On the orders of the day:

It has been customary in the past to review the economic and business changes which have taken place since the last budget, and it is a particularly helpful custom at this time, because the record of the past year [Mr. Bsley.l throws some light on the progress made in bringing the full resources of this country into use for the furtherance of our war effort and for the maintenance of our people. It is also the background against which we must view the budget proposals. It should be borne in mind that the financial forces bringing our resources into full use are the war expenditures of our own government, the purchases which the United Kingdom government is making here, and the exports which are sold to other countries. Financial policy has been a condition rather than a cause of the heightened tempo of Canadian business. Taking the twelve months to the end of March as a basis of comparison, our exports to the United Kingdom increased by 45 per cent in the past year. Our exports to the United States have increased by about 21 per cent. To all countries the increase has been 26 per cent. Exports of gold increased by about 8 per cent, but, unfortunately, our receipts from tourists declined substantially. Our net receipts were increased only because of the travel restrictions imposed on Canadians. For the first quarter of this calendar year, our rapidly rising war expenditures were five times the figure of the same quarter of last year and at the rate of more than $1,000,000,000 annually. In comparison with the same period a year ago, the physical volume of business in Canada in January and February was 15 per cent higher while the volume of manufacturing was 11 per cent higher. It is at first a surprise that these increases are considerably smaller than those which took place in the preceding period of twelve months. When we turn, however, to the value of construction contracts, which in the first three months of 1941 stood 100 per cent higher than in the same period last year, we see that what was taking place, and is still taking place, is a great expansion in our capacity to produce, and that from now on a greatly increased output will be flowing from our war plants. Whereas in March, 1940, the number of persons employed had increased by less than 7 per cent over the previous March, the increase shown in March of this year is approximately 20 per cent. In the early period of the war, increased output was obtained by employing more fully and for more days in the week those people who were already counted as employed. During the past year, it is apparent that increases in production have required the employment of additional workers. Clearly from now on, aside from some increases in efficiency, any The Budget-Mr. Ilsley enlargement in our scale of production will be dependent upon our ability to add more workers to our working force. It has already been indicated that we shall probably need this year for both the armed forces and industry an additional 300,000 persons. How near we are at present to full employment is a point open to prolonged argument. As long as there is rapid change in industrial needs, there will necessarily be some temporary unemployment. It is significant that the number of employable persons on relief during the past winter has been only a third of the number shown for the previous winter, that the percentage of trade unionists unemployed has been only slightly above the figure for the winter of 1928-29, and that industries necessarily seasonal in the operations are finding it increasingly difficult to maintain their working forces. It is undesirable that we should try to force the expansion of production to the point where our seasonal industries would be stripped of workers and some of our most important exports restricted. As our seasonal requirements and as our war requirements mount between now and next autumn, we shall have to forgo some of the less essential of our civilian requirements in the interests of maximum war production. The greatly increased volume of business activity during the past year has resulted in very substantial increases in income. It has been estimated that our national income for the calendar year 1940 was $600,000,000 in excess of the figure for 1939. Of that $600,000,000, $348,000,000 was in salaries and wages, the remainder in business, professional, agricultural and investment income. While we cannot trace all the ramifications of the expenditures of income, we can see easily enough where some substantial portions of the increase in, income have gone. Something like $300,000,000 went into increased dominion revenues. Without increased rates some provinces and municipalities have experienced large fortuitous gains in revenue. For the first two months of 1941, retail sales in Canada were about 13 per cent higher than in the same period of the previous year. Purchases of passenger automobiles were slightly below the level of the previous year, which was, however, the highest level on record for January and February. Expenditures on residential construction during the first three months are reported to 'be 19 per cent higher than in the same period a year ago. The greatest increase in construction, of course, has been in industrial construction where the first quarter's figures are about four times those of last year. Most, but by no means all of this, has been occasioned by the expansion of war industries. These few figures give some impression of a country which has greatly increased its capacity for war production, and, at the same time, increased its production for civilian use; a country which has drawn nearly all of its working force into active work, and will encounter more and more difficulty in expanding the scale of production still further. They indicate that far from there being any reduction in civilian consumption there has been a very substantial increase as war activity has developed. We do not know what tremendous events are shaping to emerge in the year ahead of us. We are bound, nevertheless, to take account of the results of the programmes which have already been put into effect in the United Kingdom, the United States and in this country. That our own plans call for war expenditures of $1,450,000,000, nearly double those of last year, is, already known. The government of the United Kingdom has intimated that it expects that purchases for all purposes will be made in Canada to the value of $1,500,000000. As the rapid acceleration of the United States defence programme proceeds, our exporters to that country will be called upon for larger and larger shipments. Rapidly developing industrial cooperation between ourselves and our neighbours will intensify this demand. These tremendous requirements of goods are additions to our normal requirements for consumption and maintenance of our capital equipment. Under the stimulus of these purchases, it is expected that our national income will increase greatly. Against an estimated increase of $600,000,000 from the calendar year 1939 to 1940, it has been estimated that the national income in the fiscal year 1941-42 is likely to rise $950,000,000 above the figure for 1940. The achievement of this increase depends, of course, on realizing a great increase in our industrial output. For the attainment of that increase we rely mainly on the expansion of industrial capacity which has taken place in the past year. Such an increase in our national income, to a level 35 per cent above that of 1939, will make possible a powerful contribution to the success of the struggle in which we are engaged jointly with the other British countries and the United States. It will make it possible without any serious encroachment on the basic standard of living of the people of this country. It will not, however, make it The Budget-Mr. Ilsley

possible for us to expand our consumption still further nor will it be possible for us generally, while we are engaged in this struggle, to enlarge, remodel and reequip our houses, buy larger and faster motor cars and respond to each and every appeal of the alluring advertisement. We can postpone till after the war the purchase of many wholly desirable and convenient products, and thereby give right of way to the equipping and maintaining of the forces that stand between us and Hitler.

The house does not need to be told that some of the most difficult and intricate of the financial problems of the country arise from our relations with the United Kingdom and the United States. Since the outbreak of war, Great Britain has suffered in common with us an acute shortage of United States dollars. In addition, Great Britain has been short of Canadian dollars. Up to March 31, Britain's deficit in her balance of payments with Canada was approximately $795,000,000. Of this amount only 31-4 per cent was met by the transfer of gold to Canada. Canada financed the remainder by the repatriation of Canadian securities held in Britain, and by the accumulation of sterling balances in London. The first of these methods accounted for 42-4 per cent of the total deficit and the second for 26-2 per cent of that deficit. Since early December no gold has been received from the United Kingdom, and Canada is at present making Canadian dollars available to the United Kingdom for the full amount of her deficit with us, which for the first quarter of 1941 amounted to approximately $186,000,000. During the present fiscal year our shipments of munitions of war, raw materials, and agricultural products are expected to increase very rapidly and, as has already been indicated to the house by the Prime Minister, they are estimated to reach approximately $1,500,000,000 for the fiscal year as a whole. On this basis it was estimated that the deficit in the balance of payments with Canada of Britain, or, more accurately, of the sterling area, would be approximately $1,150,000,000. This would be a colossal sum to think of adding to Canada's direct war expenditures of perhaps $1,450,000,000. The house, however, I am sure will agree that it would be unthinkable that Britain should be unable to purchase vitally needed supplies in Canada because of a lack of Canadian dollars. For that reason it has been necessary for us to assure Britain that Canada would meet such proportion of that total deficit as Britain herself would not be able to meet by the transfer of gold or United States dollars to Canada. In view of the changed aspect of this problem as a result of events of the last few days, I wish now to turn for a few moments to Canada's own exchange problem vis-a-vis the United States. As the house is aware, Canada has normally had a deficit in her balance of payments with the United States, but in the pre-war years that deficit was met by the conversion of our surplus sterling into United States dollars in the free market in New York. Since the outbreak of this war it has not been possible to convert this surplus sterling into dollars, with the result that we have had to face the prospect of a growing shortage of United States dollars coincident with an increasing accumulation of surplus sterling. This deficit in our United States account has been a continuing problem from the outbreak of war. Our nearness to the United States is such and the commercial and industrial relations of the two countries are such that as long as United States industry is working at less than capacity, any shortage of resources, plant, material or labour could be made up by the expenditure of United States dollars- Thus, all other shortages tended to be converted into this shortage of hard currency. , The house is familiar with the series of measures by which the acuteness of this deficiency has been mitigated. The original Foreign Exchange Control Order prohibited the export of capital. Strenuous efforts have been made to extend our exports, our tourist traffic and our gold production. In May last, under the Foreign Exchange Acquisition Order the gold and foreign exchange of the Bank of Canada and private holders were taken over by the board. In June the war exchange tax of 10 per cent was imposed. In July the board was instructed to refuse dollar exchange for purposes of pleasure travel. In December the War Exchange Conservation Act prohibited, in effect, the importation of a large number of products from non-sterling countries, restricted the importation of others, and reduced, or, in most cases, eliminated, the duties on large classes of imports from the United Kingdom. In addition, heavy excise taxes were imposed, largely for exchange reasons, on automobiles and a considerable list of other articles which occasion substantial imports of parts and materials from the United States. These steps were taken in the conviction that it was only common sense that, when we were being forced to dispose of our United States assets to meet a shortage of United States dollars, we should do what. The Budget-Mr. Ilsley we could without handicapping our war effort to reduce our non-essential expenditures in dollar exchange. However, despite all the measures that were adopted, we experienced a continuing deficit in our dollar transactions with the United States. From September 15, 1939 (the date on which foreign exchange control was established in Canada) until March 31, 1941, Canada's net deficit with the United States on both current and capital account amounted to approximately $477,000,000. (This figure, as well as the others which I shall use, is in terms of Canadian dollars). As I have already explained, we received from the United Kingdom in the early part of the period a substantial amount of gold, which was, of course, used to meet part of our deficit with the United States. It was, however, necessary to cover the balance of approximately $225,000,000 by depleting our holdings of gold and United States dollar balances and by the liquidation of certain of our holdings of other United States assets. The rapid expansion of Canada's own direct war effort and the increase in British purchases in Canada already referred to were bound to bring, unless offset by other factors, a substantial increase in our deficit with the United States. In spite of the measures taken to curtail non-essential imports, we have estimated that our imports from the United States this fiscal year will reach the huge figure of $953,000,000, of which $428,000,000 will represent purchases for war purposes. More than half of this latter total would be accounted for by components and materials required to be purchased in the United States to execute British war orders placed in Canada. Our exports to the United States for the same period are estimated at $475,000,000. Another important item on the debit side of our account with the United States is the payments we have to make for interest and dividends to United States investors estimated at $238,000,000, which is only offset to the extent of about $28,000,000 by interest and dividend payments coming the other way. The house is also aware that our net tourist receipts last year proved very disappointing, and, while w-e hope that United States tourists will come to Canada in increasing numbers and for longer periods this year, it is probably not safe to count on net receipts from this source of more than $130,000,000. Taking these and other relevant items into consideration, the best estimate we were able to make a few weeks ago indicated a probable deficit in our balance of payments on both capital and current account with the United States for the current fiscal year of approximately $478,000,000. This has recently been reduced by $11,000,000 as a result of a partial renewal of a dominion obligation maturing on May 1st next. Perhaps I have said enough to indicate to the house something of the magnitude of these complex exchange problems. A dramatic and magnificent contribution to their solution was made by the Hyde Park Declaration which the Prime Minister explained to the house yesterday. In that declaration, the thrice welcome progeny of the "good-neighbour" and "aid-to-Britain" policies, the President of the United States and our own Prime Minister made public an agreement under which the government of the United States will make available to Britain, under the lease-lend act, the United States components of British purchases in this country, and undertakes to purchase from us such war materials and equipment as we may find it possible to produce by an intelligently planned integration of the industrial capacities of this North American arsenal, having regard always to the requirements of Canada and the United Kingdom. It is difficult to make any precise quantitative estimate of the contribution which the agreement may make to reducing our shortage of United States dollars. In the first place, while elimination of the necessity of our paying United States dollars for the United States components of British war orders in Canada should result in a substantial reduction in the drain on our United States dollars, administrative difficulties may be encountered which will make it difficult to apply the lease-lend procedure immediately to all items in this category, particularly certain raw materials purchased directly by private contractors. In the second place, while the Hyde Park Declaration referred to a total of between $200,000,000 and $300,000,000, the amount of the additional war purchases by the United States in Canada will depend on the practicable limits of production and integration, and it will, of course, take some months for them to reach their expected peak volume. The most reasonable estimates of the magnitude of these two factors still leave a considerable deficit in our balance of payments with the United States, but we hope this may be further lessened by continuing negotiations between the three governments. However, I must warn the house that the Hyde Park Agreement, most generous and helpful as it was, does not remove all need for the conservation of foreign exchange. It is a magnificent contribution to the success of our common struggle, not to the ease and convenience of the Canadian people. It would be foolish, for instance, to assume that it will mean the restoration to par of the The Budget-Mr. Ilsley

Canadian dollar in New York, a proposal which has recently been mooted by persons not familiar with the hard facts, or to assume that it will enable us to remove the present restriction upon the use of United States dollars for pleasure travel purposes in the United States. It was only with the greatest reluctance that the government accepted the necessity of imposing these travel restrictions, and, as the Prime Minister stated upon his return from his recent visit with the President of the United States, this administration would abandon that prohibition immediately if it could be done without injury to Canada's war effort. Such action, however, cannot be taken at the present time, as the plain fact of the matter is that even taking into account the probable benefits of the Hyde Park Agreement, we have not sufficient United States dollars available to permit us to undertake additional commitments. If all restrictions were removed, I am of the opinion that we would have to find some $70,000,000 to $80,000,000 for pleasure travel. While on this subject I would like to refer to certain misapprehensions which appear to exist in some quarters in regard to the policy which is being followed in permitting visits to the United States. In general, funds will be provided for any trip which is required for business reasons. Further, visits for necessary medical treatment or other types of health purposes are allowed, and, in certain cases, limits are established for educational courses not available in Canada. No funds will be provided for vacation or pleasure trips, but if any Canadian has arranged to visit relatives or friends in the United States who provide the United States dollars for the purpose, no objection will be raised. From time to time we hear criticism that certain people are allowed to visit the United States, and not others. I am advised by the Board that I can assure all concerned that absolutely no discrimination is exercised in considering applications and that exactly the same principle applies to every applicant. If the application falls within a class that is prohibited, it is refused without regard to the personalities concerned, and if it is in a permitted class it is granted on the same basis.

I wish now, Mr. Speaker, to review the government accounts for the fiscal year which closed on March 31st. In accordance with the procedure which has been followed in the last two budgets, I shall merely at this time summarize the results of the year's operations and at the close of this address I shall table a white paper which will include all the significant details in regard to our revenues and expenditures, our direct and indirect liabilities, our active investments and our financing operations during the past year. The house will realize that, while we are now past the end of March, our books for the fiscal year 1940-41 will not be closed for some time. For this reason the figures which I shall present to the house represent merely estimates, although I believe they are close estimates, of our revenues and expenditures for the past fiscal year. In this connection, my first duty is a pleasant one-that is, to report the fact that our revenues during the past year were of unprecedented magnitude. Our present estimate is that they will reach a total of $871,571,000, an increase over the previous year of over $309,000,000 or approximately 55 per cent. For no earlier year in our history have our receipts approached this huge total. Even the somewhat courageous estimates made by my precedessor last June were exceeded by more than $100,000,000. If hon. members contrast the huge total I have given with the dominion's revenues in the corresponding year of the great war, they will, I believe, find reason for confidence, not only in the increased strength of the dominion to bear the greater burdens of to-day, but also in the different methods which are being followed to finance this war. In 1915-16 the aggregate revenues of the dominion amounted to only $172 million, and even in the closing year of the last war they had risen to only $313,000,000. The very large increase in our revenues as compared with those for 1939-40 is to be explained by several factors. In the first place, we imposed last year a number of new taxes and we increased the rates on several of our existing taxes. In the second place, the substantial increase in business activity, in personal and corporate incomes, and in consumer expenditures, to which I have already referred, have provided a broader base for all or nearly all our taxes. Finally, there was a much less important factor, the prepayment of income taxes not normally payable until April 30. In these remarks I shall restrict myself to a brief discussion of our tax revenues and shall make no reference to our revenues from non-tax sources, such as post office receipts, return on investments, and various miscellaneous items. Total tax revenues are now estimated at $778,290,000, as compared with $468 million in the preceding fiscal year. The largest contribution to this total was made by The Budget-Mr. Ilsley our various excise taxes which account for aggregate receipts of $284 million as compared with $166 million for the previous year. Sales tax alone was responsible for total receipts of $180,750,000 and the war exchange tax for $62,000,000. The income tax was the second most important source of revenue. From the graduated tax on personal incomes, the 18 per cent tax on corporate incomes and the special tax on interest and dividends, we received a total of $220 million, or more than 50 per cent in excess of any previous year in our history. The national defence tax produced a total revenue of $28 million, while under the excess profits tax we collected $24 million. In this connection, however, I wish to emphasize that it will not be until after April 30 this year that we will receive the very large returns which we expect from the excess profits tax, as well as from the increases in personal income taxes which were imposed last June. It is not as yet possible to determine with- any precise accuracy the total amount of prepayment of income tax which normally would not have been paid until April 30, 1941, although it is estimated that about 110,000 taxpayers took advantage of the instalment prepayment plan and that prepayments were about $45,000,000. Despite the important steps we have taken to restrict non-essential imports, our imports have shown a substantial increase and as a result our revenues from customs duties rose from $104 million in 1939-40 to an estimated $131 million in 1940-41. This is larger than in any year since 1931, but still considerably below most of the pre-depression years. As a result of the tax changes imposed in the two earlier war budgets and of increased consumer incomes, our revenues from excise duties, mainly on liquors and tobacco, increased from $61 million to $89 million. I turn now to some brief comments on our expenditures for the past fiscal year. We now estimate that our ordinary expenditures will be slightly over $393 million, of which total approximately 70 per cent is accounted for by interest and other charges on. the public debt, civil and military pensions, cost of operating the postal service, and subsidies and special grants to provinces. Although it includes over $11 million additional interest and other charges on the public debt, this total is $5 million less than the corresponding figure for the previous year. Capital expenditures decreased to $3,405,000 from slightly over $7 million in 1939-40. The largest decrease in our expenditures took place in the category of so-called special expenditures, representing chiefly the cost of unemployment relief, payments under the Prairie Farm Assistance Act, and provision for losses in respect of wheat. In connection with the last named item, I have thought it wise to set up a reserve in our books of $10,500,000 which is the deficit shown, not previously provided for, in the operations of the Canadian Wheat Board calculated as at July 31, 1940. Including this reserve for wheat losses, our total special expenditures for the year are estimated at $42,613,000, which compares with an expenditure of $89,113,000 under the same category in 1939-40. As the house already knows, there was also a substantial decrease in losses of, and nonactive advances to, government-owned enterprises, chiefly the government-owned railway system. During the past year our expenditure on this account was $18,182,000 as compared with $42,079,000 during the preceding year. I come now to the last important category of dominion expenditures, namely, those on war account. By this time hon. members will, I am sure, realize how difficult it is to make precise estimates of war expenditures in advance, even for short periods. Our latest estimates indicate that our total cash disbursements for this purpose charged to the fiscal year which has just closed will approximate $816,150,000, of which $791,862,000 will represent expenditures charged to consolidated fund and $24,288,000 will represent outgo in respect of items which we treat as active assets in our accounts. For the sake of comparison it may be interesting to note that in the corresponding fiscal year of the last war, namely 1915-16, the war expenditures of the dominion amounted to only slightly over $166 million, and even in 1918-19, the last year of the war, to only $447 million. If we add the amounts which I have given you for the various categories of expenditure charged to consolidated fund together with certain miscellaneous other charges representing chiefly write-down of assets, we get an aggregate expenditure for the year of $1,266,627,000, which total I need hardly say also represents a new record for the dominion. Deducting total revenues of $871,571,000 we reach an over-all deficit for the year of $395,056,000. This is, of course, a very large deficit, but nevertheless it is substantially smaller than that which was estimated by my predecessor last June. It compares with a deficit of $118,700,000 in 1939-40. As a result of the over-all deficit of $395 million, the net debt of the dominion rose to approximately $3,666,316,000 as at March 31, 1941. Gross liabilities at that date are The Budget-Mr. Ilsley