BUSINESS WATCH

The Conservatives turn tough

Peter C. Newman February 17 1986
BUSINESS WATCH

The Conservatives turn tough

Peter C. Newman February 17 1986

The Conservatives turn tough

BUSINESS WATCH

Peter C. Newman

Faced with the choice of reducing Canada’s behemoth deficit by cutting expenditures or raising taxes, Finance Minister Michael Wilson is following the Canadian Way: he will opt for both.

Although the exact measures in his end-of-February budget remain secret, indications are that his projection of keeping growth of expenditure below increases in the gross national product will be met. The measures being studied for the 1986 budget are so draconian that deficit projections for the next fiscal year could even fall below $30 billion.

It is the plummeting value of the Canadian dollar rather than the bleating of business lobbies that has stiffened the spines of the Tory cabinet in supporting Wilson’s tough fiscal initiatives. The notion that Ottawa might eventually be able to balance its books by waiting for revenues from accelerating economic activity to build up has been permanently abandoned.

One factor that could spoil the optimistic projections is the free fall in oil prices. The Mulroney government’s economic recovery package has been based almost entirely on reviving the energy sector through the accords negotiated with Newfoundland and the Western provinces. The other unexpected minus has, of course, been the need to provide up to $1 billion for the bailouts of the Canadian Commercial Bank and the Northland Bank, a rescue mission that may turn out to have been this government’s costliest mistake.

Last year’s budget deficit totaled $37 billion on revenues of $64 billion, but the May 1985 budget included built-in expenditure cuts of $15.8 billion as well as $4.3 billion in revenue increases, mostly through gradual hikes in the federal sales tax. One possibility is that in this year’s budget speech Wilson will set out a more or less strict timetable for reducing the federal deficit by $20 billion by 1990, pledging a reduction in the national debt of $70 billion by the end of the decade. This would be the Canadian equivalent of the Gramm-Rudman act passed by Congress and designed to eliminate the American deficit by 1990-91.

The deficit problem is the harshest dilemma facing the beleaguered Tory cabinet, and there is nothing theoretical about it. The interest on the na-

tional debt in fiscal 1985-86 will cost us $26 billion, taking up most of the revenue ($32 billion) from federal personal income taxes due to be collected in that period.

The de Havilland privatization and the many sales of Crown corporations to follow is less an ideological than a fiscal response to the stretched federal budget. But what is really going to hurt politically is implementation of the Ministerial Task Force on Program

Review, chaired for the past 16 months by Deputy Prime Minister Erik Nielsen. The 46 private sector leaders who have sifted through the spending estimates of nearly every department have produced some blockbuster recommendations that could drastically reduce costs. To accept their recommendations, drafted in a political vacuum, would mean further jeopardizing the Mulroney government’s wobbly standing in the polls; to ignore those recommendations would mean permanently

alienating the business community.

Because even severe spending cuts will not meet the deficit-reduction timetable, some tax increases are inevitable. Since the minister’s staff seems to have eliminated the imposition of the long-forecast Value Added Tax, a modified version of this measure remains a possibility. Called a Business Transfer Tax, it might collect revenues only from commercial as opposed to consumer transactions—although ultimately the consumer would no doubt have to carry the extra levy. Much cheaper and easier to administer than the full VAT system, the BTT is being actively considered by Washington’s budgeteers, whose forecast is that a five-per-cent U.S. business transfer tax could raise $50 billion (U.S.) a year.

Other probable tax measures include doing away with the $1,000 interest and dividend income deduction, reducing some investment tax credit schemes and eliminating the threeper-cent deduction allowed businesses on the value of their inventories.

A voice being heard with increasing authority in government circles is that of Judith Maxwell, the recently appointed chairman of the Economic Council of Canada, who has been emphasizing just how essential it is to meet the deficit-cutting objectives. “If we don’t deal with the deficit problem over the next five years,” Maxwell has warned, “the capacity of the government to deliver all the essential services we rely on will be eroded.”

The trick will be to set out a new tax system that will not choke off the current economic growth and yet will keep interest rates down. There is no way, with the current state of federal finances, that Ottawa could support the country through another 18 months of recession.

Some of the Mulroney advisers are trying to avoid the fiasco of the 1985 budget, when the business community withdrew its support from the government. These strategists have been quietly pointing out that the alternative to Mulroney’s centrist administration would be a populist coalition, heavily influenced by Herb Gray, Lloyd Axworthy and Ed Broadbent. That would mean a government based on massive expenditures—and the only source from which it could raise money would be corporations. After this budget, no one is going to get any more out of Canada’s middle class.