BUSINESS

A BUDGET SQUEEZE

MICHAEL WILSON TRIES TO CUT THE DEFICIT BY REINING IN THE FEDERAL PUBLIC SERVICE

ROSS LAVER March 11 1991
BUSINESS

A BUDGET SQUEEZE

MICHAEL WILSON TRIES TO CUT THE DEFICIT BY REINING IN THE FEDERAL PUBLIC SERVICE

ROSS LAVER March 11 1991

A BUDGET SQUEEZE

BUSINESS

MICHAEL WILSON TRIES TO CUT THE DEFICIT BY REINING IN THE FEDERAL PUBLIC SERVICE

Few of Brian Mulroney’s promises in his 1983 Conservative leadership campaign evoked more heartfelt applause from the party’s rank and file than his vow to give civil servants “a pink slip and a pair of running shoes.” When he took office a year later, the new Prime Minister kept his word by cutting 15,000 public service jobs. Now, midway through his second term, Mulroney and his ministers are renewing their anti-big-govemment campaign in order to rein in federal spending. In last week’s federal budget, Finance Minister Michael Wilson announced plans to eliminate as many as 6,000 more public service jobs, limit government pay increases to three per cent a year for three years and slash the number of senior bureaucrats by 10 per cent. Explained one senior adviser to Wilson: “Let’s face it—not too many Canadians are going to shed a tear for the public service.”

Wilson’s expressed determination to reduce both the size and the cost of the federal bureaucracy appeared to set the stage for a prolonged and potentially ugly confrontation with the public servants, who now number 215,000. The president of the country’s largest public service union, Daryl Bean, denounced the minister for being “as sadistic as Saddam Hussein” and called on his 170,000 members to stage a general strike later this year. But Bean, president of the Public Service Alliance of Canada, acknowl-

edged in an interview: “I don’t expect a whole lot of sympathy out there.” He added: “I have faith in the public that once they have the facts, they will understand. There is absolutely no fat left in the federal public service—and the government knows that.”

Wilson, however, offered no apologies for his cost-cutting drive. In the Commons last week, the finance minister predicted that the government’s efforts to restrain the size of the public sector would save Ottawa $685 million in the 1991-1992 fiscal year, which begins on April 1. But even with those reductions, the government says, the federal deficit will remain at this year’s level of $30.5 billion. “In the current situation, the government must cut back in all areas of spending, including wages,” Wilson said in his budget speech. He added that by shrinking the size and scope of the federal government, the Tories hope to increase its efficiency, improve the business climate and strengthen Canada’s ability to compete “in a tough economic world.”

Wilson’s deficit-reducing package included several measures to shift more of the burden of health care, education and social assistance from Ottawa to the provinces. An existing cap on transfer payments to the provinces to cover those costs will be extended until 1994-1995, for a total savings to the federal treasury, based on projected spending, of $4.4 billion over five years. In addition, the government chopped $150 million from cultural programs, $125 million from environmental cleanup projects, $100 million from jobtraining programs, $75 million from aid to businesses and interest groups, and $32 million from housing for people on low incomes.

Wilson also raised the excise tax on cigarettes by $6 a carton, or three cents a cigarette, and increased the premiums paid by both workers and companies for unemployment insurance by 24 per cent, effective on July 1. The additional after-tax cost for someone earning the maximum insurable income of $35,360 will be $140.40 a year.

Business leaders in general reacted favorably to Wilson’s budget, although many of them said that he should have taken more extreme measures to reduce the deficit. Several organizations, including the Canadian Chamber of Commerce and the Canadian Federation of Independent Business, criticized the government for planning to spend an extra $3 billion this year on unemployment insurance benefits, $1.6 billion in aid to the elderly and $1.3 billion in subsidies to western grain farmers. Said Timothy Reid, the chamber’s president: “We believe program spending should have been frozen. That would have brought the deficit down substantially and would allow the Bank of Canada to reduce interest rates more.”

Those complaints aside, however, most business leaders praised Wilson for unveiling two radical new initiatives aimed at controlling the deficit and reducing inflation. One of those measures is a proposed three-per-cent limit on federal spending increases in each of the next

five years. Finance officials say that the new law will be similar to, but tougher than, the U.S. Gramm-Rudman Act, a 1985 law designed to curb deficit spending by Washington. Ottawa’s new law would apply to almost all federal expenditures other than interest payments on the $388.5-billion national debt. If spending in any one area exceeded the mandatory three-per-cent ceiling, Wilson said, the extra money would have to come from reductions elsewhere rather than from increased borrowing or higher taxes.

In an effort to improve business confidence, Wilson also proclaimed a series of inflation

targets—the first time Ottawa has explicitly tried to lower wage and price expectations since the 1982 launch of the Trudeau government’s “six-and-five” anti-inflation program. Under the Wilson plan, the government has committed itself to lowering the so-called core inflation rate, which excludes price increases for food and energy, to five per cent by the end of 1991, three per cent by the end of 1992, 2.5 per cent by mid-1994 and two per cent by the end of 1995. The rate currently stands at an eight-year high of 6.8 per cent.

Finance officials said privately that if the economy failed to meet those targets, the government and the Bank of Canada would intervene by cutting spending further or raising interest rates. Declared one senior bureaucrat: “Our whole thrust is to give people confidence that we are not going to let inflation get out of control.”

Indeed, last week's budget, Wilson's sev enth, appeared to signala significant shift in the federal government's approach to managing its fiscal and monetary affairs. In the past, the party in power has tended to loosen its purse

strings in advance of each general election, shower ing voters with new spending projects in an ef fort to improve its chances for re-election. Mulroney's government adopted that approach in the run-up to the 1988 election: in a four-month period, the Tories an nounced more than 70 federal projects, totalling more than $8 billion. Many of those initiatives were cancelled or put on hold indefinitely within months of the party's re turn to office. Last week's budget, however, allows Wilson or his successor little room to manoeuvre. Even if the government wanted to in crease spending before the next election, expect ed in late 1992 or early 1993, it would run up against its own mandatory spending limits. Far from

harming the party’s popularity, however, some Tories say that the three-year ceilings announced by Wilson will actually work to the government’s advantage.

The Conservatives have concluded that economic restraint, rather than damaging their prospects for re-election, may actually be good politics. “Spending money is political death right now,” said a senior party strategist whose advice helped to shape last week’s budget. “The old ways just don’t work anymore. People are conditioned to view governments as inherently slothful and inefficient, so even if we did announce some new public works project to pull the country out of recession, it would only be dismissed as a waste of money.” By reining in their spending, the Tories also hope to focus the public’s attention on the ideological distance between themselves and the opposition. Both the Liberals and the New Democratic Party attacked the budget because it did not offer any new spending programs to help jobless Canadians or to combat the recession. Declared NDP Leader Audrey McLaughlin: “The victims are going to be people who need health care, people who want post-secondary education, people who are homeless.” Deputy Liberal leader Sheila Copps, meanwhile, said that the budget will compound the prevailing public mood of “division and bitterness.” Declared Copps: “Our prescription would have been investment in the public sector, specifically in municipal infrastructure.”

In his budget speech, however, Wilson said repeatedly that similar approaches had failed in the past. “One of the key questions to be asked is this: ‘How much government

are people willing to pay for?’ ” -

the minister said. “Our plan does not have the government throwing large amounts of money at problems. Those are Band-Aid solutions.” According to one senior policy adviser, Wilson's remarks were aimed specifically at trying to cast members of the two opposition parties as “defenders of the status quo” who believe that government intervention and higher spending offer a solution to virtually any economic problem. “The Tories would love to be able to shift the focus of political discussion in this country back to the ground of economic management,” the adviser said. “The formula is to get the other two guys on the opposite side of the debate so that it becomes a choice between old ways and new ideas, changing with the times instead of standing still.”

Even if that strategy succeeds, however, the Tories will still have to fend off another, potentially more damaging challenge to their traditional western power base: the rise of the Calgary-based Reform party, led by Preston Manning. Although the party currently has only one MP in the Commons, most polls show that Reform has a wide lead over the Tories in the three Prairie provinces. More recently, Manning has voiced a desire to expand the party’s organization into Ontario and Eastern Canada, capitalizing on widespread voter disaffection with the three main national parties.

Although the Reform party promotes a wide range of traditional conservative views, one of its most popular objectives echoes Mulroney’s 1983 leadership promise: a smaller, more frugal federal bureaucracy. That may explain why, in an apparent attempt to undermine Reform, the budget specifically targeted public

servants for tough treatment. Among other things, Wilson said that the government planned to freeze the operating and capital budgets of all government departments except defence, eliminate 475 of the bureaucracy’s 4,750 senior managers and limit salary in-

creases for deputy ministers and heads of Crown corporations to the same percentage paid to unionized employees. He added that every single-percentage-point pay increase for public servants in 1991-1992 would likely result in the elimination of 2,000 jobs.

Although Wilson denied that he was targeting public servants for special treatment, his clampdown on the bureaucracy clearly left many government workers feeling insecure. “There’s going to be an awful lot of bad blood created by this,” said Timothy Plumptre, an Ottawa-based consultant on civil service reform who is currently advising several federal departments on ways to streamline their

operations. As part of that -

process, Plumptre attended a closed meeting late last week with about 150 senior government managers. “There was uncertainty mixed with fear,” he said. “People were looking around, worrying that one out of every 10 people in the room would not be there a year from now.”

In fact, most analysts outside government agree with Wilson that the public service is inefficient and over-managed. But they claim that the government’s plan for across-the-board pay restrictions and job cuts is not the solution. “I’m no supporter of bureaucrats, but the reality is that federal civil servants re-

ceived the lowest pay increases of any group in the 1980s,” said Irene Ip, a senior policy analyst with the Toronto-based C. D. Howe Institute, a conservative think-tank. She added that many government employees are hardworking and deserve to be rewarded. Said Ip: “If you treat everybody the same, the really good people are just going to get demoralized and quit. Overall efficiency will just get worse.”

VVUI JU~L VVIJi~~. Some analysts said that the reductions and pay ceilings are a sign that the govern ment has turned its back on a much-publicized initiative to reorganize the public service from within. Known as Public Service 2000, the reform program was launched in De cember, 1989, by Paul Tel lier, who, as clerk of the Privy Council, is Ottawa's top civil servant. One of its key objec tives was to ensure that gov ernment employees-from senior bureaucrats to junior clerks-played an active role in restructuring the public service in order to cut red tape and improve efficiency. "What I find astounding is

that there was not one word

in the budget about PS 2000,” said Geoffrey Poapst, vice-president of the Ottawa-based Public Policy Forum, a nonprofit research group funded by private business. “The message in the budget is extremely blunt. If the government intends to go back to civil-service bashing, why did it waste so much time talking about the need to work together?”

The government may have decided that across-the-board wage freezes and layoffs in the public service are far more likely to win voter approval than specific reductions to government services, such as the controversial 1989 cuts to Via Rail. Declared Ip: “By arbitrarily targeting civil servants, the Tories are

the fact that governments in the 1990s cannot do everything that Canadians want them to.” Plumptre added that the Conservatives were ducking their political responsibilities. “In effect, Wilson is forcing the public service to make the hard choices about where the cuts should be. I mean, what is a government elected for?” With an election perhaps less than two years away, politics, not just public policy, was undoubtedly a factor in Wilson’s thinking.

ROSS LAVER

GLEN ALLEN

JOHN DALY