Canada

The new economic disorder

April 18 1977
Canada

The new economic disorder

April 18 1977

The new economic disorder

Canada

“This budget is intended to show that we really mean business in the fight against inflation.”—Finance Minister Edgar Benson, budget speech, June, 1969.

“The purpose of this budget is—first and foremost—to bring about a substantial reduction in unemployment.”—Finance Minister John Turner, budget speech, February, 1973.

“Our goals are clear. Our first objective must be to maintain the underlying trend to lower inflation.”—Finance Minister Donald Macdonald, budget speech, March, 1977.

The Trudeau government’s economic record, as even many Liberals will acknowledge, has verged on disaster. Never was this more apparent than in Donald Macdonald’s budget on the last day of March. When Pierre Trudeau assumed office in 1968, the unemployment rate was 4.8% and inflation was at 4.0% By the end of last year, unemployment had soared to 7.1% and inflation to 7.5%, with both figures still growing. At the height of World War II, Canada had a highly visible force of 719,000 in uniform. The nation’s army of unemployed now exceeds 930,000 and, according to the economic strategyjust unveiled in the budget, their ranks can’t diminish—instead they’ll be close to the million mark by the end of the year.

Macdonald and his officials admit they expect unemployment to keep rising to Great Depression levels. Economic growth would have to be at least at 5% to reverse the trend, but the minister is predicting 4% this year. Commented Dennis McDermott, Canadian director of the United Auto Workers: “What it [the budget] amounts to is a kick in the ass of the unemployed and some Easter goodies for big business.” Opposition critics suggest Macdonald chose a stand-pat approach with an eye to next year: it gives the government more room to deliver just before a general election. Charged Conservative leader Joe Clark: “One million (jobless) Canadians will have to wait until (Liberal campaign chairman) Keith Davey gives them the green light.” Nevertheless, the government, under the influence of such fiscal conservatives as Gerald Bouey, governor of the Bank of Canada, and William Hood, associate deputy minister of finance, had decided that of inflation and unemployment the

former is the greater evil at this point.

So Macdonald offered $780-million in tax incentives to business and investors— but little for the average Canadian—an approach that puzzled critics who noted that Canadian industry is already operating as much as 20% below capacity. Besides, two specific tax benefits were open to criticism One, increasing the dividend tax credit, would permit someone with no other source of income to make up to $23,750 in dividends without paying one cent in tax. The other, treating stock options as a capital gain, would allow certain companies to provide their executives with remuneration on which they would pay only half the normal tax.

For the ordinary wage earner, let alone the out-of-work, there were no such favors. A family of four gets a tax cut of up to $ 126, depending on income, but that was wiped

A graphic history of Trudeaunomics 1969-1977

1970 1971 1972 1973

1974 1975 1976 1977

out by price increases the next week for butter and skim milk powder and the pending rise in the cost of oil.

Reaction wasn’t all adverse. The bankers loved the budget. “It was so sound, conservative, and just about the best possible budget under the circumstances,” enthused Bank of Montreal chairman Fred McNeil. Said Sam Hughes, executive director of the Canadian Chamber of Commerce: “We’re grinning from ear to ear.” Manufacturers cheered the new investment credit provisions, though retailers lamented the absence of personal tax cuts. Ontario’s Conservative Treasurer Darcy McKeough called the budget “honest medicine” that “will lead to a safer and fairer economic future for our wage earners and our unemployed.” (Ontario’s NDP leader Stephen Lewis who, like federal leader Ed Broadbent, characterized the

budget as “stupid,” might have found an election issue in McKeough’s response. The treasurer was due to present his own budget on April 19, and the NDP was prepared to confront the minority Conservative government if it, too, opted to stand pat.)

The Macdonald budget’s direct makework program amounts to this: a $100 million addition to the $358 million budget of the Canada Works programs, which finance officials expect to create 50,000 jobs. Only two days earlier, Quebec alone, in its spending estimates, earmarked $80 million for a job creation program. On the same day, the Nova Scotia government increased its capital spending by about 20% to $225 million with the aim of reducing the massive unemployment there. On March 30, the PEI government abandoned its loyalty to balanced budgets and, for the

sake of stimulating employment, announced plans for a deficit approaching six million dollars.

Canada’s economic problems are not all homegrown. As inflation and unemployment started zooming out of control here, the same was happening throughout the industrialized world. But many other Western countries have had more success in keeping them in check. What’s gone wrong here? Looking at the latest budget, and given the fact that industry is already operating under capacity, why not cut taxes to stimulate the economy? The answer (aside from the cynic’s response that the election is next year, not this year) is that the government is counting on a big upturn in the American economy to pull Canada along on its shirt-tails. But the government has guessed wrong before, especially during the Trudeau years, and

may be wrong again. Said Senator Maurice Lamontagne, in a speech two years ago that is still relevant: “the conventional wisdom has been consistently wrong in its forecasts... the result of which being that government action has always been too late and has thus contributed to intensifying both cyclical inflation and unemployment rather than attenuating them”. Notable examples, most experts now agree, are the 1969-70 Benson budgets, which restrained the economy when it needed stimulus, and the 1973 Turner budget, which stimulated when restraint was in order. Macdonald says he can always break in with job-creating programs in September if the government’s forecasts are wrong.

Absent in the budget was any announcement of an early end to wage-price controls, in effect since October 14, 1975. An eleventh-hour meeting, bringing Macdonald, Trudeau and Labor Minister John Munro together with ajoint business-labor team,* produced speculation that the budget would lay the groundwork for the end of controls. Instead, Macdonald said controls would last at least until October 14, barring agreement on a program of “voluntary restraint” by business and labor. He told reporters that, at the prebudget meeting, “all they [business and labor] said was that the market is such that there won’t be a fresh outbreak of price and wage increases. They didn’t get together and say, ‘We’ll restrain ourselves.’ ” Joe Morris, president of the Canadian Labor Congress, says it is not possible for labor leaders to agree to restraint on behalf of their membership: “You’re asking people to fly in the very face of the traditional collective bargaining system in this country.” But with unemployment so high, unions are not likely to demand too much, Morris adds. However, Macdonald, unlike business and labor, does not think the time is ripe to abandon controls. He argues that the nation still suffers from an inflationary psychology and has noted, as an example, BC loggers’ demands for a 30% wage increase. “Here we go again,” he groaned.

This budget could be Macdonald’s political swansong. He has spoken publicly about the possibility of leaving politics and speculation is already rampant that Trudeau will choose a successor, probably Trade Minister Jean Chrétien, later this year. If so, Macdonald will leave behind him a disappointing record after entering the finance portfolio with the reputation of being a bit of a reformer. After introducing controls 18 months ago, he has offered little of a novel nature and it is now clear the government intends to return to the use

* Representing business at the meeting, which took place the week before the budget, were Ian Barclay, chairman of BC Forest Products Ltd., Jack Barrow, chairman of Simpsons-Sears Ltd., Paul Desmarais, chairman of Power Corp., and A If Powis, president of N oranda Mines Ltd. Representing labor: Joe Morris, Shirley Carr, Julien Major and Don Montgomery, the four leading officers of the Canadian Labor Congress.

of the traditional levers of fiscal and monetary policy to manage the economy after controls are lifted. Concedes Macdonald: “I don’t think I ever had the expectation that in a short period of time I could remake the political and economic fabric of the country. I felt that the control period was and is an opportunity to try to bring about certain changes, as much perhaps in attitude as in the institutions, and we have of course been applying ourselves to that. You can say to me, ‘You’ve been applying yourselves and you haven’t delivered a lot at this point.’ I’d plead guilty to that.”