BUSINESS WATCH

Deficits, promises and credibility

Our astronomical debts effectively mean that the expensive goodies offered by our political leaders are meaningless

Peter C. Newman October 17 1988
BUSINESS WATCH

Deficits, promises and credibility

Our astronomical debts effectively mean that the expensive goodies offered by our political leaders are meaningless

Peter C. Newman October 17 1988

Deficits, promises and credibility

BUSINESS WATCH

BY PETER C. NEWMAN

Every election is a contest between the concerned and the comfortable, but this campaign will turn on a basic economic contradiction bound to undercut the credibility of the party leaders’ promises.

That contradiction was highlighted by the stern warning, issued at the West Berlin meeting of the International Monetary Fund recently, that Canada must try much harder to reduce its runaway budgetary deficits. Any such brake on federal spending would not only endanger the politicians’ ability to pay off on their electoral largess but would undermine Ottawa’s continued success in helping foster new jobs.

Brian Mulroney’s 1984 election chant, that, if elected, he would create “jobs! jobs! jobs!” came true beyond his expectations. Between Sept. 4, 1984, and June 30, 1988, an astonishing 1,270,000 new jobs have been created, moving unemployment on a seasonally adjusted basis from 11.7 per cent down to 7.6 per cent. (Although a higher proportion of the adult population is employed than at any time in our history, nearly a million Canadians remain out of work. Still, unemployment is down in every age and vocational category and every province except Prince Edward Island.) It took the Tories only four years to add the same number of jobs that the Trudeau Liberals took seven years to produce. For the first time in several years, wages are going up faster than inflation. Average hourly earnings rose 4.7 per cent in this year’s first quarter, while consumer prices rose by only 4.1 per cent. Significantly, nearly all of the increase in job creation has been in relatively high-paying white-collar occupations.

This country has experienced an unprecedented period of economic expansion. In all but one of the Mulroney years (1984, when we ran second to Japan ), Canada has led the industrial world in its rate of economic growth. This was true despite the precipitous

Our astronomical debts effectively mean that the expensive goodies offered by our political leaders are meaningless

fall in price and demand for most of our commodity exports. Wheat quotations are running at well below their 1981 levels, and such staples as iron ore, coal, nickel, copper, and oil, which have traditionally fuelled our international commerce, are selling at sacrifice prices.

The cost of Canada’s overall prosperity has been high federal spending, which, on top of the fiscal extravagances inherited by the Mulroney crowd from the Trudeau Liberals, has placed our national finances in a perilous state. We’re like an alcoholic who decides in the false wisdom of his boozy haze that he needs just one more bottle. We’re drunk on deficits. Our national finances have been in the black only three of the past 31 years. In Trudeau’s time, the deficit shot up from $576 million on federal expenditures of $13 billion in 1968 to $38.3 billion on spending of more than $100 billion by the time he left office 16 years later. Under Michael Wilson, the annual deficit has been cut to $28 billion, but as a percentage of our gross national product, it is still the highest among the Group of Seven industrial nations—except for Italy.

Worst of all, our national debt now totals

more than $330 billion (it has gone up $90 billion during the Mulroney years), and that means spending $32 billion a year—or $87 million per day—just to pay off the interest. That gobbles up one in four revenue dollars—twice as much as the total that Ottawa collects from corporate taxes. Deficits at these astronomical heights fan inflation, requiring higher interest rates to contain demand, forcing the private sector to borrow abroad, thus increasing our foreign indebtedness. It is already higher on a per capita basis than that of the United States, which is being condemned for the spendthrift habits that have turned it into the world’s largest capital debtor.

Robert Heilbroner and other American economists have recently put forward the intriguing notion that deficits really aren’t that dangerous because national expenditures add to public capital. “There may be political arguments against creating public capital,” Heilbroner wrote in The New York Times, “but there are no strictly economic arguments against financing it by borrowing that do not apply with equal force against private capital.” He argues that federal budgets should be divided into capital and current expenditures instead of considering all public spending as consumption. It’s an intriguing proposition because the benefit of most public works is spread over far longer periods than the fiscal debts they incur. The problem is that the International Monetary Fund hasn’t accepted such a novel approach and, until it does, we’re bound to be influenced by its moral suasions to spend less.

That won’t prove easy if the run-up to the election is a sample of what we can expect during the next sue weeks. Even before the writ had been dropped, Mulroney had pledged more than $12 billion in federal largess, including such economically dubious ventures as the $400-million heavy-oil upgrader in the Alberta-Saskatchewan border town of Lloydminster, the $4.5-billion OSLO oil-sands megaproject at Fort McMurray, Alta., and the $3.2 billion in loans and guarantees for exploiting the Hibernia field off Newfoundland. The viability of these and many of the other projects on the Tory wish list depend on oil moving past $25 a barrel. But with oil prices currently testing new lows, such a scenario remains a very long shot indeed.

John Turner and Ed Broadbent will be dishing out their own election goodies. But one Liberal promise certain not to be revived is Turner’s 1984 pledge that, if elected, he would chop $15 billion off the federal deficit within seven years. In his leadership campaign, Brian Mulroney had promised to reduce the deficit to $3 billion by 1990—an equally dubious target.

Hustings promises on budget reduction have always been suspect. But with the IMF on our tail and the inevitability of lower revenues in the coming years—either through an economic slowdown or the effects of tax reform—the promise-them-anything approach of our politicians has become all but meaningless.