SPECIAL REPORT

LALONDE’S NEW DEAL

November 8 1982
SPECIAL REPORT

LALONDE’S NEW DEAL

November 8 1982

LALONDE’S NEW DEAL

SPECIAL REPORT

CANADA/COVER

It was a fitting occasion for a man who had just delivered an austere, hard-times message to the country. When Finance Minister Marc Lalonde invited 10 journalists to lunch last Friday, he dipped into his own wallet, served up five large pizzas, and uncapped a Labatt’s Party Case of beer. The cost of the repast of restraint: $65—coincidentally, the very numbers the government has used to push its Six-and-Five economic restraint program. Said Lalonde: “We’re in the process of survival.”

Lalonde’s 80-minute economic statement to the House on the day that Parliament reopened was intended to restore the morale of a shaken nation, the troubled Liberal party and his own embattled finance department. In the authoritative style that has been his trademark throughout his long political career, Lalonde unwrapped a budget in everything but name. The key points: a shift of $1.1 billion of government funds into job creation programs coupled with a promise not to widen the deficit; a pledge of another $500 million to help people who will be forced onto welfare after their unemployment benefits run out; an increase in unemployment insurance levies on employers and workers; a $100-million extension of home buyers’ grants to stimulate the housing industry; and an undertaking to spend another $400 million to expand the western rail system and alleviate the nettlesome Crowsnest Pass freight rate dispute.

Of less practical, but more symbolic, worth, was the distance Lalonde put between himself and the Liberals’ previous economic administrator, Allan MacEachen. With depression writ large in the minds of many Canadians, Lalonde’s speech attempted to end the 12 months of rudderless leadership and uncertainty caused by MacEachen’s two unsavory budgets. More important, however, was the unspoken message of the minister’s take-charge performance: while the prime minister may still be named Pierre Trudeau, in Ottawa the buck now stops with Marc Lalonde.

For the first time in nearly a decade, a finance minister has indisputably staked claim to the traditional role of economic decision-maker. Pressing the point home, Lalonde’s statement at 3 p.m. EST—Canadian stock markets chose to close early—went hand in hand

with the departure of top bureaucrat and Trudeau loyalist Michael Pitfield (page 28).

Throughout the Pitfield years the finance department’s muscle had been stripped away as part of the drive to centralize economic management in the tight grasp of the Prime Minister’s Office and Pitfield’s Privy Council Office. Privately, Lalonde vowed to rebuild his emaciated department, whose clout had diminished over the years with the departure of key mandarins to other central agencies and to the private sector.

Lalonde’s heads-up Commons debut as finance minister was a balm to the frayed nerves of Canadian businessmen. “The store is under new management, and we’re delighted,” declared Sam Hughes, president of the Chamber of Commerce. There was no joy, of course, that the deficit will soar to $23.6 billion—$4 billion more than MacEachen forecast four months ago. But the business leaders were relieved that Lalonde at least made a bid to clear away the uncertainty lingering from MacEachen’s last budget. Eight out-

standing measures—including the tax on employer contributions to private health and dental plans and a levy on wholesale goods—were either cancelled or postponed until the end of 1983. The total cost in lost revenues: more than $375 million—to say nothing of the burial of MacEachen’s scheme for more equitable taxation.

Windfall: In the grand tradition of Finance, the new minister mixed new policies with legerdemain. The $1.1 billion for economic stimulation was supposed to come from program cuts—but ministers were hard pressed to specify the details. Instead, Lalonde appears to have been the beneficiary of a windfall caused by declining U.S. interest rates that, in turn, reduced Canada’s own 1982-’83 debt repayment load by $1 billion.

In Ottawa the opposition parties condemned the increase in unemployment premiums to weekly maximums of $8.86 per worker and $12.40 for employers. Conservative Leader Joe Clark argued that by capturing $1.7 billion in higher premiums, Ottawa will imperil the pos-

sibility of creating 60,000 new jobs. The money, said Clark, could have been better used “by small business, in particular, to keep people working or create new jobs.” With almost two million unemployed, added NDP Leader Ed Broadbent, Lalonde “brought in a pittance.”

Challenge: Reaction in the provinces was mixed, if slightly more encouraging. Ontario Premier William Davis said that Lalonde’s course correction was “a step in the right direction,” although the province wants a bigger slice of the job creation money. Quebec’s René Lévesque said he is willing to cooperate, a sentiment also expressed with reservations by Manitoba and Saskatchewan. But most premiers who face the challenge of sharing the new funding asserted, as Newfoundland’s Brian Peckford put it, that desperate economic conditions require more than “the same tired, old policies.” Labor leaders, too, were nonplussed about the job creation measures, although they were pleased that basic social programs and universal coverage escaped Lalonde’s scalpel. The safety net, erected by the Liberals in the 1960s, now represents at least 25 per cent of federal outlays of $72.9 billion (see chart).

But the social system is only one reason why Ottawa finds itself in a trap of its own creation. Exuberant spending in the go-go years has produced a crushing national debt, now forecast to top $114 billion by next March. The cost of ser-

vicing that debt alone amounts to an astonishing 30 cents out of every dollar that Ottawa gleans in taxes. Lalonde, as a result, is convinced that he has the room neither to cut taxes nor to increase borrowing. As he put it rhetorically last week at the pizza lunch: “Twenty-three billion dollars in the red—how much more economic stimulus do we need?” Lalonde added, “The problem now is that there are not enough profits to pay taxes—that ’s my biggest problem.” For the country’s 1.4 million officially unemployed, the government’s message was a simple one: “Hold on.” The challenge now, says the government’s new economic guru, is to maintain some semblance of confidence about the future.

To help build that trust, Lalonde named a blue-chip panel of economic experts (page 30) to help him steer the foundering economic ship. John Helliwell, an economics whiz from the University of British Columbia, was named to head the diverse board of academics that will meet with Lalonde every six to eight weeks. Helliwell generally approves of the “middle course” Lalonde is running—between trying to curb the deficit without raising taxes and promoting mild job stimulation without letting the deficit soar uncontrollably. Helliwell believes it is vital to maintain “a general level of confidence high enough that people plan for the future.” And those plans must come from young

people saving for a home as well as businessmen planning new machines for new production.

Helliwell also feels that it is time for some “creative” economic planning to maintain support systems for the neediest. He offers no definitive recipe but he does suggest some form of government assistance to small resource towns which would allow mines or timber companies to stockpile their production. He says workers might receive unemployment insurance benefits only— but then share in future profits when inventories are finally sold. Sketchy for the moment, it is still the kind of creative New Deal-style thinking, with Ottawa listening to the grassroots, that the government had either lacked or discouraged until Lalonde took over.

Concerns: One such needy area is the B.C. forest industry, where the crisis has begun to terrify union leaders who see no end in sight. Ben Thompson, president of a loggers local of the International Woodworkers of America, has witnessed his membership cut in one year to 4,000 from 6,500. The union has set up soup kitchens—called “Food for Thought”—and it is assisting members who are having difficulty financing their mortgages. Thompson’s job includes a new element of social work these days, not just contracts. “You try to quiet their concerns,” he says. Still, he wonders if such humanitarianism is misplaced and if, perhaps, he is mis-

SPECIAL REPORT

leading people about their future. Refinanced mortgages, after all, mean higher payments later. But Thompson reasons that without such help people might turn to drastic action.

Of the 500,000 jobs that have been lost in the past year, government estimates suggest that half may have vanished permanently. Mining executives have informed Employment Minister Lloyd Axworthy to expect about 25 per cent less employment in the industry even after the recession. Thomas Maxwell of the Conference Board sometimes asks his business audiences how many of them plan to rehire next year. “Maybe one in 30 raises his hand,” says Maxwell. Echoes Laurent Thibault, executive vice-president of the Canadian Manufacturers’ Association: “Even if demand is restored vigorously, business is going to find ways to meet it without bringing its labor forces back up to the old levels.”

Explosive: Even the recent drastic drop in interest rates is of little solace to the legions of jobless. Many companies that plan to increase their productivity are not banking on restaffing plants at old levels. General Motors of Canada, for one, has tacked eight hours of overtime plus two Saturdays a month onto its production near Ste. Thérèse, Que. But so far it will not take back any laid-off workers. John De Falco, the plant chairman for the United Auto Workers, says 533 former plant employees fell off the unemployment rolls and into the welfare system last month. By January a total of 1,200 plant workers will have exhausted their UIC benefits. To his disbelief, De Falco discovered from Quebec City that to qualify for welfare payments his men would have to “run down” their assets. Anyone with more than $2,500 in the bank, a house worth more than $40,000 or a car worth more than $4,000 would not qualify.

The government’s job creation scheme—which will be outlined within weeks by Axworthy—is modest by any measure. But it may help to keep the lid on what many believe could be a poten-

tially explosive social pressure cooker. Still, one of the nation’s most respected labor leaders, Gerard Docquier of the United Steelworkers, wonders “how long we can go on like this without social unrest.” With his own union down from 190,000 to 130,000 within the past year, Docquier suggests that the hope offered by extended unemployment insurance will dampen the powder keg.

The lack of militancy among the jobless is also partially a result of the demographics of unemployment. Of the

500.000 newly unemployed, about

300.000 are younger people between 17 and 24 years of age. They are the workers at whom Ottawa aimed its job retraining programs before the recession began. But there is now a growing concern that recession-scarred workers will be less willing to adapt to the new skills that will dominate future job demand. Lars Osberg, a Dalhousie University unemployment specialist, says workers will be less likely to risk the seniority that makes them immune to most economic downturns. “What we’re building

into the labor market is the same kind of conservatism and inhibition you saw in the 1930s,” says Osberg. “Why give up a crummy job in Cape Breton for a job in Alberta you might lose?”

In a move that made the unemployed more restive, Axworthy and Lalonde rejected the idea of extending UIC benefits beyond the usual 50-week period. While the politicians will not talk openly of the Darwinian model that is dominating the job markets, there is a conviction in Ottawa even now that about 35 per cent of people who exhaust their benefits find work within six weeks of falling through the social safety net. Almost inevitably, however, such work involves fewer skills and less pay than were lost initially—and those workers become victims of the shifting social strata that occur when a recession is coupled with rapid industrial change.

With Lalonde at Finance, Donald Johnston at the head of Economic Development and Gordon Osbaldeston heading the civil service, it now appears that Ottawa has finally signalled its resolve to try once again to produce an effective development strategy. For all of Lalonde’s iron determination to succeed where others have failed, describing the problems was the easiest part of the piece.

How UI premiums will rise ANNUAL WEEKLY YEARLY INCOME DEDUCTION DEDUCTION 1982 1983 1982 $12,000 $3.80 $5.30 $198.00 $276.00 $15,000 $4.80 $7.25 $249.60 $377.00 $20,020 $5.78 $8.86 $300.56 $460.72