COVER

MARTIN'S MONEY PROBLEM

Should surpluses go to new spending, tax relief or debt reduction?

JOHN GEDDES December 29 1997
COVER

MARTIN'S MONEY PROBLEM

Should surpluses go to new spending, tax relief or debt reduction?

JOHN GEDDES December 29 1997

MARTIN'S MONEY PROBLEM

Should surpluses go to new spending, tax relief or debt reduction?

JOHN GEDDES

In Windsor, Ont., where Paul Martin grew up and his late father, Paul Sr., is still revered as an architect of national health insurance, the closing of two of the city’s four emergency rooms has sparked a debate—familiar across Canada—about how funding cuts have hit essential hospital services. As president and chief executive of Windsor Regional Hospital, Lloyd Preston might be expected to urge local son Martin, now the federal minister of finance, to take advantage of Ottawa’s fast-improving fiscal situation—and honor his father’s legacy— by topping up the transfer payments to the provinces that help fund hospitals. But Preston, like many of the Canadians surveyed in the Maclean’s/CBC News yearend poll, is wary of a return to free-spending governments. “The message should

be that we need targeted programs,” he says, advising Martin to allocate funds carefully. ‘We need an investment in healthy children.” Preston’s focused approach is typical of the cautious Canadian perspective on the dawning era of federal budget surpluses. There is no sign of a groundswell in favor of reversing all the spending cuts the Liberals imposed in their determined assault on the deficit. With Ottawa on track to balance its books this year or next for the first time since 1970, the poll asked how government should spend any surplus money. The top choice of 42 per cent of Canadians: pay down the government’s accumulated debt. That ranks ahead of cutting income taxes, the priority of 32 per cent, and spending on new social programs, the choice of just 23 per cent. “There’s a lot of caution out there,” says Michael Sullivan, a partner in the polling firm The Strategic Counsel. “People do not want the door opened to spending.” The desires of federal cabinet ministers and provincial premiers, however, may be another matter. As Martin prepares his 1998 budget, expected to be delivered in February, he faces a chorus of cabinet

colleagues asking for more money for everything from technology subsidies to funding for television productions. As for the premiers, in their meeting earlier this month with Prime Minister Jean Chrétien, they demanded that Ottawa shore up transfers to provinces for basic health and education before embarking on any new programs of its own. “All of a sudden, people think there is oodles of money around,” gripes one senior official in the federal finance department. “Meanwhile, we still have a $585-billion federal debt sitting there.”

Just how much largess Martin has to dispense is a point of much speculation—but no definitive answers. John McCallum, the Royal Bank of Canada’s chief economist—and the man credited with adding “fiscal dividend” to the national lexicon as the term for new money available to spend after the deficit is wiped out—estimates the government will have an extra $3.6 billion by the end of the next fiscal year. That figure could soar as high as $25 billion in 2001, by McCallum’s calculations.

Numbers of that scale may make it appear that Martin has the resources to reintroduce the expansionist style that marked the Liberal governments in which his father was a key minister in the booming postwar era. The reality, at least for 1998, is more constrained. ‘The dividend is going to be billions of dollars,” agrees one Martin aide, “but decisions have already been made that are going to take up much of that money.” In fact, government sources suggest that just $300 million now remains to be divvied up before the coming budget.

Poll respondents favor a tax cut over spending plans

Job pressures Citing unemployment/economic factors as a top concern Most likely: • the 50-to-64-year-old age-group: 41% • Atlantic residents: 47% Least likely: • 65 years and older: 25% • 18to 29-year-olds: 34% • Ontarians: 28%

Making converts Percentage believing that government deficits would be higher in the coming years:

The surprisingly small amount left to haggle over reflects the extent of promises already issued. Commitments made by the Liberals in last spring’s election, and goals set out in this past fall’s speech from the throne, are all but assured of financing. The Liberal campaign’s Red Book pledges alone add up to more than $1 billion— for everything from aboriginal youth centres to industrial research incentives and better funding for the Canada Council for the Arts. Other drains on resources have cropped up more recently, such as the government’s highly touted $100-million contribution towards ridding the world of land mines.

And still left among the more pressing items likely to need a share of the dividend is a possible compensation package for victims of tainted blood, especially those stricken with hepatitis C—a key recommendation in Justice Horace Krever’s Nov. 26 report on the blood system.

What begins to emerge is a scattergun approach to new spending—a lack of focus that worries the government. Liberal strategists are convinced that Canadians want to see a clear blueprint that puts education and health in the foreground. But provincial juris-

diction over both areas limits any bold solo Ottawa initiatives. So the federal government is left with little choice but to negotiate with the provinces towards co-operation on ideas like health care in the home and a subsidized drug plan. Finding room to move on post-secondary education is even more tricky. An initiative already in the works, a “millennium scholarship” fund of at least $1 billion, is Chrétien’s pet project. The scholarship is slated to be funded from the sizeable surplus now expected to be left over at the end of the

current fiscal year in March, avoiding the need to vie with other schemes for a slice of next year’s projected dividend. Meeting modest public expectations for spending could turn out to be easier than satisfying the desire for tax reductions. Says The Strategic Counsel’s Sullivan: “Even in places where we might expect to see stronger support for social spending—Atlantic Canada and Quebec—people are saying, ‘Give me some money back in the form of a tax cut.’ ” Perhaps surprisingly, in the Maritimes and Newfoundland, where the clampdown on social programs has been most controversial, 41 per cent rank income tax relief at the top of the list when it comes to allocating extra public money—well above the 23 per cent who favor renewed social spending. That pattern holds in every region—with easing the tax burden outpolling stepped-up social spending by substantial margins.

For those hankering after an immediate income tax break, how-

ever, the next federal budget is shaping up as a disappointment. In fact, Royal Bank’s McCallum predicts widespread tax relief is still a few years away. “In this mandate, until perhaps the last year,” he says, “broad-based tax cuts will be too expensive.” The high cost of lightening the tax load was highlighted recently when Martin bowed—reluctantly—to pressure from companies and unions and agreed to shave 20 cents off Employment Insurance premiums

next year, dropping the rate for employees to $2.70 for every $100 of insurable income. The cut was double the previously planned 10-cent reduction—at an additional cost next year of $700 million in lower-than-expected revenues for Ottawa. Workers will pay up to $78 less in 1998 in El premiums than they did in 1997, which could stand on budget day as the biggest single bite out of the fiscal dividend. Yet some Liberal tacticians complain that the move garnered the government little credit—reinforcing their preference for more narrowly targeted tax cuts that cost less but reap more gratitude from the beneficiaries.

While the debate rages on about

spending and taxation, much less is said about shrinking the federal debt. Still, paying down the nearly $600 billion Ottawa owes ranks as the first spending priority of poll respondents everywhere but in the Atlantic region, where it finishes second to reducing taxes. Support for tackling the debt is highest on the opposite coast, where 50 per cent of British Columbians make it their top choice for using any extra government money. Finance department officials say the most likely approach to debt repayment is to rely on the $3-billion annual contingency fund Martin has made a practice

of building into his budgets. As long as the reserve fund is not needed to cover the cost of any unexpected economic downturn, it can be earmarked for paying down debt. Repaying debt out of the unused contingency reserve would mean leaving billions more—as the fiscal dividend mounts over the next few years—available for tax cuts and spending. That division may not satisfy the preference of Canadians for shrinking the debt, but it does potentially fit the government’s own plan, a

formula calling for half the dividend to be devoted to spending, the other half to a combination of tax cuts and debt repayment. That gap between the Liberal plan to put spending first and Canadians’ tendency to view debt as the main challenge has not escaped the attention of government strategists. They are already pondering how to persuade Canadians that spending in ways that boost the economy will put Canada in a sound way to shrink debt over the long haul. Says one Liberal insider: ‘We’ve got to show how investing in the productivity of our own people will have a bigger positive impact on our economy, and on our ability to improve our debt situation, than spending the same amount by directly paying down the debt.” For Canadians accustomed to being reminded that spending had to be slashed to get rid of deficits, word that higher spending is needed to eliminate debt may be come as the biggest surprise of the new era of the fiscal dividend. □