CANADA

MARTIN'S OPTIONS

Ottawa’s deficit reduction plan faces serious challenges

Anthony Wilson-Smith,D’ARCY JENISH February 13 1995
CANADA

MARTIN'S OPTIONS

Ottawa’s deficit reduction plan faces serious challenges

Anthony Wilson-Smith,D’ARCY JENISH February 13 1995

MARTIN'S OPTIONS

CANADA

COVER

Ottawa’s deficit reduction plan faces serious challenges

ANTHONY WILSON-SMITH

For most of his days since early January, John Patrick, a 65-year-old retired motel owner, has been closeted in the basement of his home in Kelowna, B.C. It is an unlikely command post for an unassuming warrior now at the forefront of a nationwide tax rebellion of sorts. But life has been that way since Patrick spent several hours early in the new year bemoaning with friends the soaring levels of government spending and taxes. That night, Patrick was so upset by the conversation that he rose at 2 a.m. and spent the next four hours drafting letters of complaint to Prime Minister Jean Chrétien and Finance Minister Paul Martin— and formulating the plans for Tax Revolt ’95. He also prepared a five-page kit, which included form letters beseeching the federal government not to raise taxes in its upcoming budget. Patrick told friends and the media of his efforts—and soon discovered a level of national outrage exceeding his wildest expectations.

After the first week, says Patrick, “I confirmed 15,000 letters having arrived in Ottawa.” At last count, he estimated that more than 100,000 letters had been sent.

Suddenly, on the eve of a Quebec referendum, the resumption of Parliament and an impending budget, the federal Liberals are discovering a new, potent—and in this case, unwelcome—recipe for national unity: tax increases. The risk for the Liberals, of course, is that they become the target that Canadians unite against. With Martin’s certain-to-be badnews budget still not likely before late February, even the prospect of a tax hike in it appears enough to send Canadians of all ages, genders, ethnic backgrounds, language groups and political persuasions into a collective hissy fit.

The signs are almost everywhere, ranging from the cranky letters filling editorial pages to the hundreds of protesters who showed up outside a Liberal caucus meeting in Toronto last week, to the deluge of calls to radio open-line shows, to the faxes to MPs’ offices, to the explosion of telephone calls, faxes and letters to the Great Satan itself, the federal finance department. “There is unquestionably a feeling among ordinary Canadians that they are taxed to death by a government that needs to take significant steps to put its own house in order,” concedes an adviser to Martin. ‘We are very aware we have to take account of those emotions.”

How Martin attempts to do so will inevitably have powerful repercussions in areas ranging from the value of the Canadian dollar on international markets to the future of the Liberals’ enduring honeymoon with voters. The goal is clear enough: he wants to take nearly $8 billion out of federal spending next year, and to reduce the annual deficit from

its total of $39.7 billion this year to $32 billion next year. What is equally clear is that most Canadians will directly feel the impact of the budget. One obvious option is the one that annoys Patrick and other Canadians the most: a hike in personal income taxes. A one-per-cent raise, for example, would give the government an additional $6.2 billion—but run the risk of a full-fledged tax revolt. A surtax of half of one per cent, on the other hand, is more likely because it would still give the government an additional $3 billion—-but raise the average family’s taxes by only $250 annually.

At one end of the scale, the wealthy—in the form of well-paid executives or shareholders in large corporations—will almost certainly face higher taxes. Businesses that depend on regional economic development programs will also feel the pinch, because those programs will be sharply cut, although not eliminated. At the other end, anyone unemployed, or about to be, will likely receive a smaller unemployment insurance cheque, a more stringent eligibility requirement and a shorter period in which to collect benefits. Somewhere in the middle are all those Canadians who either drive cars or buy or use products that are transported by gas-powered vehicles: a gas tax of anywhere from one to one and a half cents a litre appears almost certain, and will fuel the inflation rate accordingly.

What is also clear is that it will soon be even more desirable than ever for Canadians to live in a rich, financially self-sufficient province rather than a disadvantaged one. That is because Ottawa is about to give the provinces more power over the operation of social programs in return for giving them less money. Already, some of the provinces have their finances in far better order than the federal government. Saskatchewan

and Alberta, for example, both expect to balance their budgets by the 1996-1997 fiscal year, although they will achieve that aim in dramatically different ways (page 16). Similarly, New Brunswick has reduced its deficit from a high of $515 million in 1991-1992 to an expected $273 million this year—and has legislation in place that requires a balanced budget within three years.

Balancing the budget remains a far more difficult challenge for Ottawa for several reasons. One is sheer scale: Ottawa will spend close to $170 billion this year (including interest payments on the debt), so that a 20-per-cent cut of $34 billion would be greater than the budget of most Canadian provinces. Another is the sheer size of the present debt: out of that $170 billion, $47 billion is in interest charges—so that the 20-per-cent cut would have to come out of the remaining figure of $123 billion. That would mean that in real terms of the services it provides, the government would be cutting its expenditures by closer to 30 per cent.

The dilemma for Canadians dependent on government services is that all levels of government are trying to reduce their spending at the same time. Last week, Human Resources

Minister Lloyd Axworthy startled many people when he conceded that he is indefinitely shelving most of his plans for a complete overhaul of the country’s social programs. The reason, said Axworthy, is that the government’s financial situation is too precarious to undertake widespread reforms. That observation baffled some other Liberals, who had always felt that one of the purposes of social program reforms would be to save, rather than spend, money. But one immediate element his department will focus on is a “revision”—meaning reduction—of the size of the unemployment insurance program, which is expected to pay out $15.6 billion in benefits this year.

To take any of those steps successfully, the government will have to draw significantly on the large stock of goodwill that public opinion polls indicate it has been amassing in the past 15 months. With their approval rating among voters ranging in recent months between 60 and 70 per cent, the Liberals have some room to manoeuvre. At least part of the Liberals’ popularity is based on the fact that neither of the two large opposition parties, Reform and the Bloc Québécois, has appeared as a credible alternative to form a government. Now, Reform, with its emphasis on the need to reduce the size of government, faces its best opportunity since the 1993 election campaign to impress voters. “This exasperation with taxes is a gut issue with us,” says Calgary MP Jim Silye, one of the party’s finance critics. As well, the party’s performance in criticizing the budget is likely to be considerably better than it was last year, when it offered only a lacklustre response several weeks after Martin tabled the budget. This year, Reform will table its own proposal before Martin’s budget.

It will never be clear how much effect any of the pre-budget protests have on the final product. But some senior Liberals concede that their initial support for income tax increases was shaken and ultimately shattered by the ferocity of grassroots protests. ‘We came dangerously close to underestimating public frustration on this,” said one. But that is counterbalanced by the area where Martin made his one significant miscalculation in last year’s budget: an unforeseen rise in interest rates. Each percentage point rise in interest rates adds another $1.7 billion to federal spending. Already, those higher rates threaten to add as much as $5.5 billion to the 1995-1996 deficit. Despite that, Martin and other senior government figures are adamant that they will hit their deficit targets. We have always said we will do it,” said one adviser. “But it’s true that we never knew how hard it would be.” With their budget, the Liberals will likely ensure that all of the country shares the pain. £

With D’ARCY JENISH in Toronto i

Martin: most Canadians will directly feel the impact of what is almost certain to be a bad-news budget