Stop if you’ve heard this one before. A political party runs an election campaign promising new programs, a gentler approach to existing ones, and a break with the tightmoney policies of the incumbent government. Upon winning the election, the party immediately orders an examination of the government’s finances and announces that—surprise—they are in much worse shape than ever imagined. Immediately, the new finance minister orders a complete review of government departments and programs, and hints at tough new austerity measures never discussed during the election campaign. He then convenes a meeting of ministers from other levels of government, and they all take turns explaining why they are not to blame for the present dilemma. All of which translates for voters into one essential message: get ready for a new dose in the already regular diet of bad news.
After little more than a month in of-
fice, the Liberals have followed that familiar formula almost to the letter. In a series of public appearances last week, Finance Minister Paul Martin was fairly brimming with dispiriting news. The deficit, the Liberals have discovered, will be between $44 billion and $46 billion for this year, rather than the $32.6 billion the Conservatives had
predicted only eight months ago. Contrary to the rosy scenario of 2.9 per cent annual growth forecast by the finance department at the same time, growth will be a more modest 2.5 per cent next year. And hundreds of thousands of Canadians, Martin said, “have withdrawn their consent to be governed”—and are demonstrating that by resorting to the underground economy and refusing to pay taxes.
In short, the situation could scarcely be more bleak. Nor could the opportunity to reverse campaign promises be more tempting.
But in a speech in Montreal last week and a subsequent meeting in Halifax with provincial finance ministers, Martin introduced several new wrinkles to an otherwise predictable scenario. The Liberals, despite the alarming size of the debt, plan to carry on with their most significant promises—including a $2-billion program aimed at renewing the country’s in-
frastructure. They insist they will keep their promise to replace one of the government’s biggest sources of revenue, the Goods and Services Tax (GST), with another tax—though whatever replaces the GST will be designed to raise at least as much revenue. They will try to placate provincial governments even as they reduce the
amount of money they give to them. To achieve that goal, they—and the provinces— will agree to changes that will sharply alter the way in which Canada is governed, and reduce or eliminate services that many Canadians take for granted. Those measures will likely be spelled out in the government’s first budget, which Martin is to present sometime in February. Even before that, the new minister must tackle the thorny question of whether to reappoint Bank of Canada governor John Crow to a new term (page 24). “To do what needs to be done, we need the co-operation of Canadians,” Martin said in an interview with Maclean’s at week’s end. “The only way to earn that is to keep our promises.”
Most of all, the Liberals say they are committed to reducing spending—perhaps even drastically. That comes despite snide and conflicting suggestions from opponents that the party has no mandate from voters to reduce so cial programs-a com plaint of the New Dem ocratic Party-or that it is not prepared to go far enough, the opposite lament from the Reform party. Still, some Reform ers say they are encour aged by Martin's early steps. Said Alberta MP Stephen Harper, after lis tening to Martin's tele vised speech emphasiz ing deficit reduction: "They have started off in the right direction." There are also those who believe that Martin, who is almost universal ly regarded as one of the nice guys of politics, simply does not have the stomach for what lies ahead (page 22). Not surprisingly, Martin disagrees. "Some of the steps I have to take will hurt," said Martin. "But if we don't take them people will ultimately be hurt a helluva lot more."
WHERE THE MONEY GOES
The Liberal government has an enormous task ahead to keep its promise to cut the federal deficit to 3 per cent of gross domestic product (GDP) in three years—to about $25 billion. That means slashing it from the current forecast of $44 billion to $46 billion (6.3 per cent of GDP). The weak economy means Ottawa can’t count on growing revenues to meet its target—so deep cuts are bound to come. Here’s where most federal money now goes:
•TRANSFERS TO PERSONS:
$41 billion, including old age security ($20 billion) and unemployment insurance ($19.4 billion)
• TRANSFERS TO OTHER LEVELS OF GOVERNMENT: $26.4 billion
• MAJOR SUBSIDIES AND TRANSFERS:
$13.3 billion, including $3.3 billion to business; $3.6 billion to native programs; and $2.4 billion in farm subsidies
• PAYMENTS TO MAJOR CROWN CORPORATIONS: $4.7 billion, including $1.1 billion
Although Martin has so far avoided specifics, it is clear that millions of Canadians will personal ly feel the pain of the deficit pinch. In the stan dard government new speak of the 1990s, it has become customary to talk about "review" and "renewal" of existing pro grams-two words that
effectively translate into "reduction." But Martin rejected even those familiar code words in favor of blunt talk. "Let us be clear," he said in Halifax, "that we are talking about sub stantial reductions in government spending." One of the ar eas almost certain to be affected is unemployment insurance, where there could be significant reductions in who qualifies for benefits, how long they receive them and how much they receive (page 28).
Other areas include health care and social programs such as welfare and old age pensions. One area sure to be under attack is the universality of some benefits, regardless of income. Ottawa, for example, now pays out $20 billion annually in pensions—and about $2.4 billion of that goes to families who have an annual income of more than $53,000. That is one of the areas where there will be pressure to cut. Still, as Martin noted, “There really are not many areas left where universality still exists.” Another area that senior Liberals have suggested is ripe for cutting is the $13.3 billion spent on subsidies—and especially the $3.3 billion worth of subsidies to business.
Few areas of government are likely to be spared—and overall, cuts will likely be deep and direct. In a speech to a conference in Ottawa last week, Intergovernmental Affairs Minister Marcel Massé suggested pointedly that the $70 billion spent annually on health care—which is actually administered by the provinces but partly paid for by Ottawa—could be cut by as much as 20 per cent without significantly reducing the range of services. One of the only non-negotiable items in health care is that Ottawa will refuse to allow provinces the right to charge user fees. “That,” said an adviser to Prime Minister Jean Chrétien, “is something we absolutely will not allow.” That is also precisely the power that some provinces, such as Quebec, would like to have. But beyond that, there are clear indications that Ottawa may loosen the terms of the Canada Health Act to allow the provinces greater latitude in the way they administer medical services. That would please provincial governments but
create a more untidy patchwork of services than the already uneven network that now exists. Already, for example, there are sharp differences between the neighboring provinces of Quebec and Ontario in the amount that physicians are paid for each visit, and the services that are covered under their respective health plans.
Beneath the surface, there are also further signs that the Liberals plan to be hardnosed about social programs.
For one, Martin announced plans to hold a meeting on Dec. 13 to discuss federal spending programs with a blue-chip panel of more than 35 people drawn from across the country. All are economists or financial specialists, and there are no invited rep-
resentatives from the roster of social activists and special-interest groups usually invited to such meetings.
Along with cuts to social programs, a less visible but equally dramatic shift is likely to take place in the way that governments spend money—and which levels of government get to spend it. Over the past 15 years—and at an accelerated rate under nine years of Tory rule—the Canadian fiscal system has changed dramatically. More to the point, the federal government is gradually losing the moral and financial right to tell the provinces what to do with their money. Ottawa, while maintaining control over the way provinces spend money in several major sectors, has sharply reduced the money it gives them. In Quebec, for example, the federal contribution to the province’s medicare program declined from a high of 47 per cent in 1978 to just 34 per cent last year, according to provincial figures. Despite that decline, Ottawa maintains control over key elements of the way Quebec medicare is administered.
Other provinces have faced similar problems in the way Ottawa makes payments under the Canada Assistance Plan (CAP). That enables Ottawa to pick up half the cost of
provincial and municipal spending on social assistance and welfare programs. But because of changes implemented by the Tories in 1990, CAP payments to Ontario, Alberta and British Columbia have been reduced by almost $6 billion. Similarly, the equalization program, under which Ottawa shifts revenues to have-not provinces, has seen payments reduced by $3 billion since 1988. And overall, both economists and provincial officials blame Ottawa for most of the combined provincial debt, which is now rising at a faster rate than the federal debt. In a new study published in the magazine Policy Options, Michael Butler, an official with the
B.C. finance department, estimates that 80 per cent of the provincial debt accumulated over the past 15 years “can be attributed directly to cuts in major transfers to the provinces.”
Despite that, economists and politicians of all stripes believe that further cuts in transfer payments to the provinces are a near certainty. In that event, in order to placate the provinces and prevent chaos, Ottawa has only limited options. One is to change the present rules of federal-provincial relations to allow the provinces to raise new revenue through other sources, such as an increased percentage of income tax revenue. Another is to relax standards to allow
the provinces greater freedom to decide what services they will—and will not—offer in such fields as health care and social programs.
Seemingly, a loosening of such standards and increased provincial responsibility would appear to lead, in the long run, to different classes of Canadians: those, for example, who live in such wealthy provinces as British Columbia and Alberta, and those who do not. That is a distressing notion to many Canadians—but it is also, say economists, a vision that must now be considered. The dry-as-dust topic of fiscal federalism, then, is about to become a topic of direct interest to all Canadians. ‘There is no way that you can go through this without a rethinking and reworking of the entire social envelope,” says Thomas Courchene, the Queen’s University economist who is one of the experts meeting with Martin next week. And, says Martin himself: “Canadians are saying ‘fix this now.’ They are telling us they want us to take the necessary steps.” Soon, the Liberal government likely will discover whether Canadians really want tough action—or just prefer tough talk.
With WARREN CARAGATA, LUKE FISHER and E. KAYE FULTON in Ottawa
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