BUSINESS WATCH

Chipping away at the mother of all debts

It’s a paradox that if Canada ever becomes solvent again, we could have the world’s highest standard of living

Peter C. Newman March 11 1991
BUSINESS WATCH

Chipping away at the mother of all debts

It’s a paradox that if Canada ever becomes solvent again, we could have the world’s highest standard of living

Peter C. Newman March 11 1991

Chipping away at the mother of all debts

BUSINESS WATCH

It’s a paradox that if Canada ever becomes solvent again, we could have the world’s highest standard of living

PETER C. NEWMAN

Before he tabled his budget last week, Michael Wilson had the reputation of being the Conservative cabinet’s most steadfast, if untheatrical, workhorse—a Tom Siddon with brains. But his latest fiscal accounting significantly raises his stature as a politician, though not as an economic forecaster.

Wilson is the first Tory minister to tackle the Reform party head-on and provide a counterthrust to party leader Preston Manning’s contention that Ottawa is populated by free-spending partisans who care nothing about rationalizing federal expenditures and even less about downsizing the national debt. That line of attack has been winning converts across Western Canada and even Ontario for the Manning followers, who portray themselves as a bunch of primly responsible believers in balanced budgeting. They will now find their position much harder to maintain. The Mulroney government has declared war on the Reformers at last.

Wilson’s unusual tactic of setting limits on future Ottawa spending at $115.8 billion plus three per cent annually until 1995-1996 certainly means that this will be his last budget. The pressures on the minister of finance to produce a pre-election budget sprinkled with giveaways this time next year (or in the spring of 1993) will be all but irresistible. At the same time, the measure provides any future finance minister with a handy weapon for defending the national treasury against vote-hungry politicians anxious to feed the spending frenzy that precedes those quadrennial national auctions known as general elections.

Channelling excess revenues from the Goods and Services Tax into the newly created Debt Servicing and Reduction Fund is a brilliant tactic, because it provides Canada’s longsuffering taxpayers with a rationale for that painful seven-per-cent levy imposed two months ago. It would have been a lot more brilliant tactic to have announced this sensible destination of GST funds at the height of last

fall’s acrimonious debate on the issue. Still, it’s the first serious attempt to slow down the spiralling deficit curve which reached its peak with Pierre Trudeau’s $38.3-billion overrun in 1984-1985. For a full decade, our annual deficits have exceeded $27 billion, so that every year $3 billion—or more than $30 billion in total—has had to be raised simply for the wasteful purpose of financing one of the world’s heaviest debt loads.

That does not include the interest on the national debt itself, which this year will cost us $43.2 billion. It’s a paradox that if Canada ever becomes solvent again, we could have the world’s highest standard of living and we could repatriate the economy. Take away the national debt, and this would be the world’s healthiest economy; with it, we’re a Zaire with polar bears.

Solvency is just around the comer, if Michael Wilson is to be believed, and this is where his budget begins to fall apart. Its delicately balanced calculations are based on inflation projections that are wildly unrealistic. The finance minister predicts that current inflation levels will be cut in half, to three per cent by the end of the next year (exclusive of food or fuel), with a drop to 2.5 per cent by the middle of 1994 and

to two per cent after 1995. That’s demonstrably silly, because no one can forecast economic trends that precisely into next month, much less four years ahead. (A sample of Wilson’s forecasting skill was his budget last year, when he predicted a deficit for 1990-1991 of $28.5 billion. Last week, he acknowledged that he had missed his target by $2 billion.)

Besides, the inflation numbers game has revealed the current crop of Tory fiscal planners, and Bank of Canada governor John Crow, at their worst. First, they bravely declared that they were about to wrestle inflation to the ground, with the central bank governor crowing about how he would reduce its rate of growth to zero, or perish in the attempt. He wrestled it hard enough to drive the economy into its first postwar made-in-Canada recession by artificially raising interest rates to punitive levels, as much as six percentage points higher than their U.S. equivalents. He eventually did get inflation down to four per cent, despite the hefty 12-percent annual salary increases that he chose to accept in the middle of his valiant crusade.

Much like Saddam Hussein, Crow then declared victory and backed off his worthy objective to make way for the GST. It was officially supposed to raise the inflation rate by just 1.25 percentage points, but the actual impact turned out to be VA times as great. The inflation rate in January increased to 6.8 per cent, the highest level since March, 1983, from five per cent. Now, the same gang, having driven the country into a recession through high interest rates, claim they’ve just rescued us by lowering them. (If you read this paragraph over again, it still won’t make any sense, but that, more or less, is what Ottawa has just finished doing.)

Even if you accept Wilson’s inflation and interest-rate projections (he believes 90-day commercial paper rates will fall to 9.5 per cent this year and continue to plummet to seven per cent after that), it’s difficult to swallow his prediction that by 1995-1996 the federal deficit will be down to $6.5 billion. Out of every dollar spent in his current budget, Wilson is obliged to pay 27 cents for interest on the national debt; 25 cents in direct transfers to taxpayers through various social welfare plans; and another 23 cents in other statutory transfers, covering a range of programs from medicare to research-and-development grants. That leaves only a quarter of total federal spending available for everything else, including national defence and every other government department. That doesn’t leave much manoeuvring room for Michael Wilson or any of his successors.

This country’s root economic problem is that we have erected a social infrastructure we can no longer afford. It costs so much to maintain—and we have become so used to depending on government largess—that Canada has become a kind of National Film Board, writ large. That once bountifully creative agency has been so grievously savaged by constant financial pressures that it now has to use most of its limited funding merely to continue existing. For Canada and for Canadians, just being there is not enough.