CANADA

Penny-pinching times

The Tories set the scene for budget cuts

MARC CLARK April 17 1989
CANADA

Penny-pinching times

The Tories set the scene for budget cuts

MARC CLARK April 17 1989

A cold drizzle fell on Parliament Hill last week as Gov. Gen. Jeanne Sauvé took her seat in the Senate chamber and began reading the speech from the throne containing the government’s stated plans for the new session of Parliament. For some Canadians, the message Sauvé read was as chilling as the April rain. The Conservatives, Sauvé said, would concentrate on business left over from their first term and, above all, would be “unflinching” in their determination to continue slashing the federal deficit. The government, Sauvé added, “is convinced that the Canadian people will endorse our efforts to control federal spending.”

The throne speech was one more signal that attempts to control the deficit may dominate Prime Minister Brian Mulroney’s second term in office as much as free trade dominated his first. Finance Minister Michael Wilson’s April 27 budget will almost certainly propose spending cuts and tax hikes that would increase government revenues—and raise taxpayers’ hackles—across the country. Other initiatives in the speech are guaranteed to heighten federal-provincial tensions. Among them: government plans to introduce a national sales tax and to review Canada’s unemployment insurance program. Indeed, the announcement that the government intended “to restructure unemployment insurance benefits in order to eliminate inconsistencies . . . [and] to create greater incentives to employment” immediately raised fears of cutbacks. And in Prince Edward Island, Liberal Premier Joe Ghiz said that if the federal government tries to reduce the flow of federal funds to his province, he would call a provincial election to get a strengthened mandate to fight Ottawa.

But cutback has been the Tory catchword since the government received its second consecutive majority, although the party did not make it an issue in the Nov. 21 general election. Said Dauphin-Swan River MP Brian White, chairman of the Tories’ Manitoba caucus: “Unless we delve into social programs—which I doubt we will do—we can’t save a lot in government spending. There just isn’t a lot of fat left to cut.” At the same time, the government’s new emphasis on austerity was also evident in the throne speech’s lack of costly new initiatives. The few new proposals included a call for a royal commission on reproductive technologies, such as artificial insemination and surrogate motherhood, a review of electoral laws and new legislation to improve the quality of water. Other commitments—continued sales of government-owned corporations, reform of laws dealing with financial institutions, introduction of a national child care program and negotiation of an acid rain accord with the United States—involved projects begun during the Tories’ first term in office.

Those initiatives paled beside the government’s promise to rein in the annual deficit, projected to be about $29 billion for 1988-1989. Senior Conservative advisers predicted that the budget will raise taxes on gasoline, alcohol and cigarettes. As well, government officials said that many departments will soon begin charging for services that are now free—and charging more for currently inexpensive services, such as maps of national parks. And there are strong indications that Wilson will cut transfers of some funds to the provinces, a move that would effectively force the provinces to become partners in reducing the federal deficit. Last week, Finance Minister Melville Couvelier of British Columbia acknowledged in Victoria that such an avenue would be the easiest way for Wilson to save money but that “there will be some outraged provincial governments” if he takes it. At the same time, Couvelier added that Wilson has no option but to raise taxes.

Still, Couvelier expressed sympathy for Wilson. Most people relate a finance minister’s task to trimming a household budget, “to cutting back on movies or not eating out so much,” he said. “But it’s not that simple. Every government program has its own constituency who can very effectively make you look like a hardhearted penny pincher—and no politician wants that to happen.”

Meanwhile, senior Tory ministers and their supporters in the business community have worked doggedly to build support for deficit control by reminding the public that 31 cents of each federal tax dollar goes to pay interest on Canada’s accumulated $360-billion debt. This week, Wilson was expected to restate his case in a major speech to the Retail Council of Canada in Toronto amid signs that the government’s austerity campaign has overwhelmed some of its opponents. Said Canadian Labor Congress spokesman Derik Hodgson: “Our voice seems tinny in the wilderness.”

Many Conservatives said last week that they are determined to administer tough medicine and to pay the political price. “It is not going to be easy,” said newly elected MP David Worthy, who represents British Columbia’s Cariboo-Chilcotin riding. “We have been told that it is going to be a real debt attack and that we could expect some very unpopular things. But now is the time to do it—even if it means we don’t get elected the next time.” But in some areas of the country, the impending cutbacks have clearly contributed to a feeling of unease. In Cache Creek, for one, a mining, logging and tourism community in Worthy’s riding, Mayor Bernard Roy told Maclean’s that he is worried by the prospect of cuts in spending on job creation. Said Roy: “Everybody here recognizes that something has to be done about the deficit. But in an area like ours, with unemployment around 14 per cent, there is a lot of concern. You might see some screaming.”

The Tories face another challenge in persuading Canadians of the merits of Wilson’s proposed national sales tax. Ottawa says that the tax is meant to be “revenue-neutral”— designed to replace, dollar for dollar, the revenues from two current sources that will be eliminated: a surcharge on income tax and a 12-per-cent federal sales tax on some manufactured goods. But some provincial governments are clearly suspicious of the plan and fearful of losing their control over sales taxation if the national sales tax is merged with already existing provincial taxes. Last week, Wilson met with provincial finance ministers in Ottawa and delivered an ultimatum: either the provinces merge their own sales taxes with the new federal scheme or Ottawa will go it alone and have the tax in place by Jan. 1,1991. For their part, the provincial ministers left the meeting unconvinced. Said Alberta Treasurer Dick Johnston: “People generally agree that this is an inflationary tax, and all provinces are concerned about that.”

But the government may be in for its roughest ride when it tackles the country’s unemployment insurance program. Reform of the program would not necessarily reduce the deficit because unemployment insurance is funded by special taxes on earnings paid by employers and employees. During the last fiscal year, which ended on March 31, the government expected to pay out roughly $10.2 billion under the plan and to collect $10.6 billion in levies. But a number of government studies over the years have called for changes to the system.

In 1986, the Conservative-appointed commission on unemployment insurance headed by former Quebec social affairs minister Claude Forget warned that “a succession of piecemeal changes had seriously compromised the integrity, simplicity and cost-effectiveness” of the system. The report added that unemployment insurance had become a crucial part of the economy in some regions—especially in poorer parts of Canada—and that meaningful reform of any kind would require “courage and caution” by politicians. Ottawa quickly shelved the report. Now, although details of the government’s plan for unemployment insurance reform are still not known, last week’s throne speech said that Ottawa is ready to amend the system to improve its “effectiveness and fairness” and to direct some of the money to job training.

Still, some Conservative MPs argue that reform of unemployment insurance should be just the starting point for a wholesale revision of income-support schemes. Some studies, among them the 1985 commission headed by former Liberal finance minister Donald Macdonald, have said that Canada’s social safety net is an unwieldy hodgepodge of federal, provincial and municipal programs, including unemployment insurance, old-age pensions and pension supplements, family allowances and tax credits, and a bewildering assortment of provincial and municipal welfare and tax-benefit schemes. Indeed, Ross Reid, MP for St. John’s East in Newfoundland, has spoken out about the need for a guaranteed annual income that would replace all or part of many federal, provincial and municipal support programs. Reid cited the work of a Newfoundland government commission that in March recommended a guaranteed income of at least $7,200 a year.

It is unclear whether Reid’s proposal has had any impact on the government. But, for his part, economist Michael Walker, executive director of the conservative Fraser Institute think-tank in Vancouver, said that the present system is “manifestly absurd. The obvious solution is a guaranteed annual income.” But Walker held out little hope for such far-reaching reform: the government, he said, lacks the political will or the imagination to tackle the project. Indeed, some members of the Tory caucus bridle at the mention of guaranteed incomes. Said White: “It sounds like we would be telling people that they can sit at home and government will look after them. That does not appeal to me.” As the government enters the stormy seas of deficit reduction, deciding how to reform the country’s income-support schemes is just one more tough political decision.