to people out there than we have had historically, even though we have lost the benefit of the TAGS money we had for quite a number of years - four, five or six years - even though these revenues have come out of the economy, the fact of the matter is that the economy is doing better now than ever it has done in many years, simply because the private sector is growing and the new revenue streams are coming on. An increase in corporate income taxes, increase in lotto revenues, increase in royalties and taxes from our natural resources such as Hibernia and those areas, are ramping up to a point where we are continuing to meet our needs.

MR. J. BYRNE: With respect to the Estimates themselves, on page 33 of the Estimates -

MR. MATTHEWS: Now you are going to get down to work.

MR. J. BYRNE: Under subhead 1.1.01., Minister's Office, we see there that you had Purchased Services estimated at $23,000, you only spent $10,000, and it is back up to $23,000 this year. Why would you not just put $10,000 there for this year, if you only spent $10,000 last year?

MR. MATTHEWS: Well, $23,000 is the amount that we have been carrying there for awhile and, while we didn't spend all of it last year, there may be some additional expenditures this year. I know there have been some expenditures this year already in that area that probably should have been made last year.

MR. J. BYRNE: Under subhead 1.2.01., Executive Support, 01., Salaries, last year you had budgeted $587,600, you only spent $479,800, and it is back up to $500,300 this year.

MR. MATTHEWS: I am sorry. That is under subhead 1.2.01?

MR. J. BYRNE: Subhead 1.2.01.01., Executive Support, Salaries.

What was going on there?

MR. MATTHEWS: The savings resulted from the assistant deputy minister position, the tax administration and secretarial position being abolished. There was a retirement there. We did away with one position so there was a savings in that area as a result of that.

MR. J. BYRNE: Under the same subhead, 03., Transportation and Communications, normally if you see an increase in Salaries, you would see an increase in Transportation and Communications. Here we saw a cut in Salaries but Transportation and Communications went up by $33,000. Why would that be?

MR. MATTHEWS: Last year there were additional expenditures in that area. There was a fair bit of travel with respect to the work of the federal-provincial tax committee dealing with HST matters, and there was simply more need for officials to be traveling and dealing with Ottawa on some of the issues that we have between us. You will notice this year that the estimate is held at $59,100 because we believe this year the level of activity under Transportation and Communications will return to a more traditional level.

MR. J. BYRNE: Under subhead 1.2.02., Administrative Support, 03., Transportation and Communications, you had budgeted $204,500. That went down to $145,000 and now it is back to $204,500. If what you were saying earlier with respect to the other subhead, with respect to Transportation and Communications, that went up and yet this one went down some $60,000. Why is that? It seems one is contradicting the other.

MR. MATTHEWS: The simple answer that I had been provided with is this: That the savings resulted in part from the increased use of e-mail and fax machines as opposed to regular postage type expenditures, and while there has been a revised budget downward last year, we are carrying the same amount this year because we are not sure that will follow through at that level. Rather than be underbudgeted there, we budgeted the same as the previous year.

I would think that if we continue to experience a positive decrease in those expenses we will, in future years, carry a lower line item.

MR. J. BYRNE: Thank you.

MR. MATTHEWS: We don't want to be using special warrants inappropriately or lightly. We want to make sure our budget has the capacity to handle these types of expenditures. Where we under expend in these areas, we create some flexibility that allows us to use special warrants to do some good things at the end of each year.

MR. J. BYRNE: Special warrants, I think you are a bit touchy on that one.

With respect to section 1.3.01.01., Salaries, Government Personnel Costs, you had budgeted $4,222,900, spent $4,416,600, and this year it is up to $5,028,500, over half a million dollars more.

MR. MATTHEWS: Yes.

MR. J. BYRNE: Why is that?

MR. MATTHEWS: It is due to the increased requirement to met pay equity settlements on the salary scales that are becoming due. Pay equity is a level of additional compensation that is kicking in year over year as a result of how pay equity has been awarded and over the time frames that it has to be implemented. As time goes on, until full implementation of pay equity occurs, we will have to make additional provisions for it year over year. I am not sure when the pay equity thing settles out.

WITNESS: Each agreement is separately negotiated (inaudible).

MR. MATTHEWS: So it is tied more to future and current contract agreements?

WITNESS: Yes.

MR. MATTHEWS: Okay, I was not sure about that so I wanted to check -

MR. J. BYRNE: Under the same subhead, section 02., Employee Benefits, it is going from $30,065,500 up to $34,361,800.

MR. MATTHEWS: Where are you now, brother?

MR. J. BYRNE: 1.3.01.02., Employee Benefits.

MR. MATTHEWS: Subhead 1.3.01.02. Yes, I have it right in front of me.

MR. J. BYRNE: Over $4 million more - $4,300,000.

MR. MATTHEWS: You are asking, why the increase?

MR. J. BYRNE: Yes.

MR. MATTHEWS: It is due to the anticipated additional costs in the area of CPP, rate increases, group insurance. There is also a block of funding for increases to Labrador benefits as part of the collective bargaining. The Province has agreed to provide additional funding for Labrador benefits. Once the affected employees have been identified, the fund will be redistributed essentially to the departments of government that are the on-line departments that have to pay out these Labrador benefits. This provision we have made here includes, if you like, some, in a sense, block funding that will eventually be redistributed to the appropriate departments to meet the Labrador benefits issue.

One area where Labrador benefits, of course, has been topical for the last number of months, the area of certain groups of nursing professions on the Coast of Labrador. While we have been dealing with the issue, we have not finally resolved implementation because we are waiting on the nurses' union to come to terms on how we should implement it. So, we have made provision for the cost of it and we will distribute it to the appropriate departments when we can.

MR. J. BYRNE: You just put something in my mind when you mentioned Canada Pension, and that has to do with the insurance we have with the government with respect to Blue Cross. I do not know if you have been receiving any complaints about the cost of that, because it has recently gone up, with respect to the services that you can receive from Blue Cross. When is the contract for Blue Cross up? Do you normally go out to tender for those products? Because I heard people compare it to the previous agent or company or whatever and they thought the previous one was a lot better.

MR. MATTHEWS: I am not sure when we tender, whether it is on a yearly basis or what, because that is an issue -

WITNESS: Five years.

MR. MATTHEWS: Five years, is it?

WITNESS: I think it is five years.

MR. MATTHEWS: That is an issue that really comes under the responsibility of Treasury Board. That is on the expenditure side of financial matters within government, and they are the ones who could best answer that. I am sure the deputy minister in Treasury Board, Peter Kennedy, would be happy to provide that information to you.

The fact of the matter is that utilization drives costs and inflation drives costs. Blue Cross, I think, will continue to go up - or whoever carries our insurance coverage - and we will continue to see increases by virtue of these two factors alone.

MR. J. BYRNE: Thank you.

Under 2.l.05.10., Grants and Subsidies, there was none budgeted last year, you spent $8,060,000, and there is none budgeted this year.

MR. MATTHEWS: Under 2.1.05?

MR. J. BYRNE: Under 2.1.05.10., Grants and Subsidies.

MR. MATTHEWS: Under 2.1.05.10. My goodness, Jack, you are traveling at unprecedented speeds here. Okay, I have it right here. Under 2.1.05., Financial Assistance to Crown Corporations?

MR. J. BYRNE: Yes, that is right.

MR. MATTHEWS: Okay. What was your question?

MR. J. BYRNE: There was none budgeted last year, you spent $8,060,000, and there is none budgeted this year. What was the $8 million for?

MR. MATTHEWS: We provided $5 million to the Newfoundland Municipal Financial Corporation to enable them to provide grant funding on the issue of municipal debt restructuring. I think we allowed for that through a special warrant.

MR. J. BYRNE: That is the five I must have been thinking about.

MR. MATTHEWS: We also made a provision there of $3,060,000 to enable the Marble Mountain Development Corporation to repay finances and borrowing connected with the condominium project in Marble Mountain. Essentially, we have taken care of that debt together with providing $5 million to NMFC at the end of the year by way of special warrants. They showed up on the special warrants tabling that I provided in the Legislature last week.

MR. J. BYRNE: I am just skimming through my notes here now.

CHAIR: Don't rush, Mr. Byrne, there is lots of time.

MR. J. BYRNE: Oh, we have lots of time.

MR. MATTHEWS: It is getting close to my bedtime, if that is worth anything.

MR. J. BYRNE: Under 2.3.01.01., Economics and Statistics, Salaries, $703,700. It went up. You spent $803,600 and now it is $819,000, so you went up $100,000.

MR. MATTHEWS: Yes. The additional funding there has been as a result of having to allocate some additional supports in support of the Strategic Social Plan that we have developed and that we are implementing on a gradual basis throughout the Province. Every now and then there is an announcement to do with further projects under the Strategic Social Plan and the social audit aspect of the Strategic Social Plan. These are additional new costs as a result of these efforts. If you want to be very specific, it provides for two directors and sixteen permanent and temporary positions under that subhead.

MR. J. BYRNE: That is all for me.

Thank you.

CHAIR: Are there any other questions?

WITNESS: (Inaudible) subheads.

On motion, subheads 1.1.01. through 2.3.01. carried.

On motion, Department of Finance, total heads, carried.

CHAIR: Thank you very much, Mr. Minister and your staff.

MR. MATTHEWS: Thank you, Mr. Chairman. Thank you, Committee members, for your attention to business, for your courtesy, and for not being inordinately difficult for me to handle.

On motion, the Committee adjourned.